ERIP stands for Early Retirement Incentive Plan. Employers have been using ERIPs for years—they’re an effective way to influence the workforce and even sometimes to avoid implementing a layoff.
An ERIP essentially provides an incentive for eligible employees to voluntarily retire early, as the name implies. The key to successful implementation is to ensure that participation truly is voluntary, yet it’s enticing so that enough employees will utilize the ERIP.
An ERIP typically provides extended benefits, such as a severance package, a specific payment amount, or an increase in pension or other retirement benefits in exchange for a release of claims against the employer. This type of arrangement can allow employees nearing retirement to voluntarily retire early. The employer can set the terms and determine who meets the eligibility criteria before implementing the plan.
Why Implement an ERIP?
Employers that are faced with staffing conundrums often have to find ways to influence staffing levels—either through voluntarily or involuntary means. For example, an employer may be facing the need to trim the size of the workforce but understandably does not want to implement a sizeable layoff, which may negatively affect morale.
An ERIP has the added benefit for an employer that it is typically utilized by older, more experienced workers who are often on the higher end of the compensation structure within the organization—thus their departure has a disproportionate impact on the payroll budget. Yet since the participation in the plan is voluntary, it’s a win-win for employers and employees who participate.
ERIP Legal Considerations
You’re probably already wondering how many legal landmines an ERIP might trigger, and that’s a fair concern. Employers need to ensure any ERIP they implement does not land them in trouble under Age Discrimination in Employment Act (ADEA) regulations or under the Older Workers Benefit Protection Act (OWBPA), which is a component of the ADEA.
Thankfully, this can be accomplished. In fact, there is a specific section of the ADEA that outlines the legality of offering such a plan:
“It shall not be unlawful for an employer, employment agency, or labor organization … to observe the terms of a bona fide employee benefit plan … that is a voluntary early retirement incentive plan consistent with the relevant purpose or purposes of [the ADEA].”
Essentially, the ADEA itself recognizes that such a plan may be legally implemented as long as specific requirements are met, such as ensuring that older workers receive the same or better benefit than younger workers and that the implementation is completely voluntary.
Tips for Implementing an ERIP
Any employer considering the use of an ERIP as a means to reduce overall staffing levels for any reason still needs to consider how to implement the program effectively.
- The first consideration is what to offer. A balance must be struck in which the offer is enticing enough to convince enough employees to take advantage of it, but not so enticing that the employer loses too many key employees as a result. Clearly, this is a delicate balance. Employers should carefully consider who will be eligible. How many years of service with the company are required? Will there be a minimum age to be eligible? What outcome are you hoping for? The answer to this question can help you set parameters.
- Ensure that the plan is implemented in such a way to stay in ADEA compliance. Just because the ADEA says such plans are allowed does not give the employer carte blanche to structure the ERIP in a way that might be construed as discriminatory. For example, ensure that the plan details do not inadvertently give better benefits to younger employees.
- There are also other legal considerations to bear in mind—be sure to understand all of the details before proceeding. For example, there are specific timeframes that ERIP offers that must be made available, and employees must be given adequate time to make a decision.
- Remember that some employees you don’t want to lose may consider taking advantage of the ERIP. Determine whether there are actions you can take to retain star performers who may consider the ERIP.
Has your organization ever offered an ERIP? How did you structure it? How was it communicated to employees? Did it have the outcome you anticipated?
*This article does not constitute legal advice. Always consult legal counsel with specific questions.
About Bridget Miller:
Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.