Reductions in Force: Minimizing Legal Risks

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Title:
Reductions in Force: Minimizing Legal Risks
Date:
November 1, 2001
Area(s) of Practice:
Labor & Employment Law

Recent changes in the economy and in the international arena are driving many companies to examine ways to reduce costs and conserve resources through downsizing, restructuring, ending lines of business, or closing a facility. In all of these scenarios and more, a layoff or reduction in force ("RIF") is often part of the company's strategic plan.

Effectuating a RIF, though, is itself fraught with legal risks. State and federal agencies as well as individual employees may force the company to defend its actions at every step. Such legal actions can eat up enormous amounts of precious time and capital, even if the company is ultimately successful. Understanding the legal risks of a RIF, proactively planning to reduce those hazards, and establishing procedures which will stand up to legal scrutiny are important steps that no company can afford to omit from its RIF planning.

This discussion, while merely an overview of some of the more significant legal concerns, should help make you aware of some dangers associated with a RIF as well as possible ways to minimize the risks.

Self-Created Obstacles to RIFs

Before attempting to outline its RIF strategy, an employer must know the parameters within which it must operate. Are there contracts or commitments that restrict its actions? Collective bargaining agreements or employment contracts may guarantee employment, limit the reasons for which the employee can be terminated, or guarantee that some procedure, e.g., selection on the basis of seniority and/or merit, will be used if terminations should occur. Even in the absence of formal written employment contracts, court decisions have established that a company can create a contractual obligation - which the employee can enforce against the employer - through an employee handbook or an employment policy e.g., job security, severance rights. Employers under such self-created obligations should take steps to comply with or to eliminate such obligations.

The term "lay off" is meant to suggest that the employee is terminated through lack of work, although to some, the term may carry an implication that the affected employee may be recalled to work. "Termination," on the other hand, suggests a final separation. Employers may choose to use "lay off" in communications with employees to underscore the cause of the separation but great care should be taken not to create any expectation that employees will be recalled to work.

Discrimination Concerns

Employers should structure the RIF to minimize the potential liability for discrimination claims, as RIFs are fertile ground for discrimination suits. Two types of claims can be anticipated: claims of disparate treatment, i.e., an employee in a protected class alleges his or her termination was motivated by the employee's protected status because other employees not in that class keep their jobs; and claims of disparate impact, i.e., the RIF has a disproportionate adverse impact on a protected class.

To ensure that RIF decisions are based on nondiscriminatory criteria, the company should identify legitimate, measurable criteria for determining which employees will be terminated. Employers often utilize "objective" criteria such as seniority, elimination of the position, or amount of compensation; in addition, "subjective" criteria are frequently used, including management's assessment of employee skills and/or past performance appraisal scores. The RIF planning process should include safeguards ensuring that these criteria are consistently applied to each employee (e.g., have human resources professionals or an attorney review the RIF decisions), and that all analyses of criteria and the reasons for all decisions are articulated and documented.

As part of the RIF planning process, after identifying the proposed criteria and process, the company should determine what adverse impact the proposed RIF would have on employees in protected categories (age, race, sex, etc.). This determination is made by running trial analyses of the effect of implementing various RIF criteria, and comparing the resultant "before and after" compositions of the workforce. Even where no adverse impact is intended, if the proposed RIF would in fact negatively impact a protected group, this creates the opportunity for an employee to make a discrimination claim. If disparate impact can be foreseen, the RIF selection process should be reexamined and perhaps revised to avoid such impact. The decisionmakers should not review demographic information; to maintain the integrity of the process and remove any chance of bias, that task should be left to those who review the RIF decisions.

Certain employees may be particularly inclined to perceive their termination as part of a RIF as a form of discrimination or retaliation. In particular, this may include employees who have recently filed a workers' compensation claim, a grievance, or a complaint against the employer; those who are close to vesting in a benefit program; and those on a leave of absence (e.g., maternity leave). Making exceptions for individuals on the basis of protected categories is generally not recommended, as this can undermine the integrity of the process. Instead, the company should carefully select RIF selection criteria to minimize anticipated claims of disparate treatment, and should ensure that decisions at each step of the RIF process are well documented.

Notice of Termination of Employment

The New Jersey Administrative Code requires that an employer notify the Division of Unemployment Insurance as soon as possible, but in no case less than 48 hours prior, when it knows that it will terminate 25 or more workers, at or about the same time and for the same reason, for 7 days or more. This rule does not apply in the case of labor disputes. Moreover, this law, unlike its federal counterpart, the Worker Adjustment Retraining and Notification Act (WARN), does not require notification to the employees themselves.

