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Getting the Most Bang for Your Buck Out of A Severance Release

Added by Cydni Waldner in Articles & Publications, Employment Law on June 10, 2019

Employers that pay severance to a terminating employee often get a release against employment-related claims. However, a properly drafted release may even provide protection for 401(k) and pension plan fiduciaries against ERISA claims.

In a recent Iowa case,[1] an employee who signed a release in connection with a severance agreement later attempted to bring an ERISA claim for breach of fiduciary duty against the employer’s ESOP plan. An ESOP is an “employee stock ownership plan” that is similar to a 401(k) or profit-sharing plan, but where employer contributions to employee accounts are made in the form of employer stock. In an ESOP, the plan often borrows money to buy shares of the company sponsoring the plan. The company then contributes money to the plan to allow the plan to repay the loan. Participants in the plan end up owning shares of the employer and the employer can deduct its contributions to the plan within IRS limits. ESOPs are managed by a trustee who is a fiduciary of the plan. The employee in this case was challenging the trustee’s decisions to purchase company stock and to take out a loan to finance the purchase of the company stock, among other things, as breaches of the trustee’s fiduciary duty to the plan.

The trustee filed a motion for summary judgment based on the release the employee signed in connection with her severance agreement. To be effective, a release must be a knowing and voluntary written waiver of existing (not future) claims. The court first reviewed the circumstances of the employee’s signing of the release: her education and work experience, the breadth and clarity of the release’s language, the amount of time the employee had to consider before signing and revoke it after signing (45 days and 7 days, respectively), her awareness of the ESOP plan transaction when she signed the release, the release’s language stating that she discussed it with a lawyer, and the fact that she received a significant severance payment in exchange for the release. Based on the circumstances, the court found that the employee’s release was a knowing and voluntary waiver.

The court then looked at the language of the release itself to determine whether it was broad enough to include ERISA claims against the ESOP trustee. The release encompassed claims against the employer and its owners, members, stockholders, affiliates and all persons acting on behalf of, by, through, under or in concert with any of them, and included all claims arising under federal law. The ESOP trustee was covered by the release because in the challenged action it was acting on behalf of owners and stockholders; in addition, the owners and stockholders included the plan and its participants, who owned stock as a result of the ESOP transaction. The release did not specifically mention ERISA, but the court determined that the reference to all claims under federal law, of any nature, arising from the employment relationship was broad enough to cover ERISA claims.

Because the employee’s acceptance of the release was knowing and voluntary, and because it was broad enough to cover the trustee as a fiduciary of the ESOP and to cover ERISA claims for breach of fiduciary duty, the court granted summary judgment in favor of the trustee.

Not all companies sponsor an ESOP; however, all employer-sponsored benefit plans are subject to claims for breach of fiduciary duty, and many times the employer is the fiduciary who will be on the hook. Employers who want to provide maximum protection for themselves and related parties when they obtain a release in connection with severance payments will take note of this case and ensure that their release language is broad enough to cover ERISA claims against employee benefit plan fiduciaries. If you have questions or would like assistance in drafting or reviewing your current severance release language, please contact the Employment Group.

[1] Innis v. Bankers Trust Company of South Dakota, No. 4:16-cv-00650-RGE-SBJ, United States District Court for the Southern District of Iowa (April 30, 2019).