A recent Seventh Circuit decision affirms the principle that an ERISA severance plan can reserve to the employer discretion over who is eligible for severance benefits.  The case is Carlson v. Northrop Grumman Severance Plan, No. 22-1764, __ F.4th __, 2023 WL 3299703 (7th Cir. May 8, 2023).

The case involved former Northrop Grumman employees who were laid off in 2012 and claimed a right to severance under Northrop Grumman’s severance plan.  But the plan said an employee was not eligible unless they received a memo from a Vice President of Human Resources notifying them of their severance eligibility.  The employees at issue did not receive an eligibility memo.

The employees argued that the requirement to receive an eligibility memo was merely ministerial and should be disregarded.  The Seventh Circuit (and the district court before it) disagreed, holding that ERISA allows a severance plan to give the employer discretion over who will receive severance benefits.  The court reasoned that the decision of who will be eligible for severance benefits is a design decision, which ERISA does not regulate.  An allegation that the employer had changed its approach to eligibility over time did not change the court’s conclusion: discretion over plan design need not be exercised consistently.  (Although ERISA allows flexibility, discretion is not completely unlimited.  Other federal laws, such as Title VII of the Civil Rights Act and the Age Discrimination in Employment Act, continue to apply.  Those laws were not at issue in this case.)

Proskauer’s Perspective

Employers thinking about whether to establish a severance plan often hesitate because they do not want to commit in advance to offering severance or a particular level of benefits.  The Seventh Circuit’s decision affirms that ERISA is not so restrictive—which means that employers may take advantage of ERISA’s protections, such as preemption of state laws and a deferential standard of review (if compliant claims procedures are followed), while still reserving discretion over eligibility.

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Photo of Seth Safra Seth Safra

Seth J. Safra is chair of Proskauer’s Employee Benefits & Executive Compensation Group. Described by clients as “extremely knowledgeable, practical, and strategic,” Seth advises clients on compensation and benefit programs.

Seth’s experience covers a broad range of retirement plan designs, from traditional defined…

Seth J. Safra is chair of Proskauer’s Employee Benefits & Executive Compensation Group. Described by clients as “extremely knowledgeable, practical, and strategic,” Seth advises clients on compensation and benefit programs.

Seth’s experience covers a broad range of retirement plan designs, from traditional defined benefit to cash balance and floor-offset arrangements, ESOPs and 401(k) plans—often coordinating qualified and non-qualified arrangements. He also advises tax-exempt and governmental employers on 403(b) and 457 arrangements, as well as innovative new plan designs; and he advises on ERISA compliance for investments.

On the health and welfare side, Seth helps employers provide benefits that are cost-effective and competitive. He advises on plan design, including consumer-driven health plans with HSAs, retiree medical, fringe benefits, and severance programs, ERISA preemption, and tax and other compliance issues, such as nondiscrimination and cafeteria plan rules.

Seth also advises for-profit and non-profit employers, compensation committees, and boards on executive employment, deferred compensation, change in control, and equity and other incentive arrangements. In addition, he advises on compensation and benefits in corporate transactions.

Seth represents clients before the Department of Labor, IRS and other government agencies.

Seth has been recognized by Chambers USA, The Legal 500, Best Lawyers, Law360, Human Resource Executive, Lawdragon and Super Lawyers.

Photo of Sydney Juliano Sydney Juliano

Sydney L. Juliano is an associate in the Labor & Employment Department and a member of the Employee Benefits & Executive Compensation Group, where she focuses on ERISA Litigation.

Sydney works on a variety of ERISA litigation matters, including fee- and investment-related breach…

Sydney L. Juliano is an associate in the Labor & Employment Department and a member of the Employee Benefits & Executive Compensation Group, where she focuses on ERISA Litigation.

Sydney works on a variety of ERISA litigation matters, including fee- and investment-related breach of fiduciary duty claims, benefit claims, and claims by trustees of multiemployer plans for withdrawal liability and delinquent contributions. Sydney is also a frequent contributor to Proskauer’s Employee Benefits & Executive Compensation Blog.

Sydney maintains an active pro bono practice, including representing clients in immigration and family court matters.

Sydney received her J.D. from the University of Virginia School of Law, where she was an Articles Editor of the Journal of Law and Politics and Director of Coaching for the Extramural Moot Court team.  While at UVA, she worked at the U.S. Attorney’s office for the Southern District of Florida.