Legal Necessity or Act of Kindness? - Designing and Administering Severance/Transition Arrangements

Transcription

1 Legal Necessity or Act of Kindness? - Designing and Administering Severance/Transition Arrangements Suzanne Walker Counsel Kilpatrick Townsend & Stockton LLP Joel Gulick Vice President and Associate General Counsel ARES Management LLC April 20, Kilpatrick Townsend

2 Overview WHEN DOES IT MAKE SENSE TO OFFER SEVERANCE? Reduction in Force Management Restructuring Mergers and Acquisitions WHY SHOULD A COMPANY OFFER SEVERANCE? Practice or policy (culture) Employee relations philosophy Potential exposure/likelihood of litigation Reason for separation WHAT SEVERANCE BENEFITS (IF ANY) SHOULD BE OFFERED? Salary continuation COBRA Outplacement services Acceleration of Equity Award Vesting (if applicable) 2

3 Reduction in Force Why? Macy s closing 68 stores likely cutting over 10,000 workers Tribune Media Wire, January 4, to lose jobs in closure of Baltimore plastic container plan Daily Record Digital Editor, March 1, 2016 Wells Fargo is closing over 400 branches CNN Money, January 13,

4 Reduction in Force Establish a Game Plan Timetable RIF Team (decision makers) Selection Process Adverse Impact Analysis OWBPA Termination Requirements Federal/State WARN Impact 4

5 Reduction in Force Timetable Consult with Counsel Document Business Decision Design a selection process Establish Data Collection Procedures Identify employees impacted by selection process Develop a Communication Plan 5

6 Reduction in Force RIF Team Outside Counsel Attorney Client Privilege Human Resources Statistical analysis, training, and communication Supervisors Selection process and communication 6

7 Reduction in Force Selection Process Must be consistent with business reasons for the RIF and uniformly applied. Criteria may be based on: Seniority Performance Job elimination Loss of project or client Attendance Leadership Potential Skills requirements (education) 7

8 Reduction in Force Selection Process Review In order to manage risk, selection process must have multiple levels of review: Supervisors make preliminary decisions Department heads review and make adjustments as necessary Supporting documentation reviewed Management and HR Review 8

9 Reduction in Force Adverse Impact Analysis Courts are likely to scrutinize all the facts and circumstances surrounding a RIF to determine whether an inference of discrimination is raised and whether an employer's business decision to terminate an employee(s) is valid (nondiscriminatory). Prior to implementing a RIF, employers should review the employee documentation (RIF list) and conduct a disparate impact analysis. A pre-rif statistical analysis can reduce the risks of discrimination allegations. 9

10 Reduction in Force Adverse Impact Analysis Attorney client privilege can be used to analyze protected categories that an employer may want to shield from discovery in any potential litigation. In addition to a disparate impact analysis, employers should review the RIF list in light of potential disparate treatment or a pattern or practice of discrimination. 10

11 Reduction in Force Adverse Impact Analysis Difference between Disparate Impact and Disparate Treatment Disparate Treatment: Employee treated differently as a result of a discriminatory motive or intent. (Direct and Indirect Evidence) can be viewed individually or impacting a group as a pattern or practice. Disparate Impact: No intentional discrimination, rather employment practices that are facially neutral in their treatment had an adverse impact on a protected class. 11

12 Reduction in Force OWBPA s Termination Requirement Older Workers Benefit Protection Act (OWBPA) Mandatory Window Period 45 days to consider 7 days to revoke Program Description Who is in the group Eligibility or selection criteria Any applicable time frames for participating in the program 12

13 Reduction in Force OWBPA s Termination Requirement Minimum Release Requirements Written in plain language. Expressly informs the employee that he/she is waiving ADEA rights. Applies only to rights or claims arising before the releases is signed. Offered in consideration of some enhanced benefit. Complies with OWBPA s notice requirements. Employees asked to sign a release must be advised in writing to consult an attorney before signing. 13

14 Reduction in Force OWBPA s Termination Requirement Conspicuous Knowing and Voluntary language BY YOUR SIGNATURE BELOW, YOU ACKNOWLEDGE AND AGREE THAT (1) YOU HAVE CAREFULLY READ AND CONSIDERED THIS AGREEMENT; (2) YOU HAVE BEEN GIVEN SUFFICIENT TIME TO CONSIDER WHETHER TO SIGN THIS AGREEMENT; (3) YOU RECOGNIZE AND UNDERSTAND THAT THIS AGREEMENT CONTAINS A FULL AND FINAL RELEASE BY YOU OF ALL CLAIMS OF EVERY KIND AGAINST THE COMPANY ARISING UP TO THE TIME YOU SIGN THIS AGREEMENT, WHETHER YOU CURRENTLY KNOW OR SUSPECT THOSE CLAIMS TO EXIST; AND (4) YOU KNOWINGLY AND VOLUNTARILY CONSENT TO THE TERMS OF THIS AGREEMENT WITH FULL UNDERSTANDING OF THEIR MEANING. 14

