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February 11, 2014
Maryland case: Did employer cheat employee out of severance pay?

The Maryland District Court recently denied an employer's request for dismissal of a former employee's severance pay claim. The employee claimed that the company had improperly denied him benefits under its severance pay plan by improperly manipulating his termination date.

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MarylandThe court ruled in favor of the employer on the claim that it breached its obligation to pay severance benefits. However, the court denied the company's request for dismissal of the claim that it unlawfully interfered with the employee's right to obtain severance benefits by manipulating his termination date so that it was just outside the window of eligibility.

Let's take a closer look at this interesting decision.

Background facts

Bruce Kirby was employed as president and CEO of Medex. The company had established an executive change-in-control severance pay plan designed to provide severance benefits to a select group of executives after a separation from employment in connection with a change of control at Medex. Kirby was a participant in the plan.

On February 16, 2011, Medex stockholders approved a merger between Medex and ELG. After the merger was consummated on March 10, 2011, the companies began operating as Frontier Medex, Inc. Kirby remained as president and chief operating officer of Frontier.

Among other things, the severance plan provided that a participant would be eligible for benefits if he experienced a qualifying termination within one year of a change in control. The change in control occurred on February 16, 2011, so Kirby's eligibility for severance benefits under the plan expired within one year from that date.

As a result, if he was terminated before February 16, 2012, he would qualify for severance benefits under the plan. If he was terminated after that date, he wouldn't be eligible for benefits.

According to Kirby, he was told on November 16, 2011, that he was going to be terminated upon the expiration of the change-in-control deadline. On January 24, 2012, he was informed in writing that he would be terminated effective February 23, 2012, one week after the expiration of the qualifying period for severance benefits.

As of January 24, he was immediately placed on "garden leave," meaning he was relieved of all responsibilities, denied access to Frontier's systems and facilities, and effectively terminated as of that date. Nevertheless, his pay and benefits continued through February 23.

Kirby filed a claim for severance benefits under the plan, but his claim was denied by the plan administrator; the denial was upheld after an internal appeal. Kirby then filed a lawsuit claiming that Frontier improperly refused to pay him severance under the plan. According to Kirby, he experienced a qualifying termination from employment because he was terminated within one year of the change-in-control event.

In particular, Kirby contended that Frontier breached its obligations under the severance plan by failing to pay benefits in violation of the Employee Retirement Income Security Act (ERISA). He also maintained that Frontier unlawfully interfered with his right to obtain severance benefits, which was a separate ERISA violation. Frontier asked the court to dismiss his complaint.

Court's decision

Breach-of-contract claim. Kirby contended that Frontier breached the severance plan by refusing to pay him the benefits to which he was contractually entitled. His claim was based on his contention that he was terminated on January 24, 2012, which was within one year from the change in control. Frontier responded that he wasn't eligible for benefits under the severance plan because he wasn't actually terminated until February 23, 2012, a week and 12 months after the change-in-control date.

According to Frontier, the unambiguous terms of the plan mandate that the qualifying termination occurred on February 23, 2012, because Kirby received full pay and benefits through that date. Kirby countered that the date listed on the notice of termination form wasn't relevant to the issue of when the qualifying termination actually occurred.

According to him, under generally accepted industry standards, his termination occurred on January 24, 2012, when he was relieved of all responsibilities, required to return all company property, and denied access to Frontier's systems and facilities.

Although he acknowledged that Frontier continued to pay his salary and benefits through February 23, 2012, he maintained that the complete and total curtailment of his work activities as of January 24 demonstrated that he was in fact terminated in January 2012.

The court disagreed, however, finding that the issue was one of contractual interpretation. According to the court, the only reasonable interpretation of the severance plan established that the qualifying termination occurred on the date specified in the notice of termination. The severance plan as a whole contemplated only one method by which employment could be terminated.

Section 2.2 of the plan provided that any termination of employment had to be communicated by notice of termination to the other party. That way, the plan clearly set forth the process by which a termination occurred. Any termination of employment required the issuance of a notice of termination, and the notice had to include a specific date of termination that couldn't be more than 30 days after the provision of the notice.

Because the plan unambiguously provided that Kirby's eligibility for severance was determined by the date of termination specified in the notice of termination, his employment ended on February 23, 2012, outside the one-year window for severance eligibility. Consequently, this claim was dismissed.

