by Dinita L. James

A new Arizona law going into effect July 24 means employees who are let go with severance pay won’t be eligible for unemployment benefits right away.

The law adds a new section to Arizona Revised Statutes § 23-621 to define severance pay, a term that was undefined in earlier legislation, which resulted in a laid-off employee of a beverage distributor receiving a year’s salary in addition to unemployment benefits.

The case began when Phoenix beverage distributor Hensley & Company implemented a reduction in force (RIF) in 2011. The company designed the RIF so that all laid-off employees would be paid two weeks of base pay and whatever benefits remained in the month of termination.

Employees who would sign a broad release of all claims against the company, known and unknown, would receive a sweeter deal based on their length of service. Employees such as Mark Wynn, who had worked at Hensley for 33 years, would get a full year’s base pay in exchange for signing the release.

Wynn accepted his $75,600 payment in November 2011 and filed a claim for unemployment benefits in December 2011. The Arizona Department of Economic Security (ADES) initially denied his claim based on the lump-sum severance payment.

The ADES’s decision was based on A.R.S. § 23-621, which was adopted by the legislature in 2004 in an attempt to prevent unemployed individuals from drawing state benefits while “receiving wages in lieu of notice, dismissal pay or severance pay.” The statute considered people not to be unemployed for the number of workdays the severance payment would cover at their regular pay rate.

Wynn appealed, and an administrative law judge concluded that 50 of the 52 weeks of base pay he received was payment for the release of claims, meaning he was eligible for unemployment benefits when he initially applied in December 2011. The company appealed to the ADES Appeals Board, which held that the entire amount, all 52 weeks, was severance pay, making Wynn ineligible for benefits for a year.

Wynn then appealed to the Arizona Court of Appeals, and the court ruled in his favor on January 7, 2014. The court decided that only two weeks’ worth of payment to Wynn was severance, meaning he was disqualified from unemployment benefits for just the first two weeks after his layoff.

The court’s ruling prompted state Representative Karen Fann (R-Prescott) to introduce a bill to prevent such decisions in the future. The bill, signed by Governor Jan Brewer on April 24, 2014, defines severance pay to include “all amounts that an employer pays to an employee due to the employee’s resignation, termination, or participation in an exit incentive program or inclusion in a [RIF] or in consideration for the employee’s release of actual or potential claims for the termination of employment.”

For more information on the new anti-double-dipping statute, see “Legislature halts double-dipping” in the June issue of Arizona Employment Law Letter.

Dinita L. James is a partner with Gonzalez Saggio & Harlan LLP in Phoenix. She can be reached at dinita_james@gshllp.com.