15 Reduction in Force OWBPA s Termination Requirement Decisional Unit The EEOC s interpretive regulations define the decisional unit as that portion of the employer s organization from which the employer chose the persons who would be offered consideration for the signing of a waiver and those who would not be offered consideration for the signing of a waiver. 29 C.F.R (f)(3) (B). The EEOC uses the term decisional unit to reflect the process by which an employer chose certain employees for a [termination or exit incentive] program and ruled out others from that program. 15

16 Reduction in Force OWBPA s Termination Requirement INFORMATION FURNISHED PURSUANT TO THE OLDER WORKERS BENEFIT PROTECTION ACT Decisional Unit for Group Termination Program: Company employees in the Department ( Decisional Unit ). Eligibility for the Group Termination Program: As a result of business need, the Company has eliminated all positions within the Decisional Unit. The Company will offer transition assistance subject to the terms and conditions set forth in the Agreement (the Group Termination Program ) to each eligible employee on or after his/her Separation Date, if any. The following chart lists the job titles and ages, as of the Separation Date, of persons in the Decisional Unit who were eligible to participate in the Group Termination Program and the job titles and ages of persons in the same positions within the Decisional Unit who were not eligible to participate in the Group Termination Program, if any Employees Eligible for Group Termination Program Job title Age Employees in Same Positions Not Eligible for Group Termination Program Job title Age 16

17 Reduction in Force WARN Worker Adjustment and Retraining Notification Act ( WARN ) is a FEDERAL law that requires an employer to provide 60 days written notice of a layoff of more than 50 employees during any 30-day period as part of a plant closing. This requirement does not consider the layoff of employees who have worked for the employer less than 6 months in the past 12 months or employees who work, on average, less than 20 hours a week. Additionally, the WARN Act requires employers to give notice of a mass layoff that does not result from a plant closing, but will result in an employment loss of 500 or more employees during any 30-day period. The Act also covers employment loss for employees if they make up at least 33% of the employer's active workforce. This requirement does not consider the layoff of employees who have worked for the employer less than 6 months in the past 12 months or employees who work, on average, less than 20 hours a week. WARN defines an employer as a business enterprise that employees: (a) 100 or more employees (excluding PT workers) OR (b) 100 or more employees including PT Workers (total weekly hours over 4,000 excluding OT). 17

18 Reduction in Force MINI-WARN Most states do not have their own layoff notice laws (e.g. mini-warn ), but do operate rapid response offices to help enforce federal WARN. VA no state law; subject to federal requirements DC no local law; subject to federal requirements; and MD employers experiencing a Mass Layoff, (even temporary) that affects 25 or more workers, are required to submit a listing of the laid off workers to the local MD unemployment office at least 48 hours in advance of the Mass Layoff. In addition, the Maryland Economic Stabilization Act provides for the adoption of voluntary guidelines to be followed by employers regarding advance notification of reductions in operations, provision of information on continuation of benefits, and mechanisms for state assistance. 18

19 Reduction in Force Severance/Transition Pay Benefits ERISA Plan Non-ERISA Plan/Policy 19

20 Reduction in Force ERISA What is the Employee Income Retirement Security Act (ERISA)? ERISA is a federal law, enacted on September 2, 1974 (and subsequently amended) that establishes minimum standards for pension plans and sets forth rules for transactions associated with employee benefit plans. ERISA includes disclosure and reporting requirements, standards of conduct for plan fiduciaries and to provide for appropriate remedies. 20

21 Reduction in Force ERISA Section 3(1)(B) of ERISA defines an employee benefit plan as, among other things, any plan, fund, or program... established or maintained by an employer... for the purpose of providing for its participants or their beneficiaries 21

22 Reduction in Force ERISA Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1 (1987) established the standard for determining whether the payment of severance pay is pursuant to a plan. In Fort Halifax, the Supreme Court held that a one-time, lump sum severance payment triggered by a plant closing did not create an ERISA plan because it did not create the need for an ongoing administrative scheme. 22

23 Reduction in Force ERISA Factors used to determine an ongoing administrative scheme : 1. Form and type of payment (i.e., lump sum, periodic, alternative forms); 2. Amount of discretion employer has in determining eligibility or benefits; 3. Period of time over which benefits are paid; 4. Single event or are generally available to employees from time to time; 5. Need for monitoring, financial coordination or recordkeeping by the employer over a period of time. 23

