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Legal Updates

Recession Reality: Reductions In Force And The Accompanying Legal Risks

Recent recession fear is fueling concern among workers that shrinking corporate revenue may lead to substantial job cuts across industries.  With the difficult decisions ahead for employers comes the legal minefield created by a reduction in force (“RIF”).  While many employers recognize the potential plant closing or mass layoff obligations associated with a significant elimination of jobs, too often these same employers fail to properly plan for a more limited reduction in force, one that may be similarly fraught with peril.

For example, consider the employer that, as a cost-cutting measure, elects to eliminate its entire sales force in one of its branch offices.  Can the employer clearly explain why each individual’s employment will be terminated?  Could that reason be interpreted as discriminatory based on the raw demographics of the laid-off employees?  Are the employees entitled to notice (or notice pay)?  Do the employees’ commission plans contain a termination provision that could affect whether they have earned certain sales commissions?  Will the employees be entitled to severance pay?  How should the severance pay be calculated, and what should the terms of the severance agreement be?  Is the severance policy documented?  Will the employees be entitled to health insurance continuation coverage under COBRA or mini-COBRA or unemployment assistance?  How will the termination decision be communicated to employees and when?  Each of these issues contains an inherent pitfall that could expose the employer to potential liability.

Like any other corporate decision that affects the bottom line, the key to a properly executed RIF is having a structured RIF plan that has been reviewed and approved by human resources, senior management and legal counsel.  At a minimum, an effective RIF plan should contain the following components.

Establish Objective Selection Criteria

Every reduction in force that affects more than one employee should be supported by a justification statement.  A justification statement is an internal document that contains a list of objective criteria supporting the decision to eliminate the position and/or lay off the employee and that flags potential issues that may impact the company’s future liabilities to the laid-off employees.  For example, the justification statement should contain:

  • Each employee’s protected characteristics under equal employment opportunity laws, recent workplace injuries, leaves of absence and internal complaints of misconduct;
  • A description of any employment-related promises (e.g., bonus, term of employment, benefits) that have been made to the employee;
  • Any restrictive covenants under which the employee may have future obligations to the company;
  • A summary of any immigration-related implications of the RIF (i.e., forfeiture of authorization to work and/or reside in the United States);
  • The names and ages of employees in the same division with the same title and responsibilities who will be subject to the RIF, and another list with the names and ages of employees with the same title and responsibilities who will not be subject to the RIF;
  • Non-discriminatory factors supporting the reason for the termination of employment, such as lack of seniority, elimination of a job function or performance or skill deficiencies; and
  • Names of those involved in the RIF decision.

Again, it is important for senior management, human resources and legal counsel to be involved in preparing the justification statement.  The justification statement is of critical importance because it will serve as the foundation for decision-making and outline the defense to any legal challenge that the RIF was based not upon objective, non-discriminatory criteria, but upon a protected class, most commonly the age of the terminated employees.

N.B. This document should be copied to counsel, to protect it under the attorney-client privilege.

Identify Any Triggered Plant Closing/Mass Layoff Laws

Whether the company has any obligations under state or federal plant closing/mass layoff laws depends primarily on the total number of employees in the company, the location of the company and the number of employees subject to the RIF.  For example, under the federal Worker Adjustment and Retraining Notification Act (“WARN”) Act, which applies to businesses employing one hundred (100) or more employees, covered employers must provide sixty (60) days’ notice to employees and government officials of any “plant closing” or “mass layoff.”  A “plant closing” means the permanent or temporary shutdown of a single site of employment or one or more facilities or operating units within a single site of employment, if the shutdown results in an “employment loss” of fifty (50) or more employees during any thirty (30) day period.  A “mass layoff” means a reduction in force that results in an employment loss at a single site during a thirty (30) day period of either: (a) at least thirty-three percent (33%) of the employees and a total of fifty (50) employees, or (b) five hundred (500) or more employees.

