The term “severance pay,” is often used loosely, sometimes mixing together potential obligations under the law with those under employer policies, collective bargaining agreements or benefits plans.  In many states, such as New York, there is no obligation to give severance as a matter of state labor law.  See generally Glenville Gage Co. v. Industrial Bd. of Appeals, 70 A.D.2d 283 (3d Dep’t 1979).  However, some severance, separation or benefit programs have elaborate structures, and employers must assess the interplay between those policies and wage-and-hour law, as illustrated in a new decision from the Sixth Circuit rejecting a novel minimum wage claim.  McCarthy v. Ameritech Publ., 2014 U.S. App. LEXIS 15517 (6th Cir. 2014).

Plaintiff McCarthy was given two options under an involuntary layoff program: (1) receive a lump sum and retire; or (2) continue to work at 85% of her prior pay rate.  She chose Option 2.  In a later lawsuit alleging minimum wage violations, she argued that because the payments she received pursuant to the severance plan under Option 2 “constituted a preexisting severance obligation” rather than wages, she had not been compensated for the hours she worked.”  The Sixth Circuit was not convinced and rejected this minimum wage claim, holding that even though Plaintiff might be able to show that defendant fraudulently induced her to make the unfortunate choice (she claimed that she was misled into selecting Option 2 based on false information concerning health insurance coverage), she could not “import her fraud claim into a separate FLSA claim.”

Reductions in force with severance payouts can trigger wage/hour claims and employers should carefully consider all potential claims when implementing a reduction in force with severance payouts.