Laid-Off Employees Were Not Entitled To Severance Benefits That Were Offered Under The Employer’s Discretion

CATEGORY: Client Update for Public Agencies
CLIENT TYPE: Public Employers
DATE: Jun 06, 2023

A large class action of laid-off employees filed a lawsuit against Northrop Grumman alleging that they were entitled to severance benefits and did not receive them.   Under Northup Grumman’s “Severance Plan,” a laid-off employee who regularly worked at least 20 hours a week will receive severance benefits if the employee receives a memo signed by the Vice President of Human Resources that individually addresses the employee by name (HR Memo).  The Severance Plan gave the Vice President of Human Resources the discretion to designate which laid-off workers were eligible for the severance benefits.

Hundreds of laid-off employees filed a lawsuit contending that they were entitled to severance benefits even though they did not receive the HR Memo.  They argued that the only condition of eligibility was that they worked at least 20 hours a week and they viewed the HR Memo simply as a document that would verify their eligibility.

Northup Grumman argued that management gets to decide which laid-off employees deserve severance pay and how many severance benefit packages the company could afford to pay.

The Seventh Circuit Court of Appeals disagreed with the plaintiffs.  The Court found that the Severance Plan makes receipt of the severance benefits contingent upon both working 20 hours a week and receipt of the HR Memo, which the plaintiffs did not receive.  The Court stated that welfare-benefit plans are entirely under the control of the entities that establish them and when making decisions about the eligibility terms, employers may act in their own interests and maintain discretion in offering benefits.  While a welfare-benefit plan administrator serves in a fiduciary capacity in the best interest of the plan’s participants, the employer offering the plan does not.

In addressing the plaintiffs’ other arguments, the Court found that even if Northrop Grumman provided the HR Memo to every laid-off employee who worked enough hours in the past, Northrop Grumman maintained the right to change how it exercised its discretion in deciding who receives an offer for severance benefits.  The Court found that the Severance Plan itself, and not any past practice or past mistakes, controlled.  Since the Severance Plan granted discretion to the Vice President of Human Resources to decide to whom to issue HR Memos, that discretion was controlled and plaintiffs were not entitled to such benefits.

Carlson, et al v. Northrop Grumman Severance Plan, et al, Docket No. 22-01764 (7th Cir. May 2, 2022).

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