By Carol Buckmann
Plan fiduciaries looking to avoid protracted court cases filed by their plan participants are trying to develop the best fiduciary practices. They are also considering other options to control or restrict litigation, including trying to require mandatory arbitration of ERISA claims, (see my earlier post https://cohenbuckmann.com/insights/2018/8/20/can-arbitration-shield-you-from-401k-class-actions for a discussion of the pro’s, con’s and limits of mandatory arbitration and class action waivers), seeking to designate a specific court to hear cases, and setting shorter periods to file claims for benefits in their plan documents. The courts are still trying to define the extent to which there are limits on these practices. However, a recent court case highlights an additional option- obtaining releases from terminating employees that cover ERISA fiduciary breach claims.
In Innis v. Bankers’ Trust Company of South Dakota, a federal district court in Iowa determined that a general release that stated “by signing this document you are releasing all known claims” without mentioning ERISA prevented a participant from suing an ESOP trustee for fiduciary breach. The decision contains a good discussion of the factors to be reviewed in determining whether such a release is valid and enforceable.
To be effective, the basic legal requirements are that a release must be:
· in writing
· signed by the employee who is waiving the right to sue
· a knowing and voluntary waiver
· supported by adequate consideration (This means that you must give the employee something of value in return, such as severance pay, or a pickup of COBRA contributions, in addition to what the employee would receive without signing the release.)
The release can’t cover future claims.
Innis received severance pay as consideration for the signed release, so the court’s focus was on the factors to look at in determining whether the release was knowing and voluntary. In addition to the factors above, the court reviewed the employee’s:
· education and business experience
· input in negotiating the release
· length of time to consider the release before signing (here, Innis had 45 days to consider it and 7 days to revoke the release after signing)
· knowledge of rights and relevant facts, and
· opportunity to consult an attorney
The court also considered whether the release was induced by improper conduct by the employer and found that it was not.
After analyzing all of the facts, the court concluded that this release was knowing and voluntary. It reached this conclusion even though the employee did not consult an attorney or try to negotiate the specific language in the release. Further, although the document she signed included an acknowledgment that she had read and understood the release, there was no evidence presented that she had actually done so.
There were some limits on the effect of the release to keep in mind—
· Innis had taken some college courses and had worked as a senior marketing communications specialist. The court didn’t take the position that only executives could sign valid releases, but would a release be enforceable against someone with less education or a lower level job?
· The release was valid against the ESOP trustee even though the employer obtained the release. However, the court stated that this was because an ESOP trustee acted on behalf of stockholders. It cannot be assumed that a release would be equally valid against the typical trustee or outside fiduciary.
· The court stated that the release prevented this plaintiff from asserting claims on behalf of the plan, but did not bar the plan from asserting the same claims. An employee can’t release plan claims without the plan’s consent.
Plan sponsors considering using releases should make the language as broad as possible and should monitor future developments in the courts that might limit their enforceability.