Under the federal WARN Act, certain employers must give 60 days' advance warning of the termination of 50 or more employees in a 30-day period. Specifically, the requirement is triggered by a "plant closing" or a "mass layoff" as defined by the Act. WARN notice must be given to (1) affected employees as well as part-time employees, (2) the state dislocated worker's unit, and (3) the local government. In certain cases, in lieu of providing 60 days' notice, the employer may be able to terminate employees earlier if it compensates them for the number of days by which it shortened the 60-day notice. There are also limited exceptions for closings and layoffs caused by natural disasters or certain unforeseeable circumstances, and in some situations, for closings caused by insolvency or bankruptcy.

Severance Agreements

Severance agreements may be - and often are - used as part of a RIF plan to avoid lawsuits and minimize potential liability. An employer may offer the departing employee a severance package, which includes benefits exceeding those to which the employee would otherwise be entitled, in exchange for a release and waiver of the employee's right to sue for any actions during or pertaining to their employment. However, negotiating severance agreements on an ad hoc basis can be problematic, in that it can create additional difficulties under ERISA (discussed below), as well as claims by other employees alleging discriminatory motives for offering different severance packages and agreements to them. Consequently, if severance agreements are to be used, a standard form severance agreement should be used for all affected employees.

Under the federal Older Workers Benefits Protection Act (OWBPA), an employee 40 years of age or older must be given 45 days to consider a severance agreement, and is also entitled to information about the job titles and ages of other employees to be laid off and those to be retained, as well as information about the eligibility factors used in determining who would be retained or laid off. If the employer fails to take these steps, the release and waiver cannot be enforced with respect to an employee's federal age discrimination claim.

ERISA

The federal Employee Retirement Income Security Act (ERISA) forbids an employer from terminating employment in order to prevent the employee from vesting under an employee benefit plan (e.g., pension plan). As a result, an employer should conduct an analysis to determine how many employees the RIF would prevent from vesting in the near future, and whether the risks suggest that the employer should change its selection criteria.

COBRA

The federal Consolidated Omnibus Budget Reconciliation Act (COBRA) requires many companies to continue to permit terminated employees, and their dependents, to stay on the group health insurance plan for at least 18 months after termination but at the expense of the former employee. Proper notification to employees and dependents is critical. Distribution of COBRA notices should be done so as to ensure receipt by each qualified dependent. Employers should consider mailing the information directly to each dependent as opposed to entrusting it to the employee.

FLSA: Payment of Wages

Under the federal Fair Labor Standards Act and the New Jersey Wage and Hour law, final paychecks to departing employees must be issued no later than the regular payday for the pay period during which the termination occurs. The final check should include all wages. For hourly employees, this includes all time actually worked. Salaried employees, who are paid a flat salary on a weekly basis under the FLSA, may not be docked for days during the workweek when no work was available. By terminating exempt personnel at the end of the workweek, the employer can avoid having to pay exempt personnel for days not worked.

There is no federal or New Jersey law which requires an employer to pay out accrued vacation, holiday or sick time upon termination or layoff (unless such benefits are considered "wages," which is not the case in New Jersey). However, in New Jersey and in many other states, the employer's established policies and/or practices (which often provide for payment of accrued time) may create contractual obligations, and employees may sue for breach of contract if those policies are not followed. Therefore, the employer should follow its own policies and practices with regard to paying out accrued time.

Protection of Confidential Information and Trade Secrets

Companies planning a RIF should include measures in the process for protection of company proprietary and confidential information. If employees signed a confidentiality agreement earlier in their employment, now is the time to examine those agreements, and determine if they provide adequate protection to the company. There are also judicial decisions recognizing that an employee has a duty to maintain the confidentiality of an employer's proprietary information after employment ends, even in the absence of a written agreement. Employers should remind departing employees of their obligations to maintain confidentiality, whether the obligation arises from an existing agreement or from a duty recognized by law. Even if a former agreement exists, companies may want to require employees to sign an additional confidentiality agreement (as part of a severance agreement) at the time of termination. This may be particularly appropriate if the company is aware that the employee's future plans (perhaps to work for a competitor or to set up a competing business) will create a situation threatening imminent and harmful disclosure of the company's confidential information.

Managing the Remaining Workforce

Finally, employers should be ready for managing the downsized company. Certain practical matters concerning the workforce may have to be addressed, such as revisions to schedules, job assignments, and job descriptions. The workforce which remains after the RIF will be a changed one, in many ways. Morale will be different; loyalty and trust may be reduced. While these are not legal problems, it is not hard to imagine how legal troubles could arise in such an environment; e.g., if a female employee is asked to assume the responsibilities of a departing male employee, does her compensation have to be increased? Through continual analysis and evaluation of its human resources function and policies, an employer can afford itself the opportunity to be proactive in addressing issues.

Planning for and conducting a reduction in force is a complex process which involves many legal requirements. This article only touches the surface of some of the issues that may arise. Employers are advised to seek the advice of an attorney competent in employment law when planning and implementing a reduction in force.