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Minding the Bottom Line: Minimizing the Risk of Cost Saving Strategies
As the election fervor dies down, many in the business community contemplate the possibility that the current economic slow down may be with us for some time. Businesses experience economic cycles regularly, but this cycle, somehow, seems more significant than others. As we respond to client questions about how to avoid legal landmines associated with cutting costs and payroll, we hear the same concerns and uncertainties from all business sectors. These were the inspiration for this article. While we cannot answer every question you have, we hope to share insights with our clients and friends to help spot issues as they make difficult business decisions. If you still have questions, we are here to help.
Many businesses have avoided job elimination as long as possible, and have taken alternative approaches to cutting costs. Among the most common steps are: (1) instituting hiring and wage freezes; (2) reductions in hours or wages; (3) forced time off without pay or forced vacation; and (4) reduction of certain benefits (generally not group plan-type benefits) or making group benefits less rich, e.g., increasing deductibles for health care or sharing the premium responsibility between employer and employee. These options are not available in all cases, such as with unionized workforces or for employees who have an H-1B visa, but they have helped many employers trim costs without eliminating jobs.
Other employers have already begun or are planning the process of cutting payroll costs and adjusting the size of the workforce to fit current needs. This process, whether made one decision at a time or all at once, can have some unanticipated consequences or challenges if not well planned and executed. Below is a summary of the issues, the risks, and the best way to minimize potential liability associated with reductions in force (RIF).
Issue No. 1 - Is Advance Notice Required?
If the impact of a decision is large enough, companies may need to notify employees and others in advance of their job loss. The Workforce Adjustment and Retraining Notification Act (WARN), applies to companies with 100 or more full-time employees, and requires, with some exceptions, 60-days advance notice to employees, union representatives and certain government officials, before a "plant closure" or "mass layoff" at any single site. Liability for noncompliance may include pay and benefits for 60 days, penalties, and possibly attorney fees. Given this, advance planning or budgeting the impact of paying notice pay in lieu of notice is critical if the WARN Act applies to you.
A "plant closure" is any shutdown of a worksite or facility within a worksite that impacts 50 or more full-time employees within a 30 (and sometimes 90) day period. A "mass layoff" is a reduction of at least 50 full-time employees (and for larger employers, at least 33 percent of full-time employees) at the work site within a 30 (and sometimes 90) day period. If you anticipate workforce reductions of this magnitude, we recommend you contact counsel to discuss a WARN compliance plan. More details about the WARN Act may be found here.
Issue No. 2 - How Do I Pick and Choose?
RIF is unlike any other loss of employment because it is not triggered by a problem with the employee, but rather, by market factors and business considerations over which the employee has limited or no control. As a result, the questions every laid off employee asks are "Why this?" and "Why me?" Having reasonable and supportable answers to these questions will go a long way in protecting an employer from lawsuits related to the RIF.
Allegations of discrimination and retaliation are the most common challenges to a RIF. Affected employees often claim that they were selected for termination because of their protected class, e.g., age, race, religion, sex, disability, national origin, sexual orientation, or military or veteran status, or because of their protected activity, e.g., use of OFLA/FMLA leave, worker's compensation claims, or complaints of harassment or discrimination, among others. In order to defend against these claims, employers must be able to establish the legitimate business reason for instituting a RIF and for selecting the complaining employee over others who were not selected for RIF. Employers must also be sensitive to the difficulties it will face in establishing an untainted selection process if the employees selected for RIF fall disproportionately into protected classes as compared to the pre-RIF employee population.
Given the degree of risk, employers are well served to put time and effort into ensuring that the selection process is valid, free from discriminatory or retaliatory taint, and documented in a way that will help validate the employer's decision-making process. There are, therefore, some steps that can be taken to assist in this process:
1. Determine who will be part of the decision-making process and consider including some level of HR review.
2. Identify appropriately similar groups of employees (decisional units) so that true comparisons can be made between employees.
3. List the factors that should be used to compare the employees, remembering that the more objective the standard or factor, e.g., seniority, the harder it is for a plaintiff to prove discrimination or retaliation. The more subjective the factor, e.g.¸ flexibility, positive attitude, the greater the risk of discriminatory intent being found as a factor in the rating.
4. Develop a rating system and a tool (spreadsheet, chart, etc.) to capture and compare the ratings of employees in the areas identified as important.
| |
Employee A
|
Employee B
|
Employee C
|
| Seniority |
3
|
5
|
2
|
| Performance |
3
|
2
|
5
|
| Job Knowledge |
3
|
4
|
3
|
| Cost Savings |
-1
|
-4
|
-1
|
| TOTAL |
8
|
7
|
9
|
5. Analyze the result to determine if employees in protected groups drop out in disproportionate numbers. If this is the case, review the factors and the rating system to see if they can become even more job-focused.
6. Look at other risk factors for those impacted by the RIF such as worker's compensation history and OFLA/FMLA usage and evaluate the risk individually.
One final consideration is to include counsel in this process and copy him/her on all documents and e-mails. This will help if you wish to claim the documents and communications are privileged attorney-client communication or protected work product.
Issue No. 3 - How Do I Deliver the News?
Communicating a termination decision is never easy. The process of talking with employees about the RIF will be easier, however, if employees had some advance warning that reductions were being considered. No matter the circumstances, planning ahead for the meeting is critical. We recommend you consider the following:
1. Determine the logistics, such as when and who will deliver the news, whether you will hold exit interviews, how employees will return company property and retrieve personal property, whether security is needed, and how and when to share the news with remaining employees.
2. For those employees who have non-compete or confidentiality agreements, decide whether to remind them of their obligations and whether to provide a copy of the document to the employee.
3. Decide whether severance will be offered, and if so, whether it will be conditioned on signing a release. Ensure your release is enforceable and includes the additional requirements associated with a RIF.
4. Evaluate the option of outplacement services. If you decide to use this option, determine who will receive this benefit and whether it will be part of the release.
5. Prepare a general script for the conversation, train those who will be delivering the news about how to navigate the pitfalls that may arise in difficult conversations, and consider preparing a Frequently Asked Questions memorandum to help employees digest the impact of the RIF and their options regarding things such as 401(k) loan repayment or transfers, unemployment eligibility, letters of reference, and health insurance continuation.
6. Have final paychecks ready and ensure they are properly calculated to include any accrued but unused vacation, PTO, or FTO. Remember the limitations on deductions from paychecks and consider carefully how to handle repayment of loans, negative PTO/FTO balances, etc.
This is a difficult process for any company to go through. We hope this information has been helpful to you and has answered some of your questions. Our Employment & Labor Team is here to assist you in this process or answer any questions that may arise; please contact Tamsen Leachman or Jack Cooper for such assistance. We thank Tamsen Leachman for her contributions to this article.
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