Reductions in Force - What Employers Should Consider
Rhonda D. Shelton, Partner: Shapiro Buchman Provine Brothers Smith LLP

RIF's. Lay-offs. Workforce reductions.

After exploring and implementing what they believe to be every other option in these tough economic times, more and more employers are resorting to Reductions In Force (RIF's). If this is you, there are several important issues that must be explored and decided upon before moving forward, including the following:

1. Applicability of the Federal or California WARN Act.
2. Establish and document objective selection criteria.
3. Review for possible disparate impact.
4. Prepare severance packages that include waivers and liability releases.

The statistics are staggering. Millions of jobs have been lost since the recession began, and most of those since November 2008. Age discrimination claims are up significantly to record highs. Discrimination claims across the board are up. Employees in mass are claiming wrong-doing on the part of their former employers, including discrimination and other misdeeds. So how can employers limit liability exposure and still conduct lay-offs? In a nutshell, an employer is wise to act carefully, making sure to cross their "t's" and dot their "i's."

1. WARN Act. RIF's of certain sizes may trigger notice requirements under the federal Worker Adjustment and Retraining Notification Act (WARN Act). California has its own WARN Act-type notice laws with lower thresholds for the notification trigger. In general, these laws require 60 days advance written notice to the affected employees, any involved unions, state agencies, and certain elected officials. The penalties are significant for failure to comply with these laws and include the payment of the prevailing party's attorneys' fees. Thus, it is imperative that employers considering lay-offs of any appreciable size contact legal counsel to determine if WARN Act notifications are required.

2. Selection Criteria. It is also essential that employers document the reasons for a RIF and what the RIF is expected to accomplish. While cost-cutting is presumably obvious, employers must put pen to paper and set forth exactly what the problem is and how the RIF is expected to help. Facts, figures, and information gathered as well as assumptions and projections should all be detailed.

Once the goal is determined, the employer must decide which employees are to be laid off so as to accomplish that goal. Unless there are individual employment contracts or collective bargaining agreements to consider, layoff decisions can be based on any legitimate, objective business need. Typically, this requires a review of the structure, hierarchy, and job descriptions to determine if tasks or positions can be combined or eliminated all together. In a nutshell, is there is new organizational structure that can get the job done with fewer positions?

Next, the employer must determine selection criteria to identify employee traits that best fit with the anticipated new organizational structure. Those criteria MUST be based on quantifiable and objective factors such as seniority, job classification, performance evaluations, and disciplinary issues. Each, however, has its own set of pros and cons. This requires a balance of meeting the goals of the organization, perceptions of "fairness" by employees, and attempting to head-off potential claims. Once the criteria are selected, however, it is critically important that employers apply those criteria objectivelyóindeed, surgically and dispassionately.

3. Disparate Impact. Before the chosen criteria are implemented, initial selection decisions should be evaluated to determine if there is a disproportionate effect on persons in protected classes. That is, did the RIF as currently planned have a greater effect on minorities or women or workers over 40 as compared to persons not in the protected class? If so, further analysis must be made to determine if this disproportionate effect can be justified by a business necessity.

Keep in mind it is not necessary for an employer to have intended to disproportionately effect persons in a particular protected class; it can be enough that the ultimate outcome was a disproportionate effect.

4. Releases and Waivers. Many employers conducting RIF's believe they simply cannot afford to offer severance benefits. However, the cost of a modest package is minimal compared to even a single lawsuit. As a result, many employers offer a severance package to laid off employees in exchange for a release of all claims. While releases do not guarantee protection to the employer, properly drafted and executed releases can be used to bring litigation to a swift conclusion and much less expensively.

Issues to consider in obtaining properly drafted and executed releases include the requirements of the Older Worker Benefits Protection Act that has many specific elements that are necessary to obtain a valid age discrimination waiver.

There are many additional issues to be considered when contemplating a RIF, including announcing the RIF (communication and perception of fairness to employees is of major importance), immigration issues if some employees are on H-1B visas, impact on 401(k) plans, benefit plans, and health savings accounts, and COBRA considerations, to name only a few.

The decision to conduct a RIF should not be entered into hastily or lightly. There are a multitude of issues that can cause liability. Employers would be well-advised to explore all other options before resorting to this highly unpopular strategy. Other options could include eliminating employer contributions to retirement plans, requiring employees to pay a greater portion of their health insurance premiums, changing health insurance carriers, changing health insurance coverage, eliminating or reducing mailings to employees, eliminating or reducing non-essential travel, freezing salaries, restricting overtime, and reducing salaries. As with RIF's, however, each of these options has its own set of pros, cons, and potential pitfalls that should be explored with legal counsel in advance of taking any action.

Shapiro Buchman Provine LLP continues to provide its clients, professional advisors and its friends with up to date reports on recent developments in business, real estate, employment, estate planning and taxation.

Authored by
Rhonda D. Shelton, Esq. Partner

[email protected]

This article, published on the Shapiro Buchman Provine Brothers Smith LLP website 7/09, appears with permission from the author. 

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