Is it a Plan? Maybe. Maybe Not.

In a matter of first impression, on August 11, 2011 the Eighth Circuit held that a one-person contract providing severance benefits is not an ERISA plan for preemption purposes, creating a split in the circuit courts.

Kevin Schieffer was President and CEO of the Dakota, Minnesota & Eastern Railroad (“DM & E”). Anticipating a possible change of control, Schieffer and DM & E entered into an Employment Agreement to encourage his ongoing employment and to provide certain benefits should he be terminated without cause or resign for good reason. With a merger imminent, DM & E terminated Schieffer without cause, triggering the Employment Agreement’s various severance provisions. Ultimately, disputes arose as to the amounts DM & E owed Schieffer.

Schieffer filed a demand for arbitration under the Employment Agreement’s arbitration provision. Schieffer’s arbitration demand included a claim for double damages under South Dakota’s failure-to-pay wages statute. DM & E logically sought to thwart Schieffer’s ability to recoup double damages under the applicable state law.

In this regard, DM & E commenced an action in federal court to enjoin the arbitration as preempted by ERISA. See 29 U.S.C. § 1144(a); Aetna Health Inc. v. Davila, 542 U.S. 200, 209, 124 S.Ct. 2488, 159 L.Ed.2d 312 (2004) (ERISA expressly preempts “any state-law cause of action that duplicates, supplements, or supplants the ERISA civil enforcement remedy.”) DM&E argued that the Employment Agreement is an ERISA plan and, therefore, the district court had subject matter jurisdiction to enjoin Schieffer’s attempt to invoke preempted state law remedies. The district court disagreed, holding that the Employment Agreement is not an ERISA employee benefit plan and, therefore, granted Schieffer’s motion to dismiss.

On appeal, the Eighth Circuit first examined the Supreme Court’s decision in Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 107 S.Ct. 2211, 96 L.Ed.2d 1 (1987), wherein the Supreme Court construed 29 U.S.C. § 1144(a) as not preempting a Maine statute that required employers to provide one-time severance payments in the event of a plant closing. The Court explained:

Congress intended pre-emption to afford employers the advantages of a uniform set of administrative procedures governed by a single set of regulations. This concern only arises, however, with respect to benefits whose provision by nature requires an ongoing administrative program to meet the employer’s obligation. It is for this reason that Congress pre-empted state laws relating to plans, rather than simply to benefits …. The requirement of a one-time, lump-sum payment triggered by a single event requires no administrative scheme whatsoever to meet the employer’s obligation.

The Eighth Circuit had previously concluded that Fort Halifax “delineated the standard to be applied” when determining whether an employer’s plan to provide severance benefits to select employees “falls within ERISA’s ambit.” Kulinski v. Medtronic Bio–Medicus, Inc., 21 F.3d 254, 257 (8th Cir.1994). The district court had applied this test in concluding that the Employment Agreement was not an ERISA employee benefit plan. Yet, the Court rejected this analysis as “unnecessary” because Kulinski (and its progeny) involved employer severance benefits made available to classes of employees. Here, on the other hand, the Court was asked to consider whether an individually negotiated “one-person” contract between an employer and a single employee may be an ERISA plan.

Accordingly, the Court first turned to the plain language of the statute. The Court noted that ERISA defines an “employee welfare benefit plan” as “any plan, fund, or program … established or maintained by an employer … to the extent that such plan, fund, or program was established or is maintained for the purposes of providing for its participants or their beneficiaries … (B) any benefit described in section 186(c) of this title [other than pension benefits].” 29 U.S.C. § 1002(1). Although severance benefits are clearly among those described in § 186(c), the Court opined that the words “plan” and “program” in § 1002(1) “strongly imply benefits that an employer provides to a class of employees.” Moreover, it noted that reference to “participant’s or their beneficiaries” in the plan language of the statute “reflects the congressional intent that a covered ‘plan’ is one that provides welfare benefits to more than one person.”

The Court also considered the “broader context of this preemption issue,” specifically, that “Congress has never preempted state laws that regulate and enforce individual employment contracts between employers and their executives.” The Court acknowledged that freedom remains an important prerogative of the States, no matter how complex a contract may be to administer, and neither the administrative nor the remedial purposes of ERISA preemption apply to the resolution of contractual disputes between an employer and a single, salaried employee. Thus, after considering “ERISA’s statutory language, purpose, and historical context” the Court ultimately concluded that “an individual contract providing severance benefits to a single executive employee is not an ERISA employee welfare benefit plan within the meaning of 29 U.S.C. § 1002(1).”

In so holding, the Eighth Circuit recognized that that several other circuit courts have concluded the opposite – that a contract with a single employee to provide post-termination benefits may be a “one-person” ERISA plan if it satisfies the “administrative scheme” criteria of Fort Halifax. See Cvelbar v. CBI Illinois Inc., 106 F.3d 1368, 1376 (7th Cir.1997) (cautioning that “arrangements that involve a single employee [require] particularly careful scrutiny”); Biggers v. Wittek Indus., 4 F.3d 291, 297 (4th Cir.1993); Williams v. Wright, 927 F.2d 1540, 1545–47 (11th Cir.1991). However, the Eighth Circuit rejected the reasoning in those opinions as “quite perfunctory” and noted those courts failed to consider the plan language of § 1002(1) or the “broader context of this preemption issue.”

Thus, depending on the Circuit, an individually negotiated “one-person” contract between an employer and a single employee may or may not be an ERISA plan. Until the Supreme Court addresses this Circuit split, employers should be aware of the law in their jurisdiction before executing one-time severance agreements such as the one at issue here.