Fourth Circuit Outlines Pitfalls in Using Severance Plans for Layoffs
Time 5 Minute Read
Fourth Circuit Outlines Pitfalls in Using Severance Plans for Layoffs

The Fourth Circuit issued an opinion in Messer et al. v. Bristol Compressors International, LLC et. al. that should serve as a cautionary tale to employers planning to use severance agreements when implementing layoffs.  There, the court considered three questions.  First, whether Bristol Compressors validly eliminated its severance plan before terminating Plaintiffs’ employment.  Second, whether certain Plaintiffs who signed a Stay Bonus Letter Agreement (“SBLA”) waived their claims against Bristol Compressors.  And third, whether four of the Plaintiffs received adequate notice under the WARN Act before their employment was terminated.

Elimination of Severance Plans

The Fourth Circuit first held that Bristol Compressors did not validly revoke its severance plan (contained in the Employee Handbook) before terminating Plaintiffs’ employment.  In reaching this conclusion, the Court noted that the severance plans were considered an unvested employee welfare benefit plan under ERISA, meaning the Company was free to amend or eliminate the plan so long as such actions are done in compliance with formal procedures established in a written plan.  With this in mind, the Court concluded that Bristol Compressors did not comply with the procedures set forth in the plan, which required that the Board of Directors have Human Resources effectuate the Board’s decision to eliminate the severance plan.  Instead, the Board voted to eliminate the plan but HR did not take any further action in implementing the Board’s action.  Consequently, the Fourth Circuit reversed and remanded the issue back to the district court.

Waiver of Claims under SBLA

On the second question, the Fourth Circuit ruled that the SBLA provision under which certain plaintiff employees waived their right to participate in litigation was not unconscionable.  Although the court looked to Virginia contract law when making this decision, the same principles likely apply in other jurisdictions.  The court reasoned that even though the amounts employees were to receive under the SBLA were less than what they would be entitled under WARN, the disparity itself does not establish the “gross disparity” required to find an agreement unconscionable under Virginia law.  And although the SBLA contained some statements that could be read as evidence of bad faith or appeared to be a contract of adhesion (i.e., disproportionate bargaining power), these problematic terms were obviated at least in part by other language giving the employees seven days to sign the agreement and consult with a lawyer.  Thus, the Fourth Circuit upheld the SBLA and found it was not unconscionable.

Inadequate WARN Notice

Finally, the court found that Bristol Compressors failed to provide adequate WARN Act notice to four of the plaintiff employees. 

Under WARN, an employer is required to give employees 60 days notice of a plant closing or mass layoff.  The WARN Act also requires, however, that employers give employees additional notice when the scheduled plant closing or layoff date is postponed beyond the original date.  If the postponement is for 60 days or more, the “additional notice” is treated as a new notice subject to the regulations of the initial notice.  Conversely, if the postponement is for less than 60 days, employers are required to give notice as soon as possible, referring to the initial notice, the date to which the action is postponed, and the reasons for the postponement.

Bristol Compressor had first notified employees on July 31, 2018, that the plant was expected to close by August 31, 2018, and that layoffs could commence immediately.  The next day, Bristol Compressor told workers the plant was set to close by September 30, 2018, but the four workers were not terminated until October 19, 2018, and the plant did not officially shutter until November 2018. Given these facts, the Fourth Circuit concluded that Bristol Compressor was required to give employees “additional notice” under WARN. 

It also rejected the district court’s finding that even though the workers were given inadequate notice under WARN they were not prejudiced in any way by the failure because they remained employed for more than 60 days after the initial July 31 notice.  The Fourth Circuit explained that the failure to give notice under WARN is not like cases in which an employer gives mistaken information to employees and is excused from liability for the mistake.  To do so, the Court noted, would render the WARN regulations meaningless.  The court thus reversed the district’s court’s grant of summary judgment to Bristol Compressor and remanded to the court for further proceedings.

Takeaway This case highlights a few of the many pitfalls that employers can encounter when implementing a reduction-in-force that includes severance agreements:  consider other severance plans that might be implicated, confirm the enforceability of any waivers, and double-check WARN Act notice calculations.

  • Associate

    As an associate on the labor and employment team, Steven’s practice focuses on advice and counseling matters, litigation, and workplace safety in the labor, employment, pandemic preparedness and compliance space. Steven has ...

  • Partner

    Kevin is co-chair of the firm’s labor and employment team and co-chair of the firm’s Retail and Consumer Products Industry practice group. He has a national practice that focuses on complex employment litigation, employment ...


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