The economic recession has caused many employers to reevaluate their severance policies. We find that employers often strive to ensure that those policies do not amount to enforceable promises to provide similar benefits to similarly situated employees, but rather are non-ERISA, ad hoc arrangements. That strategy, however, may be short-sighted. A recent decision from a federal court in California serves as a reminder that ERISA-covered severance plans often give employers more protection than informal, “one-off” arrangements. (Pierce v. Wells Fargo Bank)
The lawsuit involved a dispute between Wells Fargo and a senior executive of a company that Wells Fargo acquired. The acquired company sponsored a change-in-control severance plan (the “CIC Plan”) that was treated as an ERISA welfare plan. The CIC Plan provided severance benefits to eligible employees who were terminated or denied similar positions following a corporate merger or change in control. The senior executive claimed that he had been told he would be entitled to severance benefits even if he refused to take a comparable position with Wells Fargo following the acquisition. Acting on those representations, the executive declined to take a position with Wells Fargo, and instead submitted a claim for severance benefits. When that claim was denied, he sued in state court for breach of contract, negligence, and fraud – theories that could have resulted in an award of punitive damages.
Wells Fargo (the surviving entity) removed the case to federal court and filed a motion to dismiss, arguing that the claims were preempted by ERISA because they related to benefits offered under an ERISA plan. The executive responded that his claims were not based on the CIC Plan, but instead were premised on the oral promises made to him, and thus should be evaluated under state law.
The court sided with Wells Fargo, finding that the benefits the executive sought were essentially the same as those provided under the CIC Plan. Thus, his remedies were limited to those afforded under ERISA (which does not authorize punitive damage awards). Because the executive was offered, but refused to take, a comparable position with Wells Fargo following the change in control, he was ineligible for severance benefits under the CIC Plan’s express terms. And because federal courts have long held that oral representations cannot be used to supersede the written terms of an ERISA plan, the executive’s reliance on the alleged misrepresentations about his eligibility was misplaced.
By structuring its severance policy as an ERISA plan, the employer in this case was able to (i) dictate the forum in which the dispute was resolved; (ii) limit its exposure to the benefits provided under the plan; (iii) avoid the risk of punitive damages; and (iv) defeat a claim based on what may have been unauthorized oral promises. In exchange for the protection that ERISA affords, employers like Wells Fargo need only create written plans and summary plan descriptions (which can be the same document) and comply with limited reporting and disclosure obligations. In many instances, the protection is well worth the administrative costs.