Some employers have written policies that provide severance pay when employees lose their jobs through actions like job eliminations or reductions in force. So what happens when employees lose their job with the original employer, pursuant to a consolidation or plant sale, but that employer makes arrangements for them to transfer to comparable jobs with the new employer with no lost work time? The Kansas Court of Appeals recently ruled that City of Topeka employees whose employment was transferred to Shawnee County did not experience a “lay-off due to work or job elimination,” and thus were not eligible for severance pay under the City’s severance pay policy.
The terms of employment for workers in Topeka’s parks and recreation department were governed by the city’s personnel code. One provision of the personnel code addressed severance pay, setting forth who is eligible for it, under what circumstances, and how much.
In 2011, the city decided to consolidate its parks and rec department with Shawnee County’s department. The city and county entered into several “consolidation contracts” that set forth the terms of the consolidation. Moreover, the city’s employees didn’t need to worry about their jobs because the city was able to negotiate an assurance with the county that all city employees who wanted to could transfer to county positions at comparable pay.
The city was able to negotiate other provisions for its employees, including:
- They would be able to receive severance pay if the county fired them within the first three years after the consolidation.
- They could elect to transfer up to 300 hours of accrued unused vacation leave from the city to the county or receive a lump-sum payout of their unused vacation leave.
- They could transfer up to 1,040 hours of accrued unused sick leave from the city to the county.
Because the city employees all had the option to transfer into county jobs without suffering any period of unemployment, they weren’t eligible for severance pay under the city’s personnel code. That issue became a point of contention for about 10 city employees.
Even though they all transferred to county jobs without any loss of work days, the employees sued the city for severance payments under the personnel code. They brought claims for breach of contract (i.e., the severance provision of the personnel code) and violation of the Kansas Wage Payment Act, arguing that the city’s failure to pay severance was a failure to pay earned wages.
From the employees’ point of view, they lost their city jobs through no fault of their own, and they were thus entitled to severance. And, as they pointed out, the personnel code didn’t make payment of severance contingent on any actual period of unemployment, so it shouldn’t matter that they didn’t suffer any lost wages by transferring to county jobs.
Both the trial court and the Kansas Court of Appeals shot down the employees’ claims. The court of appeals found three rationales for concluding that severance pay wasn’t appropriate for the city employees who immediately transferred to the county.
First, courts from other states that have considered the issue have concluded that employer policies awarding severance pay to employees laid off for lack of work don’t apply when employees are allowed to immediately transfer to a successor employer with comparable duties, wages, and benefits and suffer no lack of work. In the Topeka case, the court found that the employees didn’t suffer permanent job elimination—a necessary precondition to trigger severance pay under the personnel code.
Second, the court noted that the primary intention behind severance pay is “to help former employees minimize the privations of temporary unemployment while they seek new work.” The court cited another case in which a court found that employees who are kept on by a plant owner’s successor are in a different position from those who are laid off but find alternative employment soon after the layoff. The workers who immediately transfer to a successor company don’t face the risk of unemployment, while those who are permanently laid off face the stress and upheaval associated with unemployment—even if they are able to find other jobs soon after the layoff.
Third, the court found that awarding severance pay to employees who never lost any work time amounts to a windfall for those employees and a disincentive for employers to provide severance pay at all. Quoting a decision from a different court, the Kansas court stated: “A recovery by employees in these circumstances would reduce the incentives for employers to attempt to secure positions for employees with the purchaser of a division when those employees might well prefer such employment over a relatively small amount of severance pay.”
The court thus concluded that because the employees transferred to the county in comparable jobs with comparable pay, without any loss of employment, they did not lose their jobs and there was not work or job elimination. Accordingly, they were not entitled to severance pay. To award severance pay would amount to a windfall for the city employees at the taxpayers’ expense and would punish, instead of reward, the city’s efforts to ensure that all employees would be allowed to transfer to the county. Simpson v. City of Topeka, No. 114,484, 2016 WL 6023940 (Kan. Ct. App., Oct. 14, 2016).
This case brings to mind the old saying that “no good deed goes unpunished.” The city adopted a severance pay policy for the benefit and protection of its employees. And, when its Parks and Rec Department consolidated with the county, the city arranged for employees to keep their jobs at comparable pay by transferring their employment (along with their accrued sick and vacation leave) to the county. But the employees, rather than being grateful, sued for severance pay.
Fortunately, the court was not having any of it. It recognized that awarding severance pay to employees who merely transfer from one employer to another, with no job loss or lost work time, would be a windfall to employees, would serve as a disincentive for employers to provide severance pay at all, and would punish employers for their efforts to allow employees to transfer to the new employer.
What’s the takeaway? Even when you do the right thing for the right reason, you can still get sued. Wage payment and employee benefit laws are tricky and sometimes counterintuitive. So carefully review your compensation and benefit policies (such as paid time off and bonuses), and get help from legal counsel, to ensure that these policies don’t result in a windfall for employees or have other unintended consequences.