Kreutzer v. A.O. Smith Corp.

951 F.2d 739, 1991 WL 268384

• Court: Court of Appeals for the Seventh Circuit
• Decided: December 18, 1991
• Docket: No. 90-3547
• Status: Published

Opinions

BAUER, Chief Judge.

Seven employees sued their former employer, A.O. Smith Corporation (“A.O. Smith”), alleging that it violated the Employee Retirement Income Security Act, 29 U.S.C. § 1001-1461 (1988) (“ERISA”), in its computation of severance pay. The parties filed cross-motions for summary judgment. Because we hold that the employees’ purported reliance upon an out-dated company handbook was unreasonable, we affirm.

I.

The following facts essentially are undisputed. Ronald Kreutzer, Fred Hinze, Alan Allen, John O’Shea, Thomas Yeigh, Frank Cartwright, and Gary Jeske (“the employees”) worked as supervisors for A.O. Smith Automotive Products, a division of A.O. Smith Corporation. They were terminated on December 4, 1987, as the result of a reduction in force of supervisory personnel. The employees received severance pay calculated pursuant to Corporation Policy No. PR-22, Revision 3 (1970). This suit stems from the calculation of the severance pay the employees received upon their termination.

The company’s severance formula, in effect since May 1970, is set forth in the Corporation Policy Manual PR-22. A.O. Smith refers to this formula as “Revision 3.” The policy provides the following benefits:

Completed, Years of Service Termination Pay

Less than 3 years lk of 1 month's salary

More than 3 but less than 5 years 1 month’s salary

More than 5 but less than 10 years IV2 months’ salary

More than 10 but less than 15 years 2 months’ salary

More than 15 but less

than 20 years More than 20 years 2V2 months’ salary 3 months’ salary

Appellants’ Appendix at 117. Under this version of the policy, “no deduction for potential unemployment benefits shall be made from the termination pay.” The employees claim that their severance pay should be calculated in accordance with a formula in effect from 1965 until 1970, referred to as “Revision 1.” ¹ Revision 1 appeared in the supervisor’s handbook they received when they were promoted to supervisory positions, even though it had been replaced with Revision 3 by that time. The employees assert that they were never notified of the modifications made to Revision 1 of A.O. Smith’s severance policy. It provides:

TERMINATION PAY

Under certain conditions non-union salaried employees whose jobs are abolished and who are permanently terminated from the company may receive termination (job abolition) pay.*

Such termination pay is one-fourth of a month’s regular salary for each full year of continuous service up to a maximum of 30 years’ service. Minimum termination pay is one-half of a month’s pay; termination pay is in addition to any vacation pay due the employee.

’ Refer to Corporation Policy Manual PR-22 for detailed information, (emphasis in original).

Appellants’ Appendix at 123. Revision 1, however, provided for a deduction for unemployment compensation:

If the applicable state statute permits unemployment compensation during the period covered by termination pay, a deduction from termination pay, equal to potential unemployment compensation, during a period equal to that covered by termination pay, shall be made, subject to the minimum payment provided in D.l.

Appellee’s Appendix at 105. The Revision 3 policy had no provision for an unemployment deduction. Despite the deduction for unemployment compensation, Revision 1 is more generous than Revision 3.

The employees were promoted to supervisory positions between 1972 and 1976. During those years, supervisors’ duties and benefits were outlined in a large loose-leaf Supervisor Handbook (“the handbook”). The handbook was updated periodically with replacement pages. Apparently through an oversight, the page containing Revision 1 was not replaced when Revision 3 was adopted in 1970. The Revision 1 formula still was included erroneously in Section VIII-5, the “Wage and Salary Administration” section.

In 1976, A.O. Smith replaced the handbook with a pocket-sized “Supervisor’s Manual” (“the manual”). This manual contained no information on, or reference to, termination benefits.² The introduction explained, however, that:

The Supervisor’s Manual will supplement information in the A.O. Smith Corporation Safety Manual and the A.O. Smith Corporation Policy Manual, both of which are available for supervisor reference. They are located in the offices of the division managers, staff heads (including superintendents) and company officers.

