American workers expect that if they are given walking papers, there at least will be something extra in their pay envelopes to help cushion the shock of joblessness. According to a Bureau of Labor Statistics study published last year, 61 percent of large and medium-sized companies promise managers and professionals severance pay if they are dismissed through no fault of their own; 57 percent have such coverage for technical and clerical workers, and 30 percent for production workers. Typically, the plans promise a week's pay for each year of service.
New court rulings, however, make it a lot less certain that employers will have to live up to those promises.
It's not unusual for a company to balk at paying severance pay. Often so much friction has preceded the firing that the boss refuses to give the worker one extra dollar, regardless of general company policy. In other cases, there are genuine disputes over how much is due: For instance, do long periods of illness count towards the departing employe's years of service? And currently a debate is raging about a company's obligations when, rather than dismissing individual workers, it closes down a whole plant or sells a division to another corporation. Most such situations involve small employers, but such large companies as Burlington Industries, Central Soya, Western Publishing, and Carborundum are the targets of proceedings to collect severance pay that former workers say is due them.
State labor agencies usually handle those collection efforts for workers. In 31 states, statutes specifically demand that a final pay bonus must be paid if promised. And even those states must routinely go after unpaid wages. The state agencies seldom litigate, but in thousands of cases each year they are able to get employers to pay up merely by entering the dispute.
But U.S. Courts of Appeals in both Richmond and Manhattan now have ruled that, for the last decade, the state's efforts have been based on invalid authority. The judges say that the state statutes were preempted in 1974 by the Employee Retirement Income Security Act (ERISA), the federal statute governing pension and benefit plans. U.S. Labor Department regulations say that law does not cover fringe benefits that are merely "payroll practices." But since the statute's list of such practices -- including vacation pay and weekend premiums -- does not mention severance pay, the judges reasoned that it is not a payroll practice but the kind of perk that Congress meant to be covered by federal rather than state regulation.
Understandably, states are upset by such a successful challenge to their power. New York already has challenged one appellate ruling in the U.S. Supreme Court, and North Carolina will take its case there soon. Other state labor agencies from Vermont to Hawaii are backing North Carolina.
Unless the Supreme Court overturns the appellate decisions or Congress rewrites the law, warns New York State assistant attorney general Carlin Meyer, employers will be able to walk away from severance pay obligations. That's because, while such wage-collection cases are the bread and butter of state labor agencies, the ERISA enforcement program is concerned primarily with major pension plan abuses affecting large numbers of workers. And usually the workers involved in a severance pay dispute feel "there's not enough money involved for them to get a lawyer and go into court to contest an ERISA claim," Meyer says.
There are legal as well as economic reasons why an ERISA action is not very attractive to employes trying to collect severance pay. Under state laws, any ambiguity in company policy is interpreted in the employe's favor. But under ERISA, any reasonable interpretation put forward by the company is acceptable. That distinction can dictate who wins.
Both the appellate rulings came in cases involving the January 1982 sale of the Burlington hosiery division to Kayser-Roth Corp., a subsidiary of Gulf & Western Industries. Burlington had promised severance pay to those "who involuntarily leave the company," and since Kayser-Roth initially took on all division employes, Burlington insisted it owed no severance pay. But hundreds of those workers reasoned that since they no longer worked for Burlington, the payments were due them. They "felt very much that they should have the option of taking the severance pay and going out and looking for other employment," explains New York lawyer Emily Bass, who represents some of the workers. She points out that Kayser-Roth offered no severance pay, and many of those hired at the time of the sale have since been let go, with no good-bye bonuses.
The Richmond appeals court reasoned it had to accept Burlington's reading that workers shifted with their division to a new corporation are not due severance, because that interpretation is neither arbitrary nor capricious. North Carolina labor officials are convinced that the workers there could have collected had the state law been used as the standard instead of ERISA.
Burlington, of course, has convinced both appellate courts that the state law standard no longer is valid. In a brief just filed at the U.S. Supreme Court, Burlington argues that large companies operating in different jurisdictions need a uniform national rule. "It is the patchwork of inconsistent state law enforcement mechanisms which Congress, in enacting ERISA, sought to replace with a comprehensive federal enforcement scheme," Burlington lawyer Daniel Riesel wrote.
The unanswered question for employes, of course, is just how much federal enforcement there will be to ensure that they get the severance pay they have been promised.