Alaska Employment Law

“Severance pay” v. “continued salary”

The Court of Appeals has reversed the District of Oregon and held that an EPLI insurer must indemnify an employer for settlement payments it made to an employee based on employment contract provisions relating to salary continuation and stock options.   

Salary continuation v. severance pay:  The employment contract guaranteed Mark Lehnert six years unreduced pay so long as the employer didn’t terminate him for cause.  The EPLI Policy, on the other hand, excluded ”severance pay . . . or [other payment] in the event of separation from employment” from the definition of indemnifiable damages. 

The 9th Circuit held that payment of the balance of Lehnert’s 6-years salary was not excluded “severance pay.”

The damages owed to Lehnert are not “severance pay” under the plain meaning of that term. Continued payment of the salary under Lehnert’s contract did not depend on severance. The same amount was to be paid whether Lehnert was severed or worked, so long as any discharge was not for cause. In contrast, “severance pay” is triggered only by cessation of employment, and is ordinarily calibrated to the length of employment. See Crofoot v. Columbia-Willamette Air Pollution Auth., 571 P.2d 1266, 1268 (Or. Ct. App. 1977). For this reason, Oregon courts typically view severance pay as a type of compensation earned while employed, although not paid until afterwards. See Wilson v. Smurfit Newsprint Corp., 107 P.3d 61, 68 (Or. Ct. App. 2005). In contrast, Lehnert’s postemployment salary continuation is inversely related to his period of employment: The shorter his period of employment, the more he was to be paid postemployment. Such a scheme can hardly be viewed as additional compensation for work actually performed.

Furthermore, assuming that the phrase “payment in the event of separation from employment” is relevant to illuminate the meaning of “severance pay,” it is ambiguous, at best, whether Lehnert’s continuation of salary provision concerns a “payment in the event of separation from employment.” The contractual provision in question could more fairly be characterized as one providing for continued payment of salary despite separation from employment.

Because the Policy is subject to two plausible interpretations even when the broader context is considered, the Policy must be construed against the insurer.

Analysis:  Employment contracts that provide for post-termination payments, thus, might lead to either “salary continuation” (uncertain start date, but certain end date, i.e., indefinite duration and not tied to length of employment), or “severance pay” (indefinite start and stop dates, but a calculable or certain duration or amount). 

An entirely different creature, but sometimes confusingly called “severance pay,” is a payment under a post-termination settlement agreement that compromises various disputed claims.  See Gilliam v. Nevada Power Company, 488 F.3d 1189 (9th Cir. 2007).

Other wrinkles to the issue of severance pay, broadly understood, are a) the impact of such pay on pension benefits - both as to crediting of such payments as compensation (see Gilliam, above) and suspension of pension pay during the period of receipt of such payments; b) the taxation of such payments, i.e., the application of the new Section 409A rules on deferred compensation, 26 CFR § 1.409A; and (less importantly) c) possible disqualification from “unemployment” for the period of receipt of such payments.

Acradyne Inc. v. Travelers Casualty & Surety Co. of America, 2008 WL 111188 (9th Cir. Jan. 10, 2008)(unpub.)