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Legal Updates

The Risks Of RIF Alternatives

While many employers are implementing layoffs to address their challenges in the current economy, many employers are also considering creative alternatives to reduce their costs without laying off employees.  This article addresses the legal challenges that await employers that pursue those “RIF alternatives.”

Of course, layoffs are occurring at a remarkable rate.  In January, 2009, United States employers eliminated 598,000 jobs, and the national unemployment rate, currently at 7.6%, is the highest in 16 years.  The legal challenges to properly implementing layoffs are well-documented.  Indeed, the Firm addressed these in a recent article:  “Recession Reality: Reductions In Force And The Accompanying Legal Risks, published in the Firm’s Labor and Employment Law Update in May 2008.

However, there are also legal challenges to other cost-cutting measures that impact employees’ hours, wages, and other terms and conditions of employment.  These RIF alternatives can be complicated to implement and require the assistance of experienced employment counsel to minimize the risks.  If handled properly, and depending upon the circumstances, these RIF alternatives can offer important benefits such as reduced labor costs, enhanced employee morale and loyalty.

The RIF alternatives described below do not include all possible alternatives, but will offer some guidance on the types of legal issues that can be implicated by cost-cutting measures that impact employees’ work hours, compensation and/or benefits.  Employers considering any of these RIF alternatives should be aware of these potential legal issues, and are urged to seek the advice of employment counsel in advance of implementing the alternative cost-cutting measures.

Salary Reductions  And Reduced Workweeks

Salary reductions and/or a reduction in employee’s work hours (the reduced workweek) create several risks under labor and employment laws.

For starters, these RIF alternatives create the risk of a potential wage and hour law violation.  Under the Fair Labor Standard Act (“FLSA”), the practice of a salary reduction or a reduced workweek may eliminate an employee’s exempt status (for purposes of overtime eligibility), unless the employer can establish that the reduction is bona fide and not intended to circumvent the employer’s salary basis payment obligation by.  In this regard,

  • exempt employees generally must receive a salary of at least $455 per week in order to satisfy the salary basis test;
  • employers must announce reductions in advance and implement such reductions prospectively, so as not to deprive the employee of any earned wages;
  • in the case of a reduced workweek, employers must pay a salary that is commensurate with the amount of time subtracted from the regular workweek; and
  • employers must refrain from repeatedly instituting and suspending the salary reduction or reduced workweek, as such an erratic arrangement could suggest that the salary reduction or reduced workweek is a sham.

Salary reductions should also be reviewed in advance by counsel to ensure that they do not violate other legal and contractual obligations such as: (i) anti-discrimination laws, (ii) collective bargaining agreements, (iii) employment agreements, (iv) employee handbooks, and/or (v) offer letters.  For example, to reduce the risk of discrimination claims, employers should engage counsel to carefully review the proposed salary reduction plan to ensure that the reductions will not create evidence that might support a disparate impact discrimination claim.  Likewise, salary and workweek reductions should be reviewed to ensure they will not violate any express or implied contractual rights.

Employers implementing a reduced workweek must also determine whether eligibility for participation in employee benefit plans will be impacted, or whether such an impact is intended.  Qualified counsel should review (and perhaps amend) the relevant plan documents to ensure that the plan documents accurately reflect the employer’s obligations and/or goals for benefits eligibility.

Unionized employers of course must comply with the terms of any applicable collective bargaining agreement, and will often be required to bargain with the applicable union before any types of reductions can be implemented.  Experienced labor counsel should review the employer’s collective bargaining agreement, side letters, and past practice, to identify any potential obstacles to a reduction.

Potential WARN Act Obligations?

Employers should also be cognizant of potential liability under the federal Worker Adjustment and Retraining Notification Acts (“WARN” Act) and similar state laws.  Significant salary or pay reductions may constitute “constructive discharge” (which can be defined differently under federal and various state laws), and thus a RIF alternative that triggers a mass resignation could potentially trigger statutory notice requirements.

