Eight ways employees can use ERISA in litigation over execution in terminations and attempted clawbacks
By: Bryan Tyson
Many executives and corporation boards have been eagerly watching the looming court battle between McDonald’s Corporation and its former CEO, Stephen Easterbrook.
While you can find a full summary here, according to a complaint filed in the Chancery Court of Delaware, while employed as CEO of McDonald’s, Easterbrook admitted to a relationship with an employee. The complaint claims that during an investigation into this relationship, Easterbrook represented that he had not had any other relationships with other employees. The complaint states that while McDonald’s Board considered terminating Easterbrook, it was uncertain whether the “cause” definition in his employment agreement would encompass the specific facts of the relationship with the employee. As a result, the Board entered into a severance agreement with Easterbrook. News reports claim the severance amount was $42 million.
The complaint goes on to allege that after the severance agreement was signed, McDonald’s became aware that Easterbrook had relationships with other employees that he did not disclose. The complaint alleges claims for breach of fiduciary duty and fraud in the inducement by Easterbrook. As a remedy, the suit seeks to “clawback”—or force Easterbrook to return—the severance payment.
In response to the complaint, Easterbrook has filed a motion to dismiss based on several procedural defenses. Case watchers will have to wait over the next several months for a likely resolution of the motion to dismiss and other issues that will certainly arise in the proceedings.
However, one aspect of the case yet to be addressed is the potential effect of the Employee Retirement Income Security Act, commonly known as “ERISA.” ERISA is a federal law that governs most benefits that employees receive through their employer, including retirement plans (think 401(k)s), health insurance, long-term and short-term disability, group life insurance, and many severance plans. In the McDonald’s case, part of the relief the company seeks is a recission of the severance benefits provided to Easterbrook as part of his negotiated severance package. According to McDonald’s complaint, those severance benefits are part of a larger severance plan, which may be subject to ERISA.
Why does it matter that ERISA might apply in the McDonald’s case or in any case where a company is attempting to sue a former employee?
- ERISA preempts all state laws that “relate to” an employee benefit plan. ERISA displaces or “preempts” all state laws that “relate to” an employee benefit plan. The U.S. Supreme Court has given the term “relate to” a very broad definition such that almost any claim that has anything to do with an ERISA plan is preempted. So if a company’s claim for breach of fiduciary duty against a corporate executive would require any reference to or consideration of a severance plan (e.g., the company asks to rescind the plan as a remedy), that claim might be preempted and therefore void.
- ERISA requires special administrative procedures. ERISA contains very specific procedures that must be followed to assert a claim. A company’s failure to follow these procedures can provide arguments against the company’s requested remedies or help to defeat a company’s claims. In some circumstances, the ERISA procedures could even force a company to turn over important information prior to litigation.
- ERISA imposes fiduciary liability on plan administrators. ERISA plans must have a “fiduciary,” or someone who administers the plan and must act in the best interests of beneficiaries (the intended recipients of the benefit plan). Failure to uphold this standard can subject the fiduciary to liability under ERISA. In executive termination litigation, this may provide the executive addition claims against company entities, the company itself, or company personnel.
- ERISA only looks to plan documents to determine liability. Typically, an ERISA plan (including a severance plan) is governed solely by its plan documents. For example, in the McDonald’s case, the executive may argue that the only document that matters for the lawsuit is the severance agreement; all the extraneous facts afterwards (that are not in the severance agreement) cannot be considered in adjudicating the executive’s entitlement to the benefits.
- ERISA provides a federal forum for litigation. All ERISA claims can be heard in federal court and some ERISA claims must only be heard in federal court. The ability to remove a case not just from one court to another—but from the entire state court system to the federal court system—can be a valuable procedural weapon for an executive.
- ERISA provides for attorneys’ fees. Litigation can be expensive, especially if you’re up against a giant company with seeming unlimited resources. ERISA has a provision providing for a court to award attorneys’ fees in its discretion. That can help level the playing field when a company is suing an individual or group of individuals.
- ERISA can limit remedies. When Congress passed ERISA, it designed very specific and exclusive remedies that would be available. Many of those remedies require special circumstances for a company to be able to recover benefits from an executive, providing the executive further defenses.
- ERISA can provide both a sword and shield for an executive. ERISA is, in a sense, “one-stop shopping” for many executive benefits issues. It not only provides preemption protection from claims by the company against the executive that relates to severance or other benefit plans, but it also provides the vehicle through which the executive can file a claim to recover any additional benefits due. Being able to use the law as both a sword and a shield at the same time can be a very efficient way to litigate claims.
Whether ERISA applies to the McDonald’s/Easterbrook case remains to be seen, but the case is a good reminder that executives facing termination or dealing with post-employment investigations or allegations should consider whether ERISA may provide some relief or defenses for them as they transition through those issues.