4th Circuit lays out risks for employers using severance plans in layoffs

Employers looking to use severance plans when conducting layoffs should heed the lessons learned in a recent decision from the U.S. 4th Circuit Court of Appeals (whose rulings apply to all employers in West Virginia, Maryland, North Carolina, South Carolina, and Virginia). The appeals court considered three questions: whether the employer validly eliminated its severance plan before discharging the employees, whether certain employees who signed a stay bonus letter agreement (SBLA) waived their claims against the employer, and whether four employees received adequate notice under the Worker Adjustment and Retraining Notification (WARN) Act before they were discharged.

Elimination of severance plans

In answering whether Bristol Compressors International, LLC, validly eliminated its severance plan before laying off employees, the 4th Circuit noted the severance plan was considered an unvested employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA). As a result, the company had the right to amend or eliminate the plan as long as it complied with the written plan’s formal procedures.

In this case, if Bristol Compressors wanted to eliminate the severance plan, the procedures required the board of directors to have human resources (HR) execute its decision. The board voted to eliminate the plan, but HR didn’t take further action. The appeals court therefore concluded the company didn’t comply with the procedures set forth in the severance plan, so its elimination was invalid.

Waiver of claims under SBLA