X to Settle $500 Million ERISA Severance Pay Lawsuit

When Musk bought Twitter in 2022, taking it private for $44 billion, he fired more than 6,000 employees– almost half of Twitter’s workforce. The layoff downsized or effectively eliminated departments that dealt with the platform’s trust and safety, human rights and media teams content functions. A separate $128 million severance lawsuit brought by Twitter executives, including CEO Parag Agrawal, is still pending.

Were workers lied to?

Courtney McMillian worked for Twitter from August 2020 through January 4, 2023. As the Head of People Experience, she led compensation, benefits, and other global functions. In her 2023 lawsuit, she alleged that a severance plan had been in effect at the company since at least 2019.

Twitter had referred to the plan in company-wide FAQs and emails before the merger. Additionally, an April 2022 merger agreement between Musk and Twitter even specified that post-merger severance benefits would be no less favorable for workers than pre-merger benefits for a year after the deal closed. Nonetheless, there was no formalized plan document, as is generally the practice with ERISA plans.

Based on these informal communications, senior employees believed that they were entitled to six months of base pay, plus one week for each full year of service, and less senior employees anticipated two months’ base pay, plus one week for each full year of service. They were also allegedly led to believe that they would receive vested restricted stock units, bonuses, a cash contribution for health insurance and three to six months of outplacement services.

Nonetheless, after the mass layoff, some employees were offered at most three months of benefits. Some received nothing. None of the other benefits materialized.

Miller and Ronald Cooper, who had been added as a lead plaintiff later, filed their lawsuit in the Northern District of California. On behalf of themselves and similarly situated employees, they sought relief from wrongful denial of benefits and various breaches of fiduciary duty under ERISA.

When is a severance agreement an ERISA plan?

Most people think of 401k plans when they think about ERISA. However, plans that provide other forms of benefits, often referred to as “welfare benefit plans,” and which include severance pay plans, may also be covered by the terms of ERISA.

But not all promises of pay on termination of employment are qualified under ERISA. A general promise along the lines of “Don’t worry, we’ll take care of you,” is not an ERISA plan. A certain degree of formality seems to be required. More specifically, a severance plan is subject to ERISA if it requires an “ongoing administrative scheme.” The factors a court may consider include employer discretion in eligibility or benefit calculations, payments over time, and the provision of additional benefits like outplacement services or continued insurance coverage. A simple, one-time lump-sum payment triggered by a single event generally falls outside ERISA’s scope.

Twists and turns

In July 2024, The District Court granted X/Twitter’s motion to dismiss the ERISA lawsuit because it did not find the required degree of formality, noting particularly that there was not an official plan document. The workers then appealed to the Ninth Circuit, and settlement negotiations followed.

It should be noted that the severance payments are not yet a “done deal.” There is ample reason to anticipate that the agreement in principle may yet fall apart.

Executives’ lawsuit

Four former Twitter executives, including former CEO Parag Agrawal, have claimed in a contract lawsuit that Elon Musk fired them as he took over Twitter, “without reason, then made up fake cause” to avoid handing over the money. Tellingly, they argue that the move was part of a “larger pattern” of refusing to pay former staff what they were due.

In the lawsuit, they contend that under a years-old executive severance plan they are owed one year’s salary and stock awards. That would total more than $57 million for Mr. Agrawal; more than $44 million for Chief Financial Officer Ned Segal; more than $20 million for Chief Legal Counsel Vijaya Gadde; and more than $6 million for General Counsel Sean Edgett.