Know Your Rights: 

Severance Pay & ERISA
Doug Bonney

In 1998, when Sunbeam CEO Chainsaw Al Dunlap got the ax, it may have given working people the feeling that there is justice in the world after all. This was especially true because the Sunbeam's corporate Board of Directors announced that it would not pay any severance to its former CEO, Chainsaw Al. 

Unfortunately, the Sunbeam directors almost certainly made that move in effort to appease shareholders rather than to avenge the tens of thousands of people Chainsaw Al had fired during his long career as a CEO. According to an article in the Wall Street Journal, furthermore, the purported denial of severance pay may simply have been a legal ploy in a campaign to negotiate a smaller severance payment to Chainsaw Al. According to a Journal article at the time, when it was all said and done, Sunbeam would probably end up paying Chainsaw Al millions of dollars in severance pay in accordance with his employment contract. 

Although this reward for poor performance seems unfair to any ordinary working person, it is in fact the normal way things are done in the world of high-level corporate executives. It also serves to point out an area in which the law is steeply slanted against regular working people, who often have a very tough time collecting small amounts of severance pay when they are laid off or when their factories close. 

In the rare case where corporations like Sunbeam refuse to pay severance to a fired CEO, the executive can simply sue for breach of contract or request arbitration under the terms of his employment contract. For regular working people, collecting severance pay is much more difficult because severance pay is usually considered an employee benefit which falls within the realm of the Employee Retirement Income Security Act of 1974, also known as ERISA. Congress passed ERISA in 1974 because many corporations such as Studebaker were going bankrupt and defaulting on their pension liabilities to retirees. ERISA was supposed to make it easier for employees to collect the benefits promised them during their employment, and it was supposed to protect those benefits from unscrupulous corporations. As it has worked out, however, ERISA has often made it much harder for employees to get their benefits. 

A good example of this problem is found in the case of severance pay. The problem is that ERISA allows employers to make so called "reasonable" interpretations of their severance pay plans, and not too surprisingly employers tend to resolve all doubts in their favor so that they do not have to pay severance very often. This is totally different from normal contract law in which contracts are strictly construed against the party that wrote the contract. 

A series of cases involving a Missouri plant closing provide a good example of this catastrophe. In the mid 1980s, Diamond-Shamrock closed a plant in Missouri but did not pay severance benefits to the laid off employees. Shortly after the lay off, some of the employees sued in state court under a contract theory, and those employees won severance benefits. Later, some other employees tried the same thing, but by that time the company's high-priced lawyers had figured out a new defense. They took the case out of state court and into federal court and argued that ERISA applied to the severance pay plan. Because ERISA allowed the company to interpret the terms of its severance plan, the court upheld the denial of severance benefits based on the company's interpretation of the plan. In that second case, the company won, and the employees were denied severance pay. The first case was really just a fluke attributable to a mistake by the company's lawyer. 

Although it's easy to grin in the face of Chainsaw Al's demise, working people need to remember that things are often stacked in favor of the rich and against working people. All too often, this is true of laws that are supposed to protect working folks. Congress cannot be relied upon to protect the masses. Only an effective Union can help working people in the fight to even the playing field. 

This is Doug Bonney of the Bonney Law Office helping you to know your rights!