September 5, 2011
Authored by: Travis Kearbey
This mixed question of fact and law has perplexed courts perhaps as much as it has confused benefits managers in corporations across the nation. However, for employers operating within the jurisdiction of the Eighth Circuit Court of Appeals (AR, IA, MO, MN, NE, ND, and SD) this question has recently become easier to answer with respect to single-employee agreements. In August, the Eighth Circuit parted with federal courts in the Fourth, Seventh, and Eleventh Circuits by holding in Dakota, Minnesota & Eastern Railroad Corp. v. Schieffer that a contract governing severance benefits for a single employee does not constitute an ERISA plan.
This result may not strike the average person as much of a surprise given that–as the Eighth Circuit points out in Schieffer–the term “plan” naturally contemplates benefits practices that apply to more than one employee. Indeed, it seems likely that few parties to negotiated contracts with individual executives intend for the severance provisions of such contracts to be treated as ERISA “plans.” At this point, however, Schieffer represents a minority position among federal courts of appeals on the issue of whether one person’s employment contract governing severance may constitute an ERISA plan. This split of authority serves as a good reminder that common severance practices can sometimes result in a finding that an ERISA plan exists. Given that a host of technical and reporting requirements apply to such plans, employers should carefully consider whether their severance practices (e.g., historical but unwritten practices of paying severance on a discretionary basis) may be treated as an ERISA plan by a court or the U.S. Department of Labor.
Furthermore, employers in the Eighth Circuit’s jurisdiction should remain mindful that, going forward, Schieffer will likely limit the ability to argue that ERISA preempts state law actions to recover severance benefits under single-employee contracts. As emphasized in Schieffer, “Congress has never preempted state laws that regulate and enforce individual employment contracts between employers and their executives.” Notably, however, despite Schieffer‘s holding that a “one-person” contract does not, alone, constitute an ERSIA plan, ERISA preemption may still serve as a defense to a state-law action to recover severance if the action represents a demand for the payment of benefits under ERISA plans, as amended by an employment agreement, because ERISA preemption extends to all state laws that “relate to” an employee benefit plan.