Function Over Form in Severance Plans Under ERISA

by Michelle R. Ferber and Ben McDonald

Okun M.D. v. Montefiore Case

On July 17, 2015, the United States Court of Appeals for the Second Circuit overturned a district court’s dismissal of a physician’s lawsuit against his employer for Employee Retirement Income Security Act (“ERISA”) violations.  The physician sued his employer, Montefiore Medical Center, alleging that Montefiore terminated him for pretextual reasons so that the company could avoid paying him its standard severance package.

The plaintiff-physician worked as a pediatrician and professor at Montefiore Medical Center’s Albert Einstein College of Medicine from 1988 to 2011.  Montefiore has a severance policy in place which provides that all full-time physicians who are terminated for “other than cause” are entitled to either twelve months’ notice or six months’ severance pay.   In May 2011, the plaintiff notified his supervisor that he would be leaving Montefiore in September 2011 for another job.   Less than two weeks after notifying his supervisor of his intentions to leave, Montefiore terminated the plaintiff “for cause” purportedly for comments the plaintiff made during a meeting days before.  Plaintiff then brought his lawsuit against Montefiore alleging that his termination was merely a pretext for Montefiore to interfere with his right to severance payments under Montefiore’s policy and the ERISA statute.

The district court granted Montefiore’s motion to dismiss on the basis that Montefiore’s severance package did not qualify as an “employee welfare benefit plan” under the purview of ERISA.  For his lawsuit to properly be heard in a federal court, the plaintiff must allege that the defendant interfered with the rights afforded to the plaintiff under federal law.  Here, the plaintiff alleged that Montefiore violated the provisions of the federal ERISA statute.  By finding that Montefiore’s severance package did not fall under ERISA as an employee welfare benefit plan, the district court ruled that the case could not be heard in a federal court because the court had no subject-matter jurisdiction over the controversy.  In short, as the court ruled that the case was not governed by federal law, it dismissed the plaintiff’s case from federal court.

On appeal, the Second Circuit’s task was to revisit the issue of whether Montefiore’s severance package was indeed an employee benefit plan under ERISA.  The Court identified three non-exclusive factors to guide the court when determining whether an employer’s particular undertaking involves the kind of “plan, fund, or program” that falls under ERISA.  The Court considers: (1) whether the employer’s undertaking or obligation requires managerial discretion in its administration; (2) whether a reasonable employee would perceive an ongoing commitment by the employer to provide employee benefits; and (3) whether the employer was required to analyze the circumstances of each employee’s termination separately in light of certain criteria.

First, the court found that Montefiore’s severance package required discretion and individualized evaluation by the company in order to administer the package.  Second, the court found that plaintiff reasonably expected that Montefiore would be continuing to honor the package it had offered without interruption since 1996. Finally, the court found that while administering this package required only a little oversight from management, combined with the other two factors, Montefiore’s severance package does look like an employee welfare benefit plan.  As such, the plan is subject to the federal laws encapsulated in the ERISA statute and, therefore, properly belongs in a federal court.

The Appellate Court reversed the district court’s dismissal and remanded the case back down to allow the plaintiff to have his case heard in federal court.  While the plaintiff’s ultimate case has yet to be heard and decided, employers can still glean some ERISA guidance from this case:  if you offer something that looks, walks, and quacks like a duck, regardless of what you call it, you may have a federally regulated duck on your hands.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.