Even when federal WARN Act requirements are satisfied, employers sometimes fail to acknowledge state plant closing laws.  For example, New Jersey recently enacted a law governing plant closing that contains more employee protections than afforded under federal law, such as more expansive employer notice obligations and stiffer penalties for non-compliance with such notice provisions.  Other states, such as New Hampshire, have enacted laws requiring specific employer notice requirements to state unemployment agencies and other government entities.

It is critically important for a company undergoing a RIF to identify whether the RIF may potentially trigger a plant closing or mass layoff, and to contact legal counsel for a more thorough analysis of coverage and notice obligations.  Penalties for state or federal WARN Act obligations are extensive.

Severance Plan or Policy

Although many companies establish and publish a severance policy in the employee handbook, other companies maintain confidential severance practices, most often to allow for increased flexibility of the post-employment payout.  (N.B. These unpublished practices can create de facto severance plans under federal law, which may impose unintended obligations on the employer.)  Regardless, however, during RIF planning, it is important to establish a RIF plan or policy regarding severance pay and related matters to ensure that post-employment benefit decisions are consistent and objective.  If a company’s severance plan or policy fails to establish objective criteria (e.g., one week of severance per year of service and/or one month of paid health insurance coverage per year of service), and if laid-off employees are treated inconsistently, then the company could be vulnerable to discrimination claims.

Separation Agreement And Release

Properly-drafted separation agreements are the key to ensuring an effective release of future employment claims and a clear communication of the rights and obligations of the departing employee.  Such agreements should clearly outline the consideration (i.e., the severance payment/benefits being offered by the company) to ensure enforceability of the release being provided by the employee in exchange.  The release contained in the separation agreement should identify any state-specific employment statutes that could otherwise have been the basis of an employment claim and state that the employee is waiving his or her potential rights under those statutes in exchange for the severance benefits.

Moreover, under the Age Discrimination in Employment Act (“ADEA”) and the Older Workers Benefit Protection Act (“OWBPA”), a severance agreement concerning employees who are forty (40) years of age or older must include an attachment containing a statement of the objective criteria used for the RIF decision, the list of names, job titles and ages of employees subject to the RIF and a similar list of employees not subject to the RIF.  The separation agreement also must contain certain notice provisions.  In all RIFs, the separation agreement should be tailored to the specific situation.  Therefore, we encourage you to seek assistance from legal counsel when preparing the separation agreement, and to avoid using standard form release agreements that may be non-compliant with federal and state laws.

Communicating The RIF

Perhaps the most overlooked yet arguably most important component of the RIF is determining the method and form by which the RIF is communicated to affected employees.  Prior to communicating a RIF, management, human resources and legal counsel should agree on a standard script to provide to managers communicating the RIF.  At a minimum, the script should contain the following instructions:

  • Consistently state the legitimate business reason supporting the RIF;
  • Limit discussing personal matters with the employee, including reacting to an employee’s emotional response with shared criticism of the company;
  • Be prepared to answer standard questions, such as why the decision was made, who else was impacted and what the employee should expect to happen next;
  • Treat employees with respect and dignity; and
  • Identify resources available to the employee, should the employee have any follow-up questions.

If an employee is subject to immediate termination without any required prior notice, the manager should appear at the termination meeting with a check for final pay for all earned wages, including accrued but unused vacation time and earned commissions (although termination payment provisions vary by state law); information concerning unemployment and COBRA health insurance continuation benefits; and the separation agreement, if applicable.

In addition, if the employee is subject to one or more post-employment restrictive covenants, such as a confidentiality, non-disclosure or non-competition agreement, a copy of that agreement should be produced to the employee and accompanied by a verbal reminder of the employee’s obligations under the agreement.

In sum, no manager handling the termination meeting should appear at the meeting unprepared.  It may also be advisable to have another member of management or human resources present at the meeting to document the discussion and serve as a witness.

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A RIF is an unfortunate, complicated and potentially perilous reality of conducting business.  However, the risks associated with a RIF can be greatly limited through planning and preparation, consistent and lawful decision-making and consultation with legal counsel.  We are available to assist you with planning a RIF, preparing separation agreements and addressing the complex employee compensation and benefit implications of a reduction in force.