Appeals Judge Uphold Severance Decisions

May 3, 2004 (PLANSPONSOR.com) - A divided federal appeals court ruled that a Minnesota company could set as a condition of receiving benefits under a new severance plan an employee's agreeing not to sue over benefits from a previous plan.

The U.S. 8 th Circuit Court of Appeals upheld the right of E.F. Johnson Co., a manufacturer of wireless communications systems with a plant in Waseca, Minnesota, to demand that plaintiff Daniel Peterson waive any rights to its former severance plan in order to get any payments under its new plan. The company laid Peterson off and eventually fired him.

According to the appeals ruling, the firm’s dispute with Peterson started when Johnson set up a new and less favorable employee severance plan between the time Peterson was laid off and when he was fired. Peterson argued he was entitled to payments from the more lucrative plan; the company insisted it would only pay him benefits under the later program if he signed the waiver. Peterson refused to sign a waiver and instead filed a lawsuit.

The appeals ruling overturned a lower court’s decision forcing Johnson to pay Peterson’s severance under the less-lucrative plan.

“We sympathize with Peterson’s dilemma, but the company could have eliminated the old plan altogether and not offered its employees a new (severance) plan,” the majority wrote. “When the company decided to offer its employees a new plan, Peterson had the choice either to pursue his potential claim for benefits under the former plan, or accept the less-favorable benefits under the new plan. He chose to pursue the more favorable benefits under the old plan, refused to sign the release (of his rights to sue for old-plan benefits) and subjected E.F. Johnson to the expense of the suit it sought to avoid by requesting the release. As it turns out, hindsight has revealed Peterson should have signed the release and accepted the reduction in benefits.”

However,in his dissenting opinion, Circuit Judge Gerald Heaney argued that the district court judge was right in ordering Johnson to pay Peterson under the new plan.

“I agree with the district court that allowing E.F. Johnson to drastically reduce severance benefits after laying off, but before terminating Peterson, leads to an inequitable result that should not stand,” Heaney wrote. “It is true that Peterson refused to sign the release when originally presented to him, but when an employer drastically reduces severance benefits after laying off, but before terminating an employee, and the employee brings a good faith suit believing that his rights to benefits vested prior to the plan being amended, the employee should not be left without any benefits at all.”

A full copy of the opinion is at  http://www.ca8.uscourts.gov/opndir/04/04/031494P.pdf .

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