"Arbitrary" Reasoning Can't Block Severance Benefits

December 30, 2002 (PLANSPONSOR.com) - A US District Court has found an employer's interpretation of the firm's severance plan to be unreasonable, according to Washington-based legal publisher BNA.

In Dabertin v. HCR Manor Care Inc, Magistrate Judge Ian Levin of the US District Court for the Northern District of Illinois found Health Care and Retirement Corp (HCR) Manor Care Inc “acted arbitrarily and capriciously and was ‘downright unreasonable’ when it determined that [the former employee] did not suffer, in the Plan’s language, a significant reduction in the scope of her ‘authority, position, title, functions, duties or responsibilities,'” and therefore not entitled to benefits.

HCR’s severance plan provided participants benefits only if discharged by the company, other than for cause, or if the participant left for “good reason.”    Defined as a “good reason” was “a significant reduction in the scope of a Participant’s authority, position, title, functions, duties or responsibilities.”  

Judy Dabertin, claiming her position had significantly changed due to reduction in the number of facilities she was managing, applied for severance benefits after resigning her job.   The severance plan’s administrative committee denied benefits when it included additional qualifiers before a plan participant could qualify for benefits under the “leave for good reason” definition, according to the court.

The committee’s decision said if a participant continued to have a full range of authority with respect to the business unit the participant managed, the scope of the participant’s authority would not be affected. The decision also said the purpose of the “good reason” requirement was “only to preclude changes that make a Participant’s continued employment ‘degrading or humiliating.'”

However, the court found the new limitations modified the plan and did not merely interpret it.   Dabertin was not able to rely on the plain and ordinary meaning of the plan’s language at the time she made her job termination decision. As a result, the court said, the committee’s decision was “downright unreasonable.”

“Mis”Manored Care

Dabertin was a vice president of operations for Manor Care and in 1998, became a participant in Manor Care’s severance plan, which was adopted in anticipation of a merger with a subsidiary of HCR.

Manor Care merged with HCR, in September 1998 and required vice presidents to assume the additional role of general managers and focus more on the day-to-day operations of the facilities assigned to them. Dabertin, who prior to the merger had been assigned to both the Central and Western divisions, was assigned to only the Western Division after the merger to allow her to visit the facilities more often.    This left Dabertin with similar responsibilities, but for fewer facilities.

Dabertin resigned from her position and submitted a claim for severance benefits, in October 1998, claiming she had “good reason” for the resignation due to the reduction in the number of facilities, beds, budgeted revenue and operating profit, direct reports, and construction projects assigned to her and thus the significant change in her position’s duties.

The severance plan’s administrative committee denied her claim.

Scope Peering

HCR claimed that Dabertin still had the same responsibilities, only for a smaller unit of the business.   The court rejected this argument, saying HCR’s interpretation of “scope” was not in accord with its ordinary popular meaning.

Applying the arbitrary and capricious standard of review, the court found that the committee imposed new criteria, which either amended or modified the terms of the severance plan and was “downright unreasonable” in saying that Dabertin did not suffer a significant reduction in the scope of her responsibilities.

The court overturned the committee’s decision and awarded severance benefits to Dabertin.