Many of you offer some type of severance benefits to your employees, perhaps on a one-time basis in exchange for a release of claims by someone you've fired, to a group of employees during a layoff, or through an employment agreement to attract key employees. But no matter how or why you offer severance pay, you should assess whether your severance arrangements are subject to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA).

'Ongoing administrative schemes'

There's no question that severance pay is a type of benefit covered by ERISA, which governs employee benefit plans. Whether severance benefits are being provided under a plan subject to ERISA has been the subject of many judicial opinions, however.

The U.S. Supreme Court has held that a severance arrangement will be considered an ERISA benefit plan if it requires an "ongoing administrative scheme." A one-time, lump-sum payment of severance triggered by a single event doesn't generally require an ongoing administrative scheme; therefore, that type of severance benefit isn't typically considered an ERISA plan. What does constitute an "ongoing administrative scheme" has been left to the lower courts to determine.

In general, courts have considered the following factors when determining whether a severance pay arrangement requires an ongoing administrative scheme:

1.       whether the payments are one-time, lump-sum payments or continuous payments;

2.       whether the employer undertook any long-term obligation to make the payments;

3.       whether the severance payments come due after the occurrence of a single, unique event or whenever the employer terminates employees; and

4.       whether the severance arrangement requires the employer to engage in a case-by-case review to determine if an employee is entitled to payment.

Benefits of ERISA coverage

Knowing whether severance payments are subject to ERISA is important. If your plan is governed by ERISA, you must meet the law's reporting, disclosure, and fiduciary requirements. Those requirements mean you must put the terms of the severance arrangement in writing and distribute summary plan descriptions to eligible participants.

Despite those and other burdens, there are advantages if your severance arrangements are subject to ERISA. For example, ERISA bars jury trials, damages for emotional injuries, and punitive damages. The federal law also preempts state law, taking the payment of severance benefits out of state law regulation.

Copyright © 2005 M. Lee Smith Publishers LLC. This article is an excerpt from GEORGIA EMPLOYMENT LAW LETTER. Georgia Employment Law Letter does not attempt to offer solutions to individual problems but rather to provide information about current developments in Georgia employment law. Questions about individual problems should be addressed to the attorney of your choice. Georgia does not certify specialists in the law, and we do not claim certification in any listed area.