Can Employee Benefits Be Used as a Carrot to Avoid Litigation?

The litigious nature of our society breeds unnecessary and frivolous legal claims, which often blind-side employers with unexpected litigation. Although employers may consistently prevail when faced with frivolous claims, employers still incur unwanted expenses associated with defending themselves in the process. What if there is a way employers can protect themselves from unnecessary legal claims? Specifically, what if employers could avoid litigation over claims for employee benefits, employment-based claims, or other state or federal legal claims? In the context of the provision of employee benefits, employers may avoid unnecessary and frivolous litigation by conditioning the receipt of employee benefits on the waiver of legal claims. In other words, the provision of employee benefits may be used as a carrot to obtain a waiver of legal claims for employee benefits, employment-based claims, or other state or federal legal claims.

How Can Employers Use Employee Benefits as a Carrot to Avoid Litigation? 

The provision of employee benefits is voluntary, and an employer is free to eliminate or modify benefits at any time and for any reason, so long as the benefits are not vested and the employer reserved the right to do so in the plan’s document. Under the Employee Retirement Income Security Act ("ERISA"), pension benefits generally vest over a specified period of time, meaning the employee obtains a nonforfeitable right to receive such benefits. Thus, employers may only condition the receipt of pension benefits that are not vested. Employers may, however, condition the right to vest in such benefits in the first place, or the right to receive benefits that may be provided in the future, such as early retirement benefits. Unlike pension benefits, welfare benefits do not become vested under ERISA. Therefore, employers are free to eliminate or modify such benefits so long as employees were not promised specific benefits, either in the plan documents, communications with employees or otherwise. Following this reasoning, courts have found that employers are permitted to condition benefits on a waiver of legal claims because the employer is permitted to eliminate or reduce benefits at any time, so long as the benefits are not vested and the employer reserved the right to do so in the plan document.

Conditioning the Receipt of Severance Benefits on the Waiver of Legal Claims for Employee Benefits is OK

This reasoning was recently applied by the Eighth Circuit in Peterson v. E.F. Johnson Company. In Peterson, the Company initially adopted a severance benefit plan for employees who were involuntarily terminated without cause. Peterson was a participant in the plan. Peterson was laid off and later terminated without cause. After Peterson’s layoff, but before his official termination, the Company adopted a new, less-favorable severance benefit plan in place of the original severance benefit plan. Upon termination, the Company offered Peterson benefits under the new severance benefit plan. In addition, the Company conditioned the receipt of the benefits under the new plan on Peterson’s waiver of his rights to claim potential benefits under the old, more generous plan. Peterson contended that he had a right to receive benefits under the old plan, or, at the least, the Company was prohibited from conditioning the receipt of benefits on the waiver of his legal claims for benefits under the old plan.

The Eighth Circuit Court of Appeals disagreed. The court held that the Company had a right to condition Peterson’s receipt of benefits under the new plan upon his execution of a waiver of his right to claim potential benefits under the old plan. The court reasoned that, while Peterson’s situation was sympathetic, the employer could have eliminated the old plan altogether and not offered employees a new plan. 

Conditioning Other Employee Benefits on a Waiver of Legal Claims: State of the Law

The practice of conditioning benefits has garnered new attention due to the Peterson decision. However, conditioning other employee benefits (e.g., early retirement, disability or retiree medical benefits) on the waiver of legal claims has generally been upheld by the courts, including the U.S. Supreme Court. The U.S. Supreme Court, in Lockheed v. Spink, found that an employer can require an employee to waive employment-related claims in return for receiving benefits the employer is not otherwise obligated to provide (Spink involved the conditioning of the receipt of early retirement benefits in exchange for the waiver of employment-based claims). Thus, it appears that an employer may condition the receipt of other employee benefits on a waiver of legal claims. However, the Seventh and Tenth Circuits have limited the application of a waiver of legal claims, finding that a claim that has not yet "accrued," may not fall within the scope of the waiver. In addition, if the waiver is not explicitly provided for in the plan document (in order to give employees notice of the condition), the waiver may be found unenforceable. Thus, a broad waiver of legal claims may not be sufficient. Instead, it appears that a broad waiver, which also explicitly articulates specific types of claims that may accrue in the future (e.g., claims under ADEA or ERISA) is advisable. 

What Should Employers Do In Light of the New Ruling?

First, Peterson indicates that employers may permissibly (i) eliminate severance benefits under a rich plan, (ii) offer severance benefits under a less-generous plan, and (iii) condition the receipt of benefits under the less-generous plan on the waiver of claims for potential benefits under the rich plan. Therefore, employers (at least in the Eighth Circuit) may consider adopting this practice. Whether this practice is permissible in other areas of the country, however, is not as certain. 

In addition, case law indicates that employers may condition the receipt of other employee benefits on the waiver of legal claims. The enforceability of the waiver may depend on the scope and explicit nature of the waiver (e.g., whether the waiver is broad or limited). However, the U.S. Supreme Court, in Spink, has found that an employer can protect itself from legal claims as a condition for receiving employee benefits. Thus, employers may rely on Spink as a starting point prior to examining the case law that may be applicable in specific geographic locations. Therefore, in response to the current state of the law, employers are advised to:

• Review their severance and other employee benefit plans in order to determine whether the plan conditions benefits on the waiver of legal claims. 
  • If the plans lack such conditions, employers may (i) amend their existing plans to incorporate the waiver, or (ii) terminate existing plans and establish new plans incorporating the waiver.
• Examine the case law that may be applicable to the particular geographic location or locations in which the employer conducts business. 
• Determine the breadth and underlying intent of the waiver of legal claims in order to ensure the waiver’s enforceability in a court of law.

Our attorneys in our Tax Section are available to assist you in drafting any waiver of legal claims. In addition, our attorneys are available to assist you in amending or terminating existing plans, and examining applicable case law in order to determine the appropriate breadth and underlying intent of the waiver.