24 Reduction in Force ERISA Disclosure Requirements for ERISA Severance Plans Employer must file a Form 5500, unless the plan has fewer than 100 participants and all benefits are payable by an insurance company or the employer s general assets. Participants must receive a Summary Plan Description. Participants must receive a summary annual report, unless the plan is exempt from filing a Form 5500 annual report. Penalty for Failure to Company: Up to $1,100 per day starting from the date of the administrator s failure or refusal to file the Form 5500 Up to $110 per day per violation for failure to provide documents to participants upon request 24

25 Reduction in Force ERISA Delinquent Filer Voluntary Correction Program (DFVCP) In an effort to encourage pension and welfare plan administrators to file overdue Form 5500s, the Department of Labor s Employee Benefits Security Administration (EBSA) established the DFVCP to provide plan administrators with the opportunity to pay reduced civil penalties for voluntarily complying with the annual reporting requirements. 25

26 Reduction in Force ERISA Participation in the DFVCP is a two part process: First Electronically file a complete Form 5500 or Form SF Annual Return/Report, including all schedules and attachments, for each year the plan administrator is requesting relief. Second Use the online calculator to compute the correct penalty amount. 26

27 Reduction in Force ERISA DFVCP Penalties Small Plan Filers. In the case of a plan with fewer than 100 participants at the beginning of the plan year the applicable penalty amount is $10 per day for each day the annual report is filed after the date on which the annual report was due (without regard to any extensions),not to exceed $750. In the case of a DFVCP submission relating to more than one delinquent annual report filing for the same plan, the maximum penalty an amount is $750 for each annual report, not to exceed $1,500 per plan. Large Plan Filers. In the case of a plan with 100 or more participants at the beginning of the plan the applicable penalty amount is $10 per day for each day the annual report is filed after the date on which the annual report was due (without regard to any extensions), not to exceed $2,000. In the case of a DFVCP submission relating to more than one delinquent filing for the same plan, the maximum penalty amount is $2,000 for each annual report, not to exceed $4,000 per plan. 27

28 Reduction in Force ERISA Advantages of ERISA Applying to a Severance Plan Plans are subject to federal rather than state court jurisdiction Employer and participants may benefit from ERISA preemption Benefits are protected from creditors in the event of personal bankruptcy Disadvantages of ERISA Applying to a Severance Plan Cost of drafting a plan and SPD, as well as annual filings Use of discretion may result in discrimination claims 28

29 Reduction in Force Non-ERISA Plan/Policy While there is no authoritative checklist that can be used to conclusively determine if an employer s obligations rise to the level of an ERISA plan, the following are helpful: 1. Is managerial discretion involved in plan/policy administration; 2. Would a reasonable person believe there is an ongoing commitment by the employer to provide severance benefits; and 3. Is the employer required to analyze the circumstances of each employee s termination separately in light of certain criteria 29

30 Reduction in Force Non-ERISA Plan/Policy Okun v. Montefiore Medical Center, No. 11 Civ (PGG) (S.D.N.Y. Sept. 10, 2013) First Prong: The court found that Montefiore only exercised managerial discretion in determining initial eligibility for severance and did not exercise discretion with respect to the amount or timing of severance payments. This argued against the existence of an ERISA plan. Second Prong: The court found nothing to suggest that an employee could reasonably perceive the need for an on-going administrative program, and noted that Montefiore could terminate or amend the program at any time. Third Prong: Once an employee qualified for severance, Montefiore s severance payments were made on the basis of a simple arithmetical calculation; no individualized,discretionary analysis by the employer was required. 30

31 Reduction in Force Non-ERISA Plan/Policy Kenneth Hall v. Lighthouse Corporate Acquisitions LLC (United States District Court of Western NY Decision and Order November 10, 2016) No ERISA Coverage. No discretion is required as to the amount of severance, the timing of payouts or the form of severance. No discretion when evaluating good reason definition. No reasonable person would perceive an ongoing commitment to provide benefits under the Plan. James v. Fleet/Norstar Financial Group, Inc., 992 F.2d 463 (2nd Circuit 1993) No ERISA Coverage. Employers undertaking to give employees 60 days of pay following their last day of work if employee remains on the job until internal consolidation was completed did not qualify as an ERISA welfare benefit plan. No ongoing administrative program. 31

32 Management Restructuring Severance Pay Reasons for Management Restructuring New CEO wants to replace current members of the C-suite with his/her own team; 70 year old member of management team is unable to perform the functions of his job as it becomes more technical and he does not have the skills; and Employer wants to recruit new talent 32