The A.O. Smith Corporation Policy Manual (in effect since 1970) has contained Revision 3 of the severance pay formula. When A.O. Smith distributed the new manuals, it also circulated a newsletter, informing all supervisors that

[A] new AOS Supervisor’s Manual will be distributed to replace the Supervisor’s Handbook used for the past ten years. The new manual, pocket sized for your convenience, will contain current, valuable information for reference in your day-to-day activities.

In preparation for this distribution, we are collecting the old Supervisor’s Handbooks. Please return your copy to the general superintendent in your area.

Upon receiving your new copy, please complete, sign and return the receipt form located inside the front cover. You will be held responsible for maintaining your copy and returning it on request. Any revisions to this manual will be sent to you as required.

Despite the recall of the handbooks, the handbooks were not collected, but were “laying all over” the A.O. Smith facility. Appellants’ Brief at 9. All the plaintiff-employees testified in deposition that they were unaware of Revision 3 and the updated policy. They claim they relied upon Revision 1, the formula in the recalled handbooks, and that the new manuals did not put them on notice of the correct policy. As a consequence, they argue, they are entitled to payment under Revision 1. They maintain, however, that they should not be subject to the deduction for unemployment compensation required by Revision 1.

The employees offer two arguments to support their position. First, they contend that, under 29 U.S.C. § 1022(b), any circumstances resulting in a loss of benefits otherwise reasonably expected must be set forth in the Plan document. This argument is unavailing because Revision 1 made an explicit reference to the Corporate Policy Manual (the Plan) which contained the provision regarding unemployment compensation. Second, the employees assert that no unemployment compensation deduction should be made because “the PR-22 corporate policy [Revision 3], at the time that the supervisors were given the handbooks ... excluded a reduction_” Appellants’ Brief at 5. In other words, because the policy in effect did not require a deduction, the employees are entitled to the Revision 1 formula without the reduction. This argument seems illogical on its face.

In addition to the mix-up with the handbooks and Revisions, it is undisputed that A.O. Smith failed to comply with ERISA’s reporting provisions. It did not provide participants with the required five- and ten-year plan summaries, nor did it make the necessary periodic filings with the Secretary of Labor. See 29 U.S.C. § 1024. The employees initially brought suit in the Milwaukee County Circuit Court in August 1988, alleging that A.O. Smith breached their employment contract because it improperly calculated severance pay, holiday shutdown pay, vacation pay and Christmas bonuses. The case was set for trial, and summary judgment motions were pending, when the trial court granted the employees’ motion to amend their complaint. The new count alleged that A.O. Smith’s failure to pay severance pay under Revision 1 violated ERISA. A.O. Smith removed the entire action, asserting that the federal courts have original jurisdiction over the ERISA claim under 28 U.S.C. § 1331 (1988). The parties filed summary judgment motions in the federal action, and the district court granted summary judgment in favor of A.O. Smith. The employees appealed.

II.

It is well established that review of a district court’s grant of summary judgment is de novo. See, e.g. La Preferida, Inc. v. Cerveceria Modelo, S.A., 914 F.2d 900, 905 (7th Cir.1990). In order to uphold a grant of summary judgment, we must “view the record and all inferences drawn from it in the light most favorable to the party opposing the motion,” Lohorn v. Michal, 913 F.2d 327, 331 (7th Cir.1990), and conclude that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). First Wisconsin Trust Co. v. Sckroud, 916 F.2d 394, 398 (7th Cir.1990).

The parties do not dispute that A.O. Smith’s severance pay plan is an employee welfare benefit plan governed by ERISA. 29 U.S.C. § 1002(1) (1988). Young v. Standard Oil, 849 F.2d 1039, 1045 (7th Cir.1988), Blau v. Del Monte Corp., 748 F.2d 1348, 1352 (9th Cir.1984). ERISA preempts all state law claims for severance benefits. Young, 849 F.2d at 1043. The district court properly found, therefore, that the employees’ breach of contract claims are preempted. Kreutzer v. A.O. Smith Corporation, No. 80 C 1122 (E.D.Wis. Oct. 16, 1990).

