Some employers have formal severance plans and others (rightly or wrongly) do not.

A recent 7th Circuit decision affirms the principle that an ERISA severance plan can reserve to the employer discretion over who is eligible for severance benefits.

See Carlson v. Northrop Grumman Severance Plan (7th Cir. 2023): processWebInputExternal.pl

This supports a “best practice” drafting approach for ERISA-governed severance plans to incorporate a discretionary component as a factor in determining eligibility for benefits.

The severance plan at issue provided severance to laid-off employees regularly scheduled to work at least 20 hours/week, but only if that employee received a cover memo, signed by a human resources VP or designee, designating the employee as eligible for severance.

The employer laid off numerous workers in 2012, many of whom did not receive this memo designating them as eligible. These workers then sued, alleging they were entitled to severance because they fit the requisite number of hours requirement and arguing that the memo referenced in the plan was simply “ministerial.”

The 7th Circuit affirmed the ruling of the District Court for the Northern District of Illinois, stating that the terms of the severance plan reserved eligibility discretion to a non-fiduciary (the HR department), and it was entitled to exercise that discretion in the company’s interest.

Note that, although it was affirmed that ERISA allows flexibility, discretion is not completely unlimited – other federal laws, such as Title VII of the Civil Rights Act and the Age Discrimination in Employment Act, continue to apply, but those laws were not at issue in this case.

Employers should be mindful of this flexibility in a severance plan, so long as the discretion is explicitly reserved in writing in the plan document itself. Employers may wish to take this opportunity to review and, if needed, amend any existing severance policies to specifically provide for such discretion. Employers who have questions regarding how to do this, whether they have an ERISA-subject severance plan in place, and whether sufficient discretion is reserved in the plan document, should discuss with their ERISA counsel.

What’s in your severance plan?