Can a Severance Plan Select Who Does and Does Not Receive Severance?

A recent case raised a question in ERISA litigation. Can a severance plan selectively determine who will and will not receive severance? Can an employer use a “tap on the shoulder” method of choosing who will receive severance? According to the United States Court of Appeals for the Seventh Circuit, the answer is yes.

In Carlson v. Northrop Grumman Severance Plan, No. 22-1764, 2023 WL 3299703 (7^th Cir. May 8, 2023), the plan provided employees who worked over 20 hours per week, were laid off, and received a cover letter from a Vice President of Human Resources would receive severance. Plaintiffs contended that Northrop Grumman’s past practice was to automatically issue the cover memo to all laid off employees who worked over 20 hours per week, but that beginning in October 2011, it began withholding the memos, and severance, from a class of individuals. Plaintiffs contended the memo was a ministerial act of notifying those eligible employees they satisfied the criteria to receive benefits. Northrop Grumman, however, contended it had discretion to select to whom it would deliver the memo. Plaintiffs raised claims for benefits due under the terms of the plan and failure to disclose that beginning October 2011, employees would no longer receive the cover memos if laid off. They sued under ERISA § 502(a).

The United States Court of Appeals for the Seventh Circuit ruled in Northrop Grumman’s favor on all claims. The Court explained receipt of the cover memo was required to be eligible for benefits, and nothing in ERISA prevents a welfare plan from selectively determining who is eligible. The Court’s analysis on the disclosure claim appeared to make less sense, though. The Court wrote: Nor can relief for plaintiffs arrive via reforming the Plan. CIGNA held that reformation is in principle an available remedy but that even a mistake in a summary plan description would not by itself justify that relief—for as the Justices stressed, 563 U.S. at 437–38, a plan’s sponsor creates its terms, which cannot be varied by an administrator or a clerical employee.” The Court appears to have applied the Supreme Court’s holding with respect to claims under ERISA § 502(a)(1)(B) to Plaintiff’s claim under ERISA § 502(a)(3), and even cited to the portion of CIGNA Corp. v. Amara, 563 U.S. 421 (2011), that dealt with ERISA § 502(a)(1)(B), not ERISA § 502(a)(3). Of note, Plaintiffs filed a petition for rehearing with respect to the ERISA § 502(a)(3) claim on May 22, 2023.

If you have a claim for severance plan benefits, contact a knowledgeable ERISA lawyer today.