Carlson v. Northrop Grumman Severance Plan, 2023 WL 3299703 (7th Cir. 2023)
A group of individuals sued their former employer after they were laid off without severance benefits. Under the employer’s severance plan, laid-off employees were eligible for benefits if they were regularly scheduled to work at least 20 hours per week and had received a copy of the plan with an individually addressed cover memo signed by a human resources Vice President or designee. These individuals, who had not received cover memos, asserted that the memo was simply a ministerial verification of the 20-hour standard and that they were eligible for severance because their regular work schedules met the hours requirement. After the trial court ruled in favor of the plan, concluding that the plan’s language gave the employer discretion to choose who received severance pay upon a layoff, the former employees appealed.
The Seventh Circuit affirmed, disagreeing with the former employees’ characterization and pointing out that the plan’s terms made receipt of severance benefits contingent on receipt of the cover memo. Unlike retirement plans, welfare plans (including severance plans) are not subject to vesting rules, and welfare plan sponsors have wide latitude to control the terms of their plans and act in their own interests—such as by including discretionary components. The court noted that, while a plan administrator acts in a fiduciary capacity when exercising discretion, a company’s management does not. The individuals also claimed that the employer had previously provided memos to all laid-off employees and that some laid-off employees who had not received memos had received other severance-related benefits, but these factors were deemed irrelevant in light of the discretion provided by the plan itself. Emphasizing the supremacy of plan terms under ERISA (see our Checkpoint article), the court explained that the plan always controls—“not deliberate past practice, not mistaken past practice, and not mistaken efforts to describe the benefits in writing.” Lastly, the court rejected the argument that the employer interfered with the individuals’ benefit rights (as prohibited by ERISA § 510) because exercise of the discretion granted by the plan cannot be viewed as interference with rights under ERISA or the plan.
EBIA Comment: As the court notes, welfare plan sponsors may reserve significant discretion to determine eligibility—so long as the reservation appears in the written plan document. These individuals tried several approaches in arguing that they were owed severance benefits, but the terms of the plan prevailed. For more information, see EBIA’s ERISA Compliance manual at Sections VI.K.7 (“Severance Plans”) and IX.D.6 (“Under Some Plans, Significant Discretion Regarding Eligibility May Be Reserved”).
Contributing Editors: EBIA Staff.