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Effectively Managing Workforce Contraction In Turbulent Times – Redundancy/Layoff



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Key Points:

  • In response to rising inflation, climbing interest rates and a
    looming recession, companies of all types and sizes have begun
    operational cost-savings measures, including workforce
    reductions.

  • Employers should engage in diligent planning when implementing
    a workforce reorganization.

  • Companies must carefully navigate numerous federal and state
    regulations as well as accompanying strict timelines attendant to
    the process.

Rising inflation, increased costs of capital and the
anticipation of a downturn in the economy have caused companies in
many industries to begin to implement workforce reorganizations and
reductions.

In making plans for adjustments to company staffing levels,
employers must tread cautiously. There are numerous federal and
state employment law issues that employers should consider before
implementing a reduction in force (RIF) or terminating individual
employees. Failure to comply with the applicable statutes, which
may require as much as two to three months’ advance notice of
any covered layoffs, can negate some of the anticipated savings and
lead to litigation. Although employers can limit exposure to
lawsuits through the use of releases obtained in exchange for
benefits or severance packages, strict requirements must be met for
such releases to be valid.

Focusing on RIFs, this alert provides an updated outline of the
key considerations when dealing with workforce reduction
issues.

This alert covers a complicated topic. It is intended to provide
a general overview of the issues to aid in a basic understanding of
the range of challenges and potential options. It is not intended
to provide legal advice or serve as a substitute for consultation
with qualified counsel.

Laying off employees is a delicate matter fraught with legal and
emotional implications. However, advance planning can help minimize
a company’s legal exposure for RIFs. Such planning should
include the following steps.

Select a Restructuring Team

The first step in implementing a RIF involves establishing a
restructuring team to determine whether

layoffs are needed or whether other cost-cutting measures will
suffice. A restructuring team should include a senior member of the
human resources department, other high-level managers, operational
representatives and counsel. Ideally, the team also should consist
of personnel who have experience with layoffs.

Consider the Alternatives to a RIF

Before proceeding with a RIF, the restructuring team should
consider alternatives. While a RIF can help a company quickly trim
expenses, it can result in the loss of talent needed for when
demand resumes. Companies should consider alternatives to forced
layoffs, including early retirements, voluntary RIFs, schedule or
wage reductions, furloughs, in-sourcing of functions and related
measures to reduce the company’s cost structure without
putting its talent pool at risk or otherwise having to face the
difficulties associated with employee job loss.

Establish the Business Objectives and Rationale for the
RIF

Ideally, the next step in a RIF should involve identifying and
documenting the employer’s business objectives for the RIF.
For example, the objective of a RIF might be to eliminate 20
percent of the employees in particular department or facility.
Alternatively, a RIF might be one tool used to accomplish the
broader objective of reducing the selling, general and
administrative (SG&A) expenses of a particular department or
division by 25 percent. Once it determines that layoffs are
necessary, the employer should work with counsel to document the
linkage between the proposed layoffs and the stated business
objectives.

Thereafter, the employer must determine which employees to
lay-off—whether the RIF will focus on certain job titles or
functions, entire locations, facilities or departments. The answers
should be consistent with the stated goals of the RIF and can help
focus and shape the layoff plan. The employer also should consider
whether there will be a single round of layoffs or multiple ones.
Various factors might influence that decision, including the
predictability of the business climate, product demand, employee
morale, the ability to retain essential employees and operational
requirements.

Develop Selection Criteria

Next, the employer should develop the criteria it will use to
select employees for the layoff. Objective reasons are often easier
to defend than subjective ones if they are later called into
question in litigation.

Most layoff selections, however, will involve a subjective
component, such as employee performance or assessment of future
capabilities. Nevertheless, the employer should consider ways to
maximize the objective components of the decision. For example,
rather than relying solely on a supervisor’s evaluation, the
employer might give some weight to employee seniority.

In situations where the employer will use employees’
performance as a selection criterion, the employer may need to rely
on prior performance evaluations, a ranking system developed
specifically for the layoff or some combination of the two. If
rankings prepared as part of the layoff process are inconsistent
with prior evaluations, the employer must be prepared to explain
the discrepancy.

Company counsel can aid the employer in developing the
appropriate documentation of the criteria the employer will use,
the reasons for such criteria and their link to the rationale for
the layoff. Clearly documenting the criteria to be used also will
defuse potential arguments that the employer manipulated the
criteria to target certain employees for layoff.

Select the Decision-Makers and Communicate the RIF Objectives
and Selection Criteria

After the employer decides which criteria to use, it should
focus on selecting the appropriate decision- makers. In general,
senior management and human resources personnel may be in the best
position to make the general overarching decisions, such as those
concerning the scope of the layoff, the locations or facilities to
close, the product lines to discontinue and/or the services to
outsource.

