When changing retirement plans, employers sometimes don’t notify employees until all the details are in place. But a new case makes it clear that if you don’t let workers in on your plans earlier, you could face an expensive lawsuit.
Employer Enhances Early Retirement Benefits
In a workforce reduction, IBM offered workers two early retirement options: retire by a specified date or take a leave of absence for up to five years before retiring. Retirement benefits would be determined according to the date the person retired.
A group of workers at IBM’s Lexington, Kentucky, plant retired immediately. A month later, IBM announced a redesign of its retirement programs, which resulted in greater benefits for workers who opted to go on leave and delay their retirement date.
Join us this fall in San Francisco for the California Employment Law Update conference, a 3-day event that will teach you everything you need to know about new laws and regulations, and your compliance obligations, for the year ahead—it’s one-stop shopping at its best.
Workers Claim Duty To Disclose Plan Enhancements
The workers sued, claiming IBM violated the Employee Retirement Income Security Act (ERISA). They pointed to oral statements by the company and a provision in its summary plan description advising workers that deferring retirement until the end of the five-year leave of absence wouldn’t be financially advantageous in most cases. They also argued that IBM fraudulently induced them to retire early by failing to disclose that a more beneficial plan was being prepared.The employees claimed that if they had known what IBM was planning, they would have taken the leave of absence and then become eligible for enhanced benefits under the new program. IBM contended it didn’t make misrepresentations and wasn’t obligated to disclose the proposed changes until the details were finalized.
Employer Must Disclose Plan Under Serious Consideration
The federal Sixth Circuit Court of Appeal ruled that when an employer is giving “serious consideration” to a change in a benefit plan, it has a fiduciary duty under ERISA to disclose the progress of its deliberations-although it doesn’t have to predict whether the changes will ultimately be adopted. “Serious consideration” occurs, the court said, when a specific proposal is being discussed for purposes of implementation by senior managers who have the authority to put the change into effect. The court went on to discuss each of these factors:
- Specific proposal. The proposal must be sufficiently concrete-past the preliminary stages of gathering information, developing strategies and analyzing options. But it needn’t be in final form.
- Discussion for purposes of implementation. The discussion regarding the plan changes must have progressed to the point of focusing on the practical aspects of implementation, as opposed to still being in the data collection or strategy formulation stages.
- Consideration by senior management. The proposal must have reached the stage at which it is being considered by executives who have the authority to implement it.
Employees Get Green Light
Applying these criteria, the court found that IBM had given its new plan serious consideration three months before the workers retired. That’s when IBM’s management committee, which had the authority to approve plan changes, held a meeting to discuss them and gave the go-ahead to prepare a final design and implementation strategy. The employees now must prove that IBM actually misled them by failing to disclose the pending plan redesign and by making statements that opting for an immediate retirement date would be financially beneficial.
Practical Impact
Although this decision isn’t directly binding on California courts, it provides important guidance they may follow on your duty under federal law to disclose to workers benefit program alterations you’re planning. The risk of problems is greatest when, as the IBM workers claimed, your employees would be damaged by taking action without knowing the details of what was about to be announced.