33 Management Restructuring Separation and Release Agreements Additional consideration Severance payment Vacation payout COBRA payments Release of claims Knowing and voluntary Timing Federal Older Workers Benefits Protection Act ( OWBPA ): Consideration Period: 21/45 days Revocation Period: 7 days 33

34 Management Restructuring Separation Agreements Covenant not to sue EEOC charges permitted; no monetary award available Judicial determination of validity of ADEA release permitted Indemnification and payback provisions For breach of agreement No admission of unlawful or wrongful conduct by Company 34

35 Management Restructuring Additional Issues Cooperation Winding up of employee s work Transition of work Pending or ongoing litigation References Outplacement/unemployment benefits Return of company property Restrictive covenants (if not included in employment agreement) 35

36 Management Restructuring Additional Issues Non-disparagement Confidentiality Reaffirmation of prior agreements Attorneys fees Severance Amount Schedule of payments Section 409A issue 36

37 Management Restructuring Impact of Section 409A Section 409A became effective 1/1/2005. Operational compliance was required immediately, although certain transition relief continued through 12/31/2008. As of 1/1/2009, all plans and arrangements subject to Section 409A had to be in documentary compliance with Section 409A. 37

38 Management Restructuring Impact of Section 409A Penalties for failure to comply with Section 409A are harsh. Noncompliant compensation is included in the employee s income during the first year in which it is both: noncompliant with the requirements of Section 409A, and not subject to a substantial risk of forfeiture. Both a 20% penalty tax and penalty interest also apply to the noncompliant compensation; these amounts are payable by the employee. The employer may face penalties relating to reporting and withholding on the affected compensation. 38

39 Management Restructuring Impact of Section 409A In general: Section 409A applies to any current legally binding right to receive compensation in a future year. This is a very broad standard and covers, in part the following severance arrangements: Employment agreements with post-employment benefits Standing or intermittent severance plans Ad hoc severance arrangements For employment agreements and severance pay, several key exceptions are available. If an exception is not available, the arrangement must meet the requirements of Section 409A. 39

40 Management Restructuring Impact of Section 409A Short-Term Deferral Exception Available for compensation that is paid not later than the later of (i) 2½ months after the end of the employer s fiscal year, or (ii) March 15th of the calendar year, following the calendar year in which the right to the compensation becomes substantially vested. Severance pay triggered by an involuntary separation is not vested until the separation occurs. However, severance pay triggered by a resignation may or may not be considered vested when the arrangement is established. 40

41 Management Restructuring Impact of Section 409A Two-Times Compensation Exception Only available for involuntary separations and voluntary separations during a window program. The aggregate amount of severance pay and benefits must not exceed two times the employee s annual compensation in the year prior to the year of separation. However, compensation is limited to the 401(a)(17) limit for the year of separation. The 2017 limit is $270,000, meaning the maximum possible exclusion in 2017 is $540,000. All payments must be made not later than the end of the second tax year after the tax year of the separation. 41

42 Management Restructuring Impact of Section 409A Section 409A uses precise definitions for certain terms. Sometimes documents don t define these terms or use ambiguous definitions. For example, a severance agreement might provide for payment upon termination of employment but not define the term. If the agreement has a Section 409A savings clause, the term is deemed to have the proper Section 409A definition. It is intended that the provisions of this Agreement comply with Section 409A, and all provisions of this Agreement shall be construed and interpreted in a manner consistent with the requirements for avoiding taxes or penalties under Section 409A. As a result, if the agreement has a savings clause, there will be no Section 409A violation so long as the plan is operated pursuant to the Section 409A proper definition. 42

43 Management Restructuring Impact of Section 409A Some arrangements allow the employee to receive severance pay if the employee resigns for good reason. To qualify as an involuntary termination, definition of good reason must require employer to take action resulting in a material, negative change to employee in the service relationship, such as duties to be performed, conditions under which such duties are to be performed, or compensation to be received for performing such services. 43

44 Management Restructuring Good Reason Definition Final regulations contain a safe harbor Material diminution in base compensation Material diminution in authority, duties, or responsibilities of employee or of employee s supervisor Material change in location at which service provider works Material breach of employment agreement Must give employer notice shortly following occurrence of good reason event; Employer must have at least 30 days to cure; and If employer does not cure, employee must separate within specified period following occurrence of good reason event (specified period cannot be longer than 2 years). 44