Decisions concerning which employees to retain may be best left
to managers who have personal knowledge of the employees’
performance, unless the selections are based on purely objective
criteria. Leaving all decision-making to a single individual
carries potential risks: that individual may be a poor witness, may
later be terminated or laid off or may harbor or be perceived as
harboring personal animus toward certain employees.

Once the decision makers have been identified, an employer
should clearly communicate the objectives of the RIF and the
selection criteria to the decision makers. For example, a decision
maker might be tasked with the objective of eliminating 20 percent
of the headcount in a particular department while maintaining
critical business functionality using selection criteria based on
performance rankings weighted by employee experience. Having
clearly communicated the RIF objectives and selection criteria to
the decision makers is essential to the defense of any challenges
to their decisions.

Identify Any Contractual Requirements

While workers are “at will,” meaning they can be
laid off or otherwise terminated at any time, with or without cause
or notice, subject only to statutory restrictions, many employees
have employment contracts, offer letters or other arrangements that
place limits on how the employer may end their employment. The
restructuring team should consider all such agreements and
arrangements in evaluating job reductions. Contractual restrictions
on layoffs may also be found in other sources, such as employee
handbooks, options or equity agreements, general employee policies
or, in rare cases, verbal promises by management.

In unionized workforces, contractual restrictions in collective
bargaining agreements or those established through past practice
are also likely to place limits on an employer’s ability to
reduce its workforce or implement other cost-containment measures.
In the case of a RIF, these restrictions may impose certain
criteria, obligations or procedures on the RIF. In addition, the
decision to implement the RIF, along with its effects on the
employer’s workforce, may be subject to mandatory
bargaining.

Analyze Layoff Selections for Discriminatory Treatment or
Effect

RIF selection criteria can sometimes lead to unexpected or
unintended effects on individuals in statutorily protected
classifications. To ensure a fuller understanding of a proposed
RIF’s impact, under guidance of counsel, employers should
conduct a review of any RIF plan to identify possible issues of
disparate treatment or impact potentially caused by the plan.

“Disparate treatment” occurs when an employer
intentionally selects certain employees for layoff based on a
protected characteristic, such as race, color, national origin, sex
and pregnancy, age, disability or religion. Unlawful disparate
treatment also can occur under Section 510 of the Employee
Retirement Income Security Act (ERISA) if the employer selects
employees for layoff to avoid or reduce the costs associated with
providing ERISA-covered benefits or to prevent employees from
attaining any ERISA-covered benefit, such as pensions. Employers
must also consider other protected characteristics under state and
local laws.

“Disparate impact” occurs when the selection
criteria unintentionally cause the layoff to fall most heavily on a
protected group. For example, disparate impact against older
workers may occur if an employer uses employee salaries as a
criterion. Because older workers tend to earn higher salaries, a
layoff may disproportionately impact older workers. Where disparate
impact exists and cannot be eliminated, employment counsel should
be consulted to evaluate whether the company has a defensible
business justification for its selection criteria.

Employers may use outside experts or consultants to assist in
conducting disparate treatment and disparate impact statistical
analyses. Such outside analyses can be particularly helpful in
understanding issues of disparate treatment or impact and in
defending against a claim if litigation does result.

Consider Other Potential Legal Issues

After the employer has identified the employees selected for
layoff, it should consider the status of each one to ensure that
there are no potential claims lurking. For example, employees who
are on protected maternity, family, medical or military leave may
have certain reinstatement rights under the Family and Medical
Leave Act (FMLA) or the Uniformed Services Employment and
Reemployment Rights Act (USERRA). Unless the employer can invoke
certain defenses, discharging such employees while they are on
leave can expose an employer to liability.

Terminating employees on these or other types of protected
leaves of absence, such as disability or workers’
compensation leave, may also create the appearance of retaliation.
Similarly, terminating an employee who is considered a protected
“whistleblower” under federal, state or local law or an
employee who is known to have engaged in protected, concerted union
activity could subject an employer to retaliation claims.
Individuals who participated in internal investigations or as
witnesses for other employees may also have a basis for a
retaliation claim.

Review Restrictive Covenant Obligations

Another relevant consideration is whether the employees are
under any restrictive covenant obligations that the employer may
wish to enforce after implementing a RIF. Such obligations include
not soliciting clients or employees and not joining a competitor.
State law may impact the employer’s ability to enforce such
obligations, because some courts may be reluctant to enforce
restrictive covenants when an employee is terminated through no
fault of their own.

Document Carefully

It is imperative that the employer carefully document the
reasons for the RIF, the objectives of the RIF, the selection
criteria used and the reasons that the employer selected or did not
select each employee in the affected area(s). Such documentation
assists in refuting any claim that the employer manipulated the
layoff criteria for unlawful reasons or had any illicit motive for
the layoffs. In that comprehensive documentation, the employer
should use consistent explanations as to why it selected certain
employees for layoff or retention. It also may be appropriate to
maintain notes and minutes from any RIF restructuring team
meetings.

