related information

Related Publications
 publications full of ideas
Release of ERISA Claims: New Case Highlights Potential Pitfalls

05.08.2006

 
Is the general release and waiver language found in your standard employee severance and release agreement enforceable with respect to claims a former employee might have against an employer-sponsored benefit plan? It depends on the facts and circumstances of each individual case. Unfortunately for some employers, that is the message of a recent case from the U.S. District Court for the District of Connecticut (Linder v. BYK-Chemie USA Inc., D. Conn., 2006 U.S. Dist. LEXIS 13823, 3/10/06).

In Linder, an executive signed a separation and release agreement in connection with his separation from the employer. The agreement contained a covenant not to sue the employer and provided that:

The Executive hereby fully and forever releases the Company Group from any and all claims, causes of action and charges, of whatever kind or nature, whether known or unknown, which he now or hereafter may have against any member of the Company Group, including, but not limited to, claims arising under or in any way connected with his employment with the Company or the termination of such employment.

When the executive learned that the compensation amount used in calculating his benefits under the employer’s nonqualified supplemental executive retirement plan (SERP) would not include amounts received in connection with his exercise of certain stock options, he sued his former employer and the SERP.

While the District Court rejected the executive’s ERISA claim in this case, finding that the release and covenant not to sue he signed was effective to bar his lawsuit, the Court’s analysis highlights that a different result might be reached for a plaintiff in different circumstances or if a different employer-sponsored plan was involved. In reaching its decision, the District Court followed a rule already adopted by several Circuit Courts requiring closer scrutiny of a waiver of a claim for benefits under ERISA than of a waiver of general contract claims. To determine if a beneficiary has released claims under ERISA, the Court had to consider whether under the totality of the circumstances the waiver was ‘knowing and voluntary.’ The Court placed significant weight on the executive’s extensive business and financial experience and his involvement in the administration of the employer’s retirement plans in finding that the executive was fully aware of the implications of signing the separation and release agreement.

The Court also rejected the executive’s argument that since the SERP was not mentioned anywhere in the release agreement, he had not waived his right to bring an ERISA claim. The Court recognized that under ERISA, an employee benefit plan in some situations is recognized as separate and distinct from the employer and may sue and be sued as an entity. However, in this case, the Court found that since the SERP was an unfunded “top hat” ERISA plan where benefits are paid solely from the general assets of the employer, the employer and the plan were actually the same entity and should be considered as such in interpreting the release agreement.

The court’s reasoning implies the outcome would have been different if the plaintiff had been a lower level officer, or an executive who was not involved in the administration of the company’s benefit plans. To avoid such an unfavorable outcome under those facts, the employer may have had to include a specific reference to the SERP in the release agreement.

The Linder case serves as a reminder that employers need to be careful using standard form releases. Employers seeking to ensure that ERISA claims are released should obtain the advice of their legal counsel in preparing release agreements.

Physical Address: 301 Fayetteville Street, Suite 1900, Raleigh, NC 27601
Communication Agreement

I understand and agree that Poyner Spruill LLP will have no obligation to keep confidential the information that I am now sending to the firm.