Fifth Circuit: Incentive Plan Was Not an ERISA Plan | Practical Law

Fifth Circuit: Incentive Plan Was Not an ERISA Plan | Practical Law

In litigation involving a construction company's incentive plan that paid bonuses to employees who worked through the completion of a construction project, the Court of Appeals for the Fifth Circuit held that the incentive plan was not an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA), and therefore the court lacked federal jurisdiction over the case. Accordingly, the Fifth Circuit vacated and remanded to the district court.

Fifth Circuit: Incentive Plan Was Not an ERISA Plan

Practical Law Legal Update w-030-2820 (Approx. 4 pages)

Fifth Circuit: Incentive Plan Was Not an ERISA Plan

by Practical Law Employee Benefits & Executive Compensation
Published on 25 Mar 2021 • USA (National/Federal)
In litigation involving a construction company's incentive plan that paid bonuses to employees who worked through the completion of a construction project, the Court of Appeals for the Fifth Circuit held that the incentive plan was not an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA), and therefore the court lacked federal jurisdiction over the case. Accordingly, the Fifth Circuit vacated and remanded to the district court.
In litigation involving a construction company's incentive plan that paid bonuses to employees who worked through the completion of a construction project, the Fifth Circuit held that the incentive plan was not an ERISA plan, and therefore there was no federal jurisdiction over the case (Atkins v. CB&I, L.L.C., (5th Cir. Mar. 22, 2021)). Accordingly, the Fifth Circuit vacated and remanded to the district court.

District Court Rules That Plan Is Subject to ERISA

The plaintiffs in this case are former employees of the defendant construction company. To retain employees through the completion of a project, the company offered a bonus as part of a Project Completion Incentive Plan (PCIP). Under the PCIP, eligible employees could earn a bonus equal to 5% of total earnings from their start date at the site through the date the employee was either:
  • Laid off due to a reduction-in-force.
  • Transferred by the employer because the employee's work at the site was done.
Employees who quit before the end of the project were not eligible for the bonus.
The former employees, who quit before the end of the applicable construction project, sued the employer in state court arguing that the PCIP resulted in impermissible wage forfeitures under the Louisiana Wage Payment Act. Relying on ERISA, the employer removed to federal court (see Practice Note, ERISA Litigation: Preemption of State Laws (Overview)). The district court held that the PCIP was an ERISA plan based on its required ongoing discretion and administration concerning qualifying termination determinations. The employees appealed.

Requisite Discretion Regarding Eligibility Lacking

On appeal, the only issue before the Fifth Circuit was whether the PCIP was an employee benefit plan under ERISA, as required for the case to proceed in federal court. Ruling for the employees, the Fifth Circuit vacated and remanded, concluding that the PCIP was not an ERISA plan, and therefore it lacked federal jurisdiction over the case.
In its analysis, the Fifth Circuit acknowledged that the PCIP was "akin to a severance plan"—some of which are subject to ERISA. However, based on the Supreme Court's Fort Halifax decision (482 U.S. 1 (1987)) and applying factors from case law involving severance plans, the Fifth Circuit concluded that the PCIP was not subject to ERISA. Among other factors, the Fifth Circuit reasoned that:
  • The PCIP provided for a one-time payment, rather than a series of payments.
  • There was a simple formula for calculating the bonus payment.
  • While there was no "single-day trigger," eligibility was tied to employees completing their duties on a discrete project, which distinguished the PCIP from traditional ERISA plans involving more complicated eligibility requirements.
  • Although there was some discretion involved in determining eligibility for the bonus (for example, determining whether an employee was transferred or laid off due to a reduction-in-force), it was not enough to make the PCIP an ERISA plan.
  • There was no administrative structure for overseeing the PCIP.
(See Practice Note, Severance Benefits, Plans, and Agreements: Overview: Severance Arrangements Subject to ERISA and Analyzing Severance Plans Flowchart.)

Practical Impact

As this case demonstrates, the presence of an ERISA plan—which is a threshold issue regarding ERISA's applicability and federal court jurisdiction—is not always a clear-cut determination (see Practice Note, Voluntary Benefits: Why It Matters Whether ERISA Applies). Here, the Fifth Circuit's ruling rested in significant part on the lack of employer discretion in determining the employees' eligibility for the incentive bonus. The court characterized this eligibility determination as "clear as day" given that the former employees conceded that they had quit before construction ended. The Fifth Circuit noted additional factors that may be instrumental in determining whether an ERISA plan exists, for example:
  • The presence of administrative procedures (such as rules for handling claims and appeals).
  • An arrangement that is administered on a large scale to many employees or requires continuous monitoring of beneficiaries.
  • An arrangement that requires ongoing oversight after benefits have been paid, for example, regarding:
    • continuing benefits under an insurance contract; or
    • the potential need to claw back severance benefits if a payee returns to work.
For more information, see ERISA Considerations for Severance Pay Policies Checklist: Compliance with ERISA.