Interference claim. Kirby raised an alternative argument that Frontier manipulated the date of his termination and, as a result, interfered with his rights under ERISA. He asserted that he was effectively terminated on January 24, 2012, but Frontier improperly claimed that his termination wasn't effective until just after the expiration of the one-year eligibility window, with the intent to deprive him of his severance benefits. To that end, he argued that Frontier kept him on the payroll just long enough to deprive him of severance.

Under ERISA, it's unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a benefits plan participant or beneficiary for the purpose of interfering with the attainment of any right to which he may become entitled under the plan.

Notably, this provision does not guarantee every employee a job until he is fully vested in a company benefit plan. Rather, ERISA prohibits unscrupulous employers from terminating or otherwise taking adverse action against an employee with the specific intent of preventing him from obtaining benefits.

There are two ways an employee may prove interference with his rights in violation of ERISA. One way is through direct evidence of the employer's specific intent to interfere (e.g., an admission by the employer that it fired him to prevent the vesting of his benefits).

The second method allows the employee to use the burden-shifting approach articulated by the U.S. Supreme Court in McDonnell Douglas Corp. v. Green. Under that scheme, the employee must first establish a prima facie (minimally sufficient) case of interference by showing that (1) his employer took a prohibited action against him, (2) the action was taken for the purpose of interfering with his rights, and (3) the action did in fact interfere with his ability to obtain a right to which he was or might become entitled.

If the employee establishes a prima facie case, a presumption of illegal interference arises, and the burden shifts to the employer to produce evidence of a legitimate reason for the challenged conduct. If the employer carries its burden and successfully establishes its legitimate nondiscriminatory explanation, the burden then shifts back to the employee, who is given an opportunity to show by a preponderance of the evidence that the employer's explanation is pretexual (an excuse for unlawful conduct).

In this case, Kirby contended that he had alleged facts sufficient to make a valid ERISA interference claim under both the direct and circumstantial methods of proof. To that end, he alleged that Frontier manipulated the termination process for the sole purpose of depriving him of his severance benefits.

He claimed that the company effectively fired him on January 24, 2012, when it relieved him of all responsibilities and stripped him of access to its systems and facilities yet wrote in the notice of termination that his date of termination was February 23, 2012.

Kirby maintained that Frontier selected the date with the specific intent of depriving him of severance benefits, and its manipulation of the date interfered with his right to severance pay. In essence, he claimed that Frontier terminated him in January but then dishonestly set the date of termination as February 23, 2012, to defeat his claim for severance benefits.

According to the court, Kirby's allegations, if taken as true, must set forth a plausible claim that Frontier interfered with his right to severance benefits in violation of ERISA. Viewing the facts in the light most favorable to Kirby, the court found that Frontier acted with the intent to deprive him of severance benefits.

Frontier's CEO allegedly told Kirby in November 2011 that he intended to fire him after the expiration of his eligibility for severance benefits. Then, on January 24, the company notified him that his termination would be effective one week after the expiration of his eligibility for benefits.

Although Frontier retained Kirby on its books as an employee and continued to pay his full salary until February 23, he was immediately stripped of all the typical conditions of employment, relieved of any work responsibilities, and denied access to the facilities. Although there may be benign reasons for paying an employee for another 30 days after stripping him of all responsibilities, there's also a possibility that Frontier had improper motives for proceeding in the way it did.

That possibility graduates to plausibility in light of the fact that the company's decision to pay Kirby's salary for another month saved it more than $700,000 in severance pay.

Because Kirby had set forth a plausible claim that Frontier interfered with his claim for severance, the issue needed to be resolved by a jury, not a court. Bruce Kirby v. Frontier Medex, Inc., Civil Action No. ELH-13-00012, D. Md., (2013).

Bottom line

This decision should prove helpful for Maryland employers that administer severance pay plans—particularly if your plan includes change-in- control provisions. As this case shows, such plans often give the employer discretion in determining whether or when an executive will be discharged. Depending on the date of termination, the employee may or may not be eligible for severance under the plan.

Although you may have very good reasons for delaying the actual termination date, if it appears that the date was selected solely to deprive an employee of his severance benefits, he could file suit under ERISA, claiming you intentionally interfered with his rights. If the employee wins his case, you will have to pay the severance benefits as well as attorneys' fees and pre- and post-judgment interest.

This article was edited by the attorneys at (Whiteford, Taylor & Preston.)

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