ERISA imposes certain obligations upon administrators of welfare benefit plans, although they are less rigorous than those imposed upon administrators of employee pension benefit plans. See 29 U.S.C. §§ 1051(1), 1081(a). These obligations include filing an annual report with the Secretary of Labor that describes the plan, sets forth its assets and liabilities, and includes other information. 29 U.S.C. § 1023(a), (b). Employers administering welfare benefit plans must also provide all participants with a summary plan description “calculated to be understood by the average plan participant, and ... sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan.” 29 U.S.C. § 1022(a)(1). Welfare benefits, moreover, do not vest like pension benefits, and an employer unilaterally may change or abolish them without violating ERISA. Young, 849 F.2d at 1045. The employees contend that A.O. Smith’s failure to provide more explicit notice of the correct severance formula coupled with its non-compliance with ERISA’s reporting provisions, entitles them to benefits under Revision 1.

The fact that A.O. Smith technically violated ERISA does not help the employees in this case. An employer’s procedural violations of ERISA entitle employees to monetary relief only in exceptional cases. See Berger v. Edgewater Steel Co., 911 F.2d 911, 920-21 (3d Cir.1990); Wolfe v. J.C. Penney Co., Inc., 710 F.2d 388, 393 (7th Cir.1983). Most courts that have considered the issue have held that the employer must have acted in bad faith, actively concealed the benefit plan, or otherwise prejudiced their employees by inducing their reliance on a faulty plan summary before recovery for procedural violations is warranted. See Blau v. Del Monte Corp., 748 F.2d 1348, 1353 (9th Cir.), cert. denied, 474 U.S. 865, 106 S.Ct. 183, 88 L.Ed.2d 152 (1985) (active concealment); Govoni v. Bricklayers, Masons & Plasterers, 732 F.2d 250, 252 (1st Cir.1984) (collecting cases requiring reliance and prejudice).

In Wolfe, the employer denied an employee’s claim for disability benefits, but failed to state the reasons for the denial. It also did not explain how the employee could overcome the deficiencies in his application for benefits as required by 29 U.S.C. § 1133(1). 710 F.2d at 392-93. Although this court held this procedural error was a “significant error on a question of law, erroneously interpreting and applying section 1133,” we did not find that it warranted a substantive remedy. Id. at 393. Instead, we remanded the case to the employer for a new determination of the employee’s claim.

Arguably, the employer’s action in Wolfe was more prejudicial than A.O. Smith’s actions were in the instant case. Because J.C. Penney failed to explain the weaknesses in Mr. Wolfe’s application for disability benefits, there was a clear possibility that he would not receive benefits to which he was entitled. In the case at bar, however, the employees were not disadvantaged by A.O. Smith’s failure to file the proper documents with the Secretary of Labor. Though some confusion may have been generated by A.O. Smith’s failure to diligently collect the handbooks containing Revision 1, this oversight does not raise the same specter of prejudice as the procedural violation in Wolfe. One hundred ten supervisors received severance pay pursuant to Revision 3. The employees submit no evidence or argument indicating why they are entitled to more severance pay than other terminated A.O. Smith supervisors. Because the employees provide no evidence of prejudice, Wolfe is unavailing.

Berger v. Edgewater Steel Co., 911 F.2d 911, 920-21 (3d Cir.1990), presents a more analogous situation to the case at bar. In Berger, the employees alleged they were entitled to severance pay because their employer failed to comply with ERISA’s disclosure requirements in connection with its severance policy. Id. at 920. The court found that the severance policy was not described or distributed to employees, and that there was no claims procedure. Further, the terms were “rather cryptic.” Id. The employer claimed that company practice under the policy was clear: only employees laid off and not eligible for any sort of pension were given severance pay. The employees contended that it was common knowledge that when any employee retired, the employee was given severance pay.

