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The Effect Of Buy-Outs/Severance Packages On Workers’ Compensation Benefits


Miller Cohen, P.L.C.

By: Norton J. Cohen

December 11, 2006

The Effect Of Buy-Outs/Severance Packages On Workers’ Compensation Benefits

In this age of job shrinkage, many employers are now offering what has been termed either “buy-outs” or “severance packages” to their employees. We have read a great deal about the packages offered to workers at General Motors and Ford Motor Company, but in addition to the auto industry a myriad of other employers are offering buy-out packages. Packages are negotiated not because of the weakness of the trade union movement but because of the strength of the movement. Companies that are non-union very seldom offer such packages to their employees, the employees are simply terminated. Questions have arisen regarding the rights of injured workers when they accept severance/buy-out packages. That issue was addressed by the Michigan Court of Appeals in November 2001, when the Court decided four cases involving employees of the Ralston Purina Company. The issue raised in that case was whether the severance package itself would reduce workers’ compensation benefits under Section 354, the coordination of benefits provision, of the Workers’ Disability Compensation Act.

All of the employees in question signed the same severance or buy-out agreement. Three of the individuals were receiving weekly workers’ compensation benefits at the time the agreement was signed: one individual was working for the employer in favored work, and gave up her employment as the result of the buy-out.

The buy-out/severance agreement resulted from the collective bargaining process between the company and its union. Individuals who accepted the agreement received a severance payment as well as an additional payment of $1,000.00 – $2,000.00 for the cost of financial planning, job retraining, relocation or career counseling. In exchange for the severance payment, participants expressly agreed to “separate from the payroll” and “relinquish all recall and future employment rights with the company.” These agreements are generally required in all such situations.

After the agreement was accepted by the four employees, Ralston Purina argued that the amounts it paid plaintiffs pursuant to the severance agreement should be credited against the workers’ compensation obligation under Section 354. The Court reviewed that Section and noted that it provides for the reduction of workers’ compensation benefits when among other payments, the employee is receiving benefits under a “wage continuation plan.” The Court concluded that the severance payment was simply not a “continuation” of employees wages. The Court found that it was significant that the payments made under the severance agreement were not based on an individual’s weekly hourly wage nor on some projected period of time in which the individual might find a new position.

The Court concluded that it was possible to properly receive workers’ compensation benefits to compensate for a loss of wages resulting from a disability while simultaneously receiving a lump sum payment from a severance agreement to compensate for the loss of employment rights. The Court in essence concluded that the consideration that the company received for the severance agreement was separate and apart from the workers’ compensation. That consideration being the surrender of all employment rights.

After making its findings relative to the legal question involving the severance agreement, the Court then reviewed the cases of the four individual’s and determined that the three individual’s who were receiving workers’ compensation at the time of the signing of the severance agreement, suffered a wage loss not because of the severance agreement but because of the prior injury. Employee Greenman’s case was different. She sustained an injury in November of 1992; had surgery on a herniated disc in February of 1993; returned to work in May or June of 1993 performing restricted work until March 1997, when she signed the severance agreement. With respect to her entitlement to workers’ compensation the Court denied the same holding that in her case, her wage loss was not causally linked to her work-related injury. The Court found it significant that Greenman never quit working because of her disability. That her wage loss was not caused by the disability but by her voluntary quitting a job that she was performing in order to receive the severance payments.

This case provides a guideline for trade unions and/or individuals in the negotiation of severance packages. Severance agreements should not contain the phrase “wage continuation”; and if possible it should state that workers’ compensation benefits will be provided according to law, however this writer does not believe that is essential in order to avoid the coordination provisions of Section 354 of the Act. With this language, workers who are off work and receiving benefits should be able to continue the receipt of their wage loss benefits without reduction because of coordination of benefits. It should also be noted, that with respect to employee Greenman, even thought the Court concluded that she would not be entitled to wage loss benefits because she was working at the time she signed a severance agreement; the employer would still be obligated to pay for medical care and treatment under the provisions of the WDCA. The medical care provisions does not depend upon wage loss but is tied solely to the need for medical treatment as the result of an injury that arises out of and in the course of the employment.

This column appears from time to time in this Local’s newspaper and is prepared by the law firm of  MILLER COHEN, P.L.C. This law firm works for trade unions, their members and friends. They have worked many years with this Local and its membership. Their office is located at 7700 Second Avenue, Suite 335, Detroit, MI 48202. Please call our law firm regarding any questions you may have concerning workers’ compensation, personal injuries, social security disability or any other are of the law.