Project Completion Bonus Arrangement Was Not an ERISA Plan

An employer promised to pay construction project employees a 5% bonus for working until completion of their assigned tasks on the project. Several employees who quit early, and thus did not receive the bonus, sued in state court, claiming that the bonus arrangement violated a state wage law. The employer removed the case from state to federal court on the basis that the arrangement was subject to ERISA. After the federal trial court held that ERISA applied and preempted the state-law claim, the former employees appealed.

On appeal, the Fifth Circuit likened the bonus arrangement to a severance plan and explained that for such a plan to be subject to ERISA, there must be an “ongoing administrative scheme.” As examples of activities that may indicate an administrative scheme, the court cited determining eligibility; calculating, paying, and monitoring benefits; and recordkeeping for reporting purposes. Here, the bonus arrangement called for only a single payment, not periodic payments, and calculating the payment amount was relatively straightforward. A less clear-cut factor, according to the court, was the frequency of triggering events, since payments were triggered at different times based on completion of each individual’s role on the project. Lastly, the court reasoned that determining individual bonus eligibility involved little discretion, distinguishing this arrangement from situations that may require determinations based on subjective criteria, such as whether a voluntary departure was for “good reason” or a termination was “for cause.” Taking these factors together, the court concluded that this arrangement entailed no “special administrative apparatus” and thus was not subject to ERISA. Accordingly, the Fifth Circuit vacated the federal trial court decision and ruled that the former employees may pursue their claim in state court.

EBIA Comment: This result is rooted in the Supreme Court’s longstanding Fort Halifax test, under which a plan is subject to ERISA when there is a commitment to systematically pay benefits, or any ongoing administrative responsibility to determine eligibility and to calculate benefits. The employer here was evidently seeking to avoid the state-law claim since ERISA remedies are relatively limited (for example, consequential and punitive damages are typically not available). But employers should keep in mind that ERISA plan status carries its own set of compliance obligations (e.g., filing required Form 5500s or responding in a timely way to requests for plan documents from plan participants). For more information, see EBIA’s ERISA Compliance manual at Sections VI.A (“Overview of Arrangements Subject to ERISA”), VI.B (“Is There a Plan, Fund, or Program?”), VI.K.7 (“Severance Plans”), and XXXVI.J (“Some General Procedural and Remedies Issues in ERISA Litigation”).

Contributing Editors: EBIA Staff.