45 Management Restructuring Good Reason Definition If good reason is triggered by any reduction in compensation, it doesn t meet IRS safe harbor. If good reason definition doesn t meet safe harbor: May take position that it still constitutes an involuntary termination and leave as is or revise to more closely comply with safe harbor; If not vested, may amend to comply with the safe harbor; or If vested and too late to fix, then must comply with Section 409A, and may need to amend other provisions to ensure compliance. If a bad good reason definition cannot be fixed, then the shortterm deferral and two-times compensation exemptions are usually not available for any portion of the severance. 45

46 Management Restructuring Severance Payment Terms The payment period can a single taxable year or a period that begins and ends in the same taxable year. It can also be a period of up to 90 days that could span two taxable years, so long as the employee cannot pick the year of payment). May be able to correct without penalty, at any time prior to the year in which the amount becomes vested, by amending to shorten the payment period. Once vested, amend to shorten the payment period. Tax reporting requirements apply to the employer and the employee. If amendment is made after payment event occurs, and payment in fact was made within 90 days after payment event and employee in fact was not allowed to control year of payment, then employee must include 50% of payment in income and pay 20% penalty tax. Tax reporting requirements apply to the employer and the employee. 46

47 Releases 409A Impact When an employer provides severance pay to an employee following employment termination, usually the employer will require the employee to sign a general release of claims against the employer as a condition for receiving the severance pay. For example: In the event of an involuntary termination of employment, and after the employee signs a release of claims against the Company and such release becomes effective, the Company shall pay the employee 24 months of base salary in 24 equal monthly installments. Any severance pay due to the employee under this Agreement is conditioned upon the employee s execution of a general release of claims in the form attached hereto as Exhibit A. 47

48 Releases 409A Impact Section 409A permits payment to be triggered only by six events. The six events do not include signing a release of claims. Many employment agreements contain this violation. To correct: If plan has a designated payment period following payment trigger, either: Amend to pay on last day of designated period, or Add requirement that if designated payment period straddles two taxable years, pay in second taxable year If plan does not have a designated payment period following payment trigger, either Amend to pay on 60th or 90th day following payment trigger, or Add a designated payment period not longer than 90 days and specify that if designated payment period straddles two taxable years, pay in second taxable year. Tax reporting requirements apply to employer and employee. 48

49 Mergers and Acquisitions Change in Control Due Diligence Merger Agreement 49

50 Mergers and Acquisitions Due Diligence Severance Pay Obligations can be anywhere: Employment Agreements Change in Control Agreements/Plans Board Minutes Offer Letters Employee Handbooks 50

51 Mergers and Acquisitions Merger Agreement If a target has no severance pay obligations and the acquiror does not have a severance plan or policy, consider providing severance through the Merger Agreement or: Implement a broad-based severance plan for all employees with varying levels of severance. Draft retention agreements to keep key employees in place during transaction. 51

52 Questions

53 Contact Us Suzanne A. Walker Counsel Kilpatrick Townsend & Stockton LLP Suzanne Walker focuses her practice on matters relating to employee benefits and executive compensation for public and private companies. Her employee benefit experience includes advising clients with respect to the design, drafting and operation of tax-qualified retirement plans such as 401(k) plans, employee stock ownership plans and KSOPs. Ms. Walker frequently advises clients on executive compensation matters relating to employment and consulting agreements and the design and implementation of cash and stock-based incentive compensation plans. Publiclytraded companies benefit from Ms. Walker s extensive knowledge of federal securities disclosure and registration rules governing stock benefit plans. Ms. Walker works closely with clients on the drafting of proxy statements and other securities filings. Private and public companies also seek Ms. Walker's guidance with human resource law issues, including the development of effective personnel policies and practices, employee and director education on employer-sponsored benefit plans and the management of reductions in force and other severance matters. Ms. Walker holds a B.A. from American University and a J.D. from Hofstra University. She is a member of the District of Columbia and New York Bars. Joel Gulick Vice President and Associate General Counsel Ares Management LLC jgulick@aresmgmt.com Mr. Gulick is a Vice President and Associate General Counsel (Credit) in the Ares Legal Group, primarily responsible for litigation matters. Prior to joining Ares in 2017, Mr. Gulick was a Vice President and Associate General Counsel at American Capital, Ltd., where his practice covered a wide variety of employment and executive compensation issues. Previously, Mr. Gulick was an Associate in the Tax Group at Arnold & Porter LLP, where he focused on transactional employee benefits matters and advised clients regarding certain tax-qualified plan matters. Mr. Gulick holds a B.A., cum laude, from Gettysburg College in History and a J.D., with honors, from the George Washington University Law School. Mr. Gulick is a Co-Chair of the Employment and Labor Committee of the Association of Corporate Counsel - National Capital Region and a member of the Maryland and District of Columbia Bars. 53