Identify When Notice Should Be Given

Failure to provide adequate notice is a significant potential
pitfall for employers implementing RIFs. Thus, employers should
carefully review applicable federal, state and local law pertaining
to this question before proceeding.

The federal Worker Adjustment and Retraining Notification (WARN)
Act and various state equivalents known as “mini-WARN”
Acts require that covered employers give up to 60 to 90 days’
advance notice before implementing a “plant closing” or
“mass layoff.” These statutes compel back pay and
benefits, civil penalties and attorneys’ fees in litigation
where the employer did not give proper notice to affected employees
or their union representatives, and/or certain government
officials. Such penalties are designed to inflict a steep price and
can significantly reduce any savings produced by a RIF.

The federal WARN Act is technical and complex. In general, it
applies to private employers with a total of

100 or more full-time employees and mandates 60 days’
advance written notice of (1) a temporary or permanent “plant
closing,” or discontinuance of an operating unit, that
affects 50 or more full-time employees1; (2) a
“mass layoff” of more than 500 full-time workers at a
single site of employment during a 30-day period that is expected
to exceed six months; (3) a RIF of between 50 and 499 full-time
workers at a single site of employment during a 30-day period, if
the RIF affects at least 33 percent of the employer’s total
active full-time work force and is expected to exceed six months;
or (4) extension of a temporary layoff affecting the number of
employees in (2) or (3) at a single site of employment that was
originally expected to last six months or
less.2 The WARN Act generally does not apply to
temporary layoffs of less than six months.

In determining whether the employer satisfies these threshold
requirements, it is important to check applicable state and local
laws. Many jurisdictions have enacted mini-WARNs that dramatically
lower the initial threshold numbers and increase the amount of
advance notice that employers must give. For example, New
York’s mini-WARN Act requires employers with 50 or more
employees to give at least 90 days’ advance notice of any
mass layoffs, plant closings or “relocation” of
operations.

There may be exceptions that excuse the employer from providing
the full amount of notice required under applicable law. Most
notably, under the unforeseeable business circumstances exception
of the WARN Act, employers are relieved from the obligation to
provide a full 60 days’ notice if the RIF is caused by a
“sudden, dramatic, and unexpected action or condition outside
of the employer’s control” such as a “dramatic
major economic downturn” or “[a] government ordered
closing of an employment site that occurs without prior
notice.” However, it is unlikely that the macro-economic
factors driven by inflation and rising interests rates, on their
own, qualify for this exception.

Implementing the RIF

Once the employer has completed the steps outlined above and
compiled its final list of employees selected for layoff, it should
make final preparations for implementing the RIF. These
preparations include:

  1. Identifying the corporate representatives who will advise the
    employees individually of the decisions, coaching them in advance
    on the employer’s consistent explanation for the RIF,
    preparing a “script” to be followed with prepared
    responses to anticipated questions and familiarizing them with
    information on benefits and any outplacement services for
    terminated employees.

  2. Ensuring that the employer pays all accrued but unpaid wages,
    bonuses, vacation, pre-negotiated severance and other compensation
    in a timely manner, with appropriate withholdings and in accordance
    with state and local law.

  3. Compiling information packets for terminated employees
    regarding final compensation payments, outplacement assistance,
    insurance continuation and procedures for reapplying for other
    positions within the company.

  4. Preparing a handout outlining answers to frequently asked
    questions about the RIF for distribution to all employees,
    regardless of whether or not they were included in the RIF; this
    will help control the spread of rumors and gossip and ensure
    dissemination of consistent explanations for the RIF.

Finally, employers should consider offering additional benefits
or severance packages to selected employees in exchange for a
release of all potential claims against the employer. With respect
to age related discrimination claims, there are several strict
legal requirements requiring specific language that must be
contained in the release, mandatory consideration and revocation
periods and disclosure obligations identifying the ages and
positions of other employees in the decisional group that employers
must follow to obtain a valid release, particularly with workers
age 40 or older. However, obtaining a valid release is the best
method of limiting potential liability against the employer.

A release also provides an opportunity for the employer to
require binding arbitration to resolve any disputes that may arise
between the employer and the discharged employees, limit the risks
of class claims and to bind the employees to covenants of
confidentiality, cooperation in future legal proceedings and the
like. Employment counsel can advise employers on how to craft
releases that will best withstand legal challenges and keep them
abreast of any potential changes in the law.

Footnotes

1 By “full-time employees,” we mean
employees who are not “part-time” as defined by WARN.
Employees who work an average of fewer than 20 hours per week, or
who have been employed for fewer than six of the 12 months
preceding notice (even if full-time), are “part-time”
employees under WARN. See  20
C.F.R.. § 639.3(h).

See id.  at
§§ 639.3(b), (c), (f); 639.4(b). Note that, under WARN,
full-time employees whose hours are reduced by more than 50 percent
for each month in a six-month period are “affected
employees” entitled to notice. Id.  at
§ 639.3(e), (f)(1).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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