Plan administrators charged with administering Employee Retirement Income Security Act-governed severance plans are often confronted with the question of whether they should conduct an independent investigation into the reasons the employer-plan sponsor terminated an individual’s employment before deciding whether to grant or deny the individual’s claim for severance benefits. The decision to conduct such an investigation, and, the breadth of such an investigation, may have consequences in the event of litigation.

This article provides some guidance to plan fiduciaries in evaluating claims for severance benefits.

Many severance plans provide that an employee is ineligible for benefits if terminated “for cause” and define cause as, among other things: neglect in performing one’s duties, misconduct, or unsatisfactory performance. A threshold question for those charged with the responsibility for deciding severance benefit claims and appeals is thus whether the employee was in fact terminated “for cause.” Whether and, if so, how “for cause” is defined is controlled by the terms of the plan.[1] What is required of plan fiduciaries under these circumstances? May they accept the employer’s stated reason for the employee’s discharge? Must they conduct an independent investigation into the reasons for the employee’s discharge? Somewhat surprisingly, there are relatively few reported decisions addressing whether a plan fiduciary has an obligation to conduct an independent investigation into an employer’s reasons for discharging an employee.

As a preliminary matter, in deciding whether an investigation is warranted, it is important to be mindful of the fact that severance plan participants, like all other ERISA plan participants, are statutorily entitled to a “full and fair review by the appropriate named fiduciary of the decision denying the claim.”[2] This means that a plan administrator must “take[] into account all comments, documents, records, and other information submitted by the claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.”[3] Moreover, pursuant to ERISA §503(1), participants must be provided “adequate notice in writing . . . setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant.”

Is An Investigation Warranted?

Where a plan fiduciary is in possession of credible evidence that an employer terminated an employee for cause, courts have generally concluded that there is no requirement that a plan fiduciary conduct an independent investigation into the reasons for the employee’s discharge from employment. For example, in Estate of Schwing v. Lilly Health Plan,[4] the U.S. Court of Appeals for the Third Circuit held that a plan fiduciary may reasonably rely on information obtained from the employer in deciding whether to deny a claim for severance benefits on account of an individual being terminated for cause. There, a sales employee was terminated for falsifying call data. Although the employee denied that he had ever admitted any wrongdoing, and argued that he was fired as an act of retaliation, the plan administrator determined that the employee was ineligible for severance benefits because he was terminated for misconduct. The Third Circuit concluded that there is no requirement that a plan administrator faced with an issue of who is to be believed must conduct an independent investigation into a claimant’s arguments, and that, in this case, there was ample evidence of the employee’s misconduct to support the denial of his claim for severance benefits.

Similarly, the U.S. Court of Appeals for the Sixth Circuit held that if a plan’s language clearly identifies the conduct that will render an individual ineligible for severance benefits, and the employer presents evidence that a terminated employee engaged in such conduct, a plan administrator need not investigate further before denying benefits. In Fahrner v. United Transp. Union Discipline Income Prot. Program,[5] an employee was terminated for insubordination after he failed to comply with his employer’s requests that he provide certain information after he took a medical leave of absence. The court observed that the plan administrator was provided with information that the employer compiled during its evaluation of whether to terminate the employee, and determined that this constituted sufficient evidence that the employee failed to comply with his employer’s procedures and instructions. The plan administrator was thus found to be justified in denying plaintiff’s claim for severance benefits.
A plan administrator may not, however, “cherry-pick the evidence it prefers while ignoring significant evidence to the contrary.”[6] In Mohammed v. Sanofi-Aventis Pharmaceuticals, an employee was terminated for improperly purchasing equipment with employer funds. The plan administrator denied his claim for severance benefits based on an oral summary and memorandum from the employer. The administrator wasn’t presented with and didn’t review the employee’s appeal letter. In the court’s view, this rendered the plan administrator’s decision arbitrary and capricious, and the court remanded the case to the plan administrator for further consideration.

Privilege Considerations

ERISA’s claims regulations provide that a participant is entitled to all “documents, records, and other information relevant to the [employee’s] claim for benefits.”[7] This includes any information considered or relied upon as part of the plan fiduciary’s determination. Accordingly, a plan administrator who denies a claim for severance based on a report of an internal investigation conducted by the employer may subject that report, and the underlying investigation, to discovery. In order to avoid this risk, the administrator may prefer to conduct its own investigation, rather than subject to discovery a report that the employer otherwise intends to keep confidential.

Proskauer’s Perspective

The guiding principle to be drawn from the relatively sparse case law is that, in deciding whether to grant or deny an individual’s claim for severance benefits, plan fiduciaries should be able to reasonably rely on credible evidence—without conducting an independent investigation—that an individual’s employment was terminated for cause. But administrators need to be sensitive to the risks of exposing to discovery any information on which it relies, even if that information emanates from the employer.

[1] Fahrner v. United Transp. Union Discipline Income Prot. Program, 645  F.3d  338, 51  EBC 1720, 2011 BL 117641 (6th Cir. 2011) (stating that the language of the  plan  provides the starting point for  determining whether an employee/participant was  terminated from employment for  cause  and  thus whether he is entitled to benefits under the plan)

[2] ERISA  § 503(2)

[3] 29  C.F.R.  §2560.503-(1)(h)(2)(iv)

[4] Estate of Schwing v. Lilly  Health Plan, 562  F.3d  522, 46  EBC 2370, 2009 BL 79732 (3d Cir. 2009)

[5] Fahrner v. United Transp. Union Discipline Income Prot. Program, 645  F.3d  338, 51  EBC 1720, 2011 BL 117641 (6th Cir. 2011)

[6] Mohammed v. Sanofi-Aventis Pharms., 2009 U.S. Dist. LEXIS 119871, at *42 (S.D.N.Y. Dec.  22,  2009)

[7] 29  C.F.R.  §2560.503-1(h)