When a Severance Agreement Is an ERISA Plan

Employees in Chicago often negotiate severance into their employment contracts separate from any company-wide severance program. Frequently, these one-off severance agreements will trigger severance if the employee is terminated without cause, or upon a change in control. Some agreements trigger a lump sum severance payment based on a number of years’ salary, and some pay out in installments. But few employees know such one-off severance agreements can constitute an ERISA plan under the right circumstances, even if the agreement doesn’t mention ERISA. A recent case highlighted the circumstances under which such an agreement amounts to an ERISA plan.

In Thompson v. Command Alkon Inc., No. 22-344, 2023 WL 3594178 (E.D. Pa. May 22, 2023), Thompson worked for Libra, a family-run, 35-employee business. Libra got purchased by Command Alkon. As part of the merger, Libra insisted Thompson have an employment agreement for a five-year term that provided her with severance if she was terminated for cause. The severance would be paid in equal installments on the normal payroll schedule for the remainder of the five-year term. The agreement stated it was intended to be an unfunded top-hat plan under ERISA. The agreement also provided Thompson could resign for “good reason,” meaning a material diminution in her authority or responsibilities, and she would be entitled to severance. After the takeover by Command Alkon, Thompson resigned, citing good reason, but Command Alkon refused to pay the severance. Thompson sued in state court for breach of contract, but Command Alkon removed to Federal Court, contending Thompson’s claims were preempted by ERISA § 502(a).

The United States District Court for the Eastern District of Pennsylvania ruled ruled the severance agreement was an ERISA plan. Employing the analysis of Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987), it held the agreement had a sufficient ongoing administrative scheme to constitute an ERISA plan. Specifically, the agreement required the administrator to determine whether Thompson’s termination was for cause, or whether she had good reason to resign. Additionally, rather than pay the benefits out in a single lump sum, the severance required ongoing administration because it paid in equal installments over the remainder of the five-year employment term. Thompson thus surprisingly found herself embroiled in ERISA litigation.

If you have a claim for severance benefits under an employment contract, contact an experienced ERISA litigation attorney today, as your agreement is likely governed by ERISA.