For years, Pennsylvania courts have consistently denied unemployment compensation benefits to employees who accept early retirement incentive packages. Recently, however, the Pennsylvania Supreme Court overruled this well-established precedent. In Diehl v. Unemployment Compensation Board of Review, the Supreme Court found that employees who accept early retirement packages offered pursuant to employer-initiated workforce reductions are eligible for benefits.
In Diehl, the employer initiated a reduction in force due to deteriorating business conditions. To encourage high seniority employees to leave voluntarily, the employer offered employees over age 60 an early retirement package. Diehl accepted the early retirement package, believing that he also would be entitled to receive unemployment compensation benefits.
Under Pennsylvania’s Unemployment Compensation Law (“Law”), generally, a claimant who voluntarily quits his job will be ineligible for benefits unless he can prove that he had a "necessitous and compelling" reason to quit. In cases involving an employee’s acceptance of an early retirement package, the Pennsylvania Commonwealth Court typically has granted benefits only where the employee demonstrated a justifiable belief that his job was imminently threatened. Importantly, however, the Supreme Court did not apply this general “voluntary quit” rule in this case. Instead, the Court focused on a “voluntary layoff option” proviso under the Law (“VLO Proviso”).
The VLO Proviso provides in part that an employee who voluntarily resigns his employment will not be denied benefits when he exercises “the option of accepting a layoff … pursuant to an established employer plan, program or policy.” 43 P.S. § 802(b). For years, the Pennsylvania Commonwealth Court has consistently refused to apply the VLO Proviso to employees who voluntarily accepted severance or retirement incentives offered by their employers.
The Supreme Court reversed the Commonwealth Court’s long-standing precedent. Specifically, the Supreme Court considered whether the option to accept an early retirement plan offered as part of an employer-initiated workforce reduction was equivalent to the “option of accepting a layoff” under the VLO Proviso. The Court found the options to be equivalent, as both essentially were a termination of employment initiated by the employer. The Supreme Court concluded that the VLO Proviso applies to employees who accept employer-offered early retirement packages as part of a workforce reduction, and as such, voluntary acceptance does not automatically disqualify them from eligibility for benefits.
The Diehl decision is notable because it increases the likelihood that employees who elect a retirement or severance incentive package also will be granted unemployment compensation benefits. Although the Law does provide a severance pay offset against unemployment compensation benefits, which may be available for some employers, the availability of the offset will depend upon the type of payment and the amount paid to the employee. As a result, employers must carefully consider potential unemployment compensation costs when evaluating the merits of offering incentive programs to employees during a reduction in force.