Lawyers who represent employees in severance negotiations should be aware and take heed of the recent New York federal court ruling in Schuyler v. Sun Life Assurance Co., 2023 WL 2388757 (S.D. N.Y., March 7, 2023). That case illustrated a dangerous pitfall that may unwittingly result in unintended unfortunate consequences based on the court’s finding that an employee’s release of her employer also waived the employee’s right to sue her disability insurer.
The case involved Kristen Schuyler, who was working for a dental supply company when she sustained a serious traumatic brain injury due to a fall down a flight of stairs. Despite undergoing intensive treatment, Schuyler continued to suffer from a host of symptoms that ultimately ended her career.
Following her termination, Schuyler applied for long-term disability benefits from her employer’s group disability insurer, Sun Life. She simultaneously negotiated a severance with her employer and executed a general release that encompassed claims under the Employee Retirement Income Security Act (ERISA). Based on the generality of the release, which specifically referenced that it applied to ERISA, Sun Life successfully argued that the release waived her right to long-term disability benefits under her employer’s group plan.
The court began its analysis by recognizing that employees may waive claims under ERISA just as they may waive other claims, so long as the waiver is “knowing and voluntary.” In determining whether a release of an ERISA claim is knowing and voluntary, the 2nd U.S. Circuit Court of Appeals has identified six relevant factors:
“1) the plaintiff’s education and business experience, 2) the amount of time the plaintiff had possession of or access to the agreement before signing it, 3) the role of [the] plaintiff in deciding the terms of the agreement, 4) the clarity of the agreement, 5) whether the plaintiff was represented by or consulted with an attorney, as well as whether an employer encouraged the employee to consult an attorney and whether the employee had a fair opportunity to do so and 6) whether the consideration given in exchange for the waiver exceeds employee benefits to which the employee was already entitled by contract or law.” Laniok v. Advisory Comm. of Brainerd Mfg. Co. Pension Plan, 935 F.2d 1360, 1368 (2d Cir. 1991).
Although Laniok and other 2nd Circuit cases cited by the court involved pension claims, the court pointed to several other rulings from other district courts within the 2nd Circuit and courts in other circuits that found disability benefit claims could also be waived.
Applying those factors, the first factor was met since Schuyler held a college degree and an MBA, and possessed extensive business experience. She was also given adequate time to consider the offer, and even had seven days to revoke her acceptance if she changed her mind after executing the agreement. Moreover, Schuyler had negotiated a higher amount of severance than what had initially been offered, along with other benefits, although the total amount she received was $25,000. Further, the agreement explicitly stated in two different places that Schuyler was releasing her right to bring a lawsuit under ERISA and recited that the release was voluntary and applied to “any and all known and unknown actions, causes of actions, suits … arising out of or in any way connected with Employee’s employment….”
Although Schuyler did not have an employment attorney review the agreement before she signed it, she submitted an affidavit stating that her disability benefit attorney had reviewed the agreement and told her there was no language specific to any claim she might later assert seeking disability benefits. Although the lawyer was correct, the court concluded that “the fact that Schuyler consulted her disability attorney before signing the agreement leaves no doubt that the waiver was knowing and voluntary.”
Schuyler still challenged the adequacy of consideration for the release, arguing that the $25,000 payment she received was significantly less than the disability benefits that were potentially payable, which she valued at $1.2 million. The court was unpersuaded, though, and found the “potential benefits” she might receive was not enough to overcome the explicit release of ERISA and the fact that Schuyler had consulted with an attorney.
The court was also unmoved by evidence that Schuyler had explicitly inquired of her employer’s attorney whether the release would impact her right to seek benefits from Sun Life; and the attorney responded, “[T]his agreement should have absolutely no effect on your ability to appeal your LTD or to file SSDI.” The court focused on the word “appeal” and determined the right to submit a claim appeal differed from her right to file a lawsuit in federal court, which was specifically enumerated.
The court also rejected Schuyler’s claim in an affidavit she filed with the court asserting that she would not have signed the agreement had she known it would preclude her from suing to challenge a denial of her disability insurance benefits claim. The court found the affidavit self-serving, after the fact, and insufficient to outweigh the other factors. Finally, even though Sun Life was not explicitly named as a party that was being released, the release applied to “any related or affiliated entities … and parties-in-interest.” The court found the ERISA statute’s definition of “party-in-interest” encompassed Sun Life. 29 U.S.C. Sec. 1002(14)(A).
It is easy to see how Kristen Schuyler would not have understood that she was signing away her right to file suit to enforce her claim seeking disability benefits, especially since the entity responsible for paying benefits was not named in the release. Nor did the release explicitly state it applied to disability benefits.
The outcome here could have been prevented, though, had the release been drafted to explicitly exclude the disability benefits claim. Unfortunately for Schuyler, even though it appears that both she and her employer intended the release not to encompass the disability benefit claim, the release failed to clarify that intent. This ruling therefore serves as a warning to employees and attorneys to make sure when negotiating severance agreements that their clients are not inadvertently releasing claims they intend to or even might pursue.
Mark DeBofsky is a shareholder at DeBofsky Law Ltd.
This article was first published by Chicago Daily Law Bulletin on March 28, 2023