The ERISA Strategist July, 2001   SEVERANCE PAY PLANS With the downturn in the economy, employers are being forced to reduce their staffs, some for the first time. While some employers believe that it is to their advantage not to have a severance plan that complies with ERISA, this federal law offers an employer substantial protection from claims for benefits by former employees. The following is a discussion of the advantages and possible disadvantages in maintaining an ERISA-covered severance pay plan. Advantages of Severance Pay Plans ERISA pre-emption. ERISA pre-empts most state laws from operating against severance pay plans, thereby negating most state law theories of liability for severance pay. Unavailability of consequential damages. Most courts will not allow pain and suffering, or other such consequential damages, to an ERISA claimant. Federal court removal rights. The vagaries of small or local court systems are readily avoided as venues for litigation. "Arbitrary and capricious" standard of review of claim actions. This means that if the plan is properly drafted, a claim denial will only be reversed by a court if the denial was arbitrary and capricious. In addition, evidence will usually be limited to the record considered by the plan administrator. Avoidance of juries. It is generally held that jury trials are unavailable in ERISA cases. This is usually to the employer's advantage, since severance cases are often technical and juries may tend to sympathize with employees more than employers. Requirement of exhaustion. An employee will generally be prohibited from suing until "administrative remedies" under the plan are exhausted. This avoids hasty or premature suits, allowing the employer more time to carefully consider decisions before the litigation trigger can be pulled. Release of claims. A severance plan can condition any or all benefits upon the employee providing a general release to the employer, and the benefits will be adequate consideration for a valid release. Design flexibility. There is little regulation of the actual terms and conditions of severance pay plans, allowing for almost any kind of eligibility, method of determining benefits, etc. Disadvantages of Severance Pay Plans Compliance burdens. The maintenance of an ERISA plan always involves at least some time, cost and inconvenience. It also adds another avenue of potential audit or inquiry by the federal government. Adverse employee perceptions. The mere existence of a well-publicized severance pay plan can send a message to employees that management contemplates terminations. Fiduciary risks. The individuals responsible for benefit decisions could be considered plan fiduciaries with personal liability for certain bad decisions. Such risks may have to be addressed through indemnification or insurance. Advising employers on the development and use of severance pay plans is a service provided by Constangy, Brooks & Smith about which some clients may not be aware. If the current economic conditions are precipitating the need to consider such measures, we encourage you to call your attorney to discuss the advantages and risks associated with severance pay plans. The information in this publication is for the purpose of informing and educating our clients about various aspects of the law and is not intended to be used as legal advice.