The plaintiffs in Berger, just like the employees in the case at bar, base their claim upon Blau v. Del Monte Corp., 748 F.2d 1348 (9th Cir.1984), cert. denied, 474 U.S. 865, 106 S.Ct. 183, 88 L.Ed.2d 152 (1985). In Blau, the employer actively concealed its severance policy and had no claims procedure, thereby violating ERISA’s procedural requirements. Id. at 1350-51. The employer’s active concealment of the plan was compounded by evidence of inequitable treatment of employees. At oral argument, counsel also informed the court that under the secret policy, severance pay would be available for company executives but not for salaried non-union employees. Id. at 1356. Based on these findings, the Blau court determined that

[w]hen procedural violations rise to [this] level ... they alter the substantive relationship between employer and employee that disclosure, reporting and fiduciary duties sought to balance somewhat more equally. The quantity of defendants’ procedural violations may then work a substantive harm.... We hold that the type of plan administration practiced by Del Monte is highly probative of whether a particular decision to deny benefits was infected by its having been made in conformity with the objectionable scheme.

Id. at 1354. The court in Berger distinguished Blau, finding that the employer’s violations and administration of the severance plan did not rise to the level of the violations in Blau. Because there was no evidence of active concealment or unfair administration of the severance policy, the Berger court refused to award the employees benefits under the policy. We agree with the distinctions drawn by the Berger court.

Moreover, in the instant case, A.O. Smith’s violations of ERISA’s reporting and summary requirements were even less prejudicial to employees than those in Ber-ger. Although A.O. Smith failed to send the Secretary of Labor the required reports, and to give the employees summaries of the severance plan, it did notify the employees where they could find the plan. A.O. Smith did not explicitly revoke Revision 1. Nevertheless, since the current plan went into effect in 1970, 110 supervisors received severance pay pursuant to it. Copies of the benefits plan were readily available to the employees. In fact, before the terminations, two of the plaintiff-employees (Alan Allen and John O’Shea) who were temporarily laid off received “lay off inconvenience pay” computed under the current policy. Appellee’s Brief at 11. The replacement manual did not include a severance pay formula. In fact, the pocket-sized manual contained no information on supervisors’ benefits. Unlike the recalled handbook, the manual instructs supervisors only on the performance of their duties, without providing benefit information. Appellants’ Brief at 9.

There is no evidence that A.O. Smith acted in bad faith, or otherwise attempted to conceal its severance policy. The employees’ position is weakened further by their inconsistent claim for the benefit of the 1965 version of the policy without the burden — they assert they are entitled to the more generous formula, but are not subject to the deduction for unemployment compensation this formula requires. As we discussed above, this contention is irrational.

Moreover, the employees rely on other sections of the A.O. Smith Corporation Policy Manual, which they contend was “undisclosed,” for their holiday and vacation pay claims.³ These inconsistencies undermine the employees’ assertion that they reasonably relied upon the 1965 severance policy in the handbook. The supervisors all presumably received benefits (such as vacations and holiday pay) during the period between the recall of the handbooks and distribution of the manuals (1976), and their termination (1987). The only source of information on these benefits was the A.O. Smith Policy Manual. This Policy Manual also contained the correct version of the severance policy. The severance policy has not changed since 1970 and has been uniformly applied. Any reliance upon the handbook and the 1965 policy, in this context, was unreasonable. We agree with the district court that in light of the undisputed facts, A.O. Smith is entitled to judgment as a matter of law.

III.

For the foregoing reasons, the decision of the district court is

Affirmed.

1 . There is no discussion of "Revision 2.” There was a Revision 4, which became effective in May 1976. Because its severance pay provisions are identical to those in Revision 3, we shall limit our references to Revision 3. See Appellants' Brief at 11, n. 11.

2 . The dissent states that the Supervisor’s Manual contained a section on employee benefits. This section explains benefits for non-supervisory employees. These benefits do not apply to supervisors, and the section seems to be designed to allow supervisors to explain and administer their subordinates’ benefits. Thus, the only information on supervisor benefits was contained in the A.O. Smith Corporation Policy Manual. In other words, supervisor benefits, i.e. vacation time, medical benefits, or severance pay, were explained only in the Corporation Policy Manual.

3 . The pendent state law claims for vacation and holiday pay were dismissed without prejudice by the district court when it entered summary judgment in favor of A.O. Smith. See Appellee’s Brief at 3.