Practical Tip:  Communicate In Writing, In Advance

Employers should prepare a written notice to employees concerning the prospective salary reduction plan or other RIF alternative.  Most importantly, this notice should be delivered to employees before any reduction is implemented.

Also, such communications should address a variety of details, including which departments will be affected, the employee’s new salary or work schedule, the intended duration of the reduction, the employees’ continued status as an at-will employee, a provision expressly superseding any prior contracts, policies and/or offer letters, and potentially an acknowledgement/signature section (particularly, if necessary to expressly amend any applicable contracts).

Voluntary and Mandatory Furloughs

Another RIF alternative is the furlough – which is typically a complete but temporary shut-down of operations and is generally unpaid (although the use of paid time off may be permitted to supplement income during the furlough).  The legal issues that typically arise relative to furloughs do so under state law or company policy.  For example, if an employer seeks to recognize an immediate financial benefit for the furlough, it may require that employees take the furlough as unpaid time off, in which case both state law and company policies should be reviewed by counsel to avoid compliance problems.  In this regard, for example, employers should be aware that some states, such as California, may require a certain amount of advance notice prior to prohibiting an employee’s use of earned vacation time.

In addition, to avoid an obligation to pay exempt employees during the furlough, employers should notify exempt employees in writing, in advance of the furlough, that they are prohibited from performing any work during the furlough, except with express approval in writing from a member of senior management.  Arguably, an exempt employee who checks email and voicemail during a furlough is “working,” and therefore could argue that he/she is entitled to payment of his/her salary for the entire week.

In addition, in a union context, the employer would likely be required to bargain over a involuntary furlough¸ unless a collective bargaining agreement already addressed the issue.

Voluntary Early Retirement or Other Voluntary Incentive Programs

A voluntary incentive program, such as voluntary early retirement, can be an effective alternative approach to cutting costs, maintaining employee morale and managing the threat of potential litigation.  Voluntary incentive programs can be planned to target a particular group of employees, as well (e.g., higher-paid professionals who have been with the company for an extended period of time, rather than lower-salaried employees who might be targeted in an involuntary RIF).  Generally, if an employee accepts a voluntary package, the employee should be required to sign a release of claims, which of course minimizes the risk of litigation.

Employers planning a voluntary early retirement program are advised to work with experienced counsel in taking the following steps to minimize legal exposure:

  • develop a voluntary retirement program that meets the employer’s goals (e.g., how many employees does the company want to accept, and which type/category of employees?), without targeting employees in a manner that might trigger discrimination claims;
  • clearly and consistently communicate to eligible employees that the incentive program is completely voluntary, and affirmatively state that a refusal of the incentive will have no bearing on their current compensation and benefits going forward;
  • review benefit plans to ensure compliance, address any plans that require amendment, and determine options for continued eligibility for healthcare and vesting options for pension benefits;
  • carefully establish a time frame for eligible employees to consider the voluntary program that corresponds with release consideration and revocation periods required under the Older Workers Benefit Protection Act (“OWBPA”);
  • document the program as required by the Employee Retirement Income Security Act (“ERISA”), or be clear that it is a one-time program so as to avoid creating a de facto ERISA program; and
  • as with any RIF or RIF alternative, carefully prepare and review all public statements and documentation.

Work / Job Sharing

Work or job sharing is a program under which one full-time job is split into two part-time jobs, either indefinitely or temporarily.  Some employees will view job sharing as akin to a partial layoff, but others may see this as an opportunity to continue to receive compensation, develop skills and maintain employment during tough times.  In addition, some state unemployment agencies offer formal job sharing programs under which employers can apply to have lost employee compensation supplemented with unemployment benefits.  (In this regard, see the accompanying article about the WorkSharing Program available to Massachusetts employers through the Division of Unemployment Assistance.)

Other RIF Alternatives

In addition to the above, employers have other RIF alternatives at their disposal, including: (i) hiring freezes; (ii) phasing out eligibility to work overtime; (iii) eliminating paid holidays and bonus programs; (iv) use of independent contractors and/or temporary staff; (v) telecommuting; and/or (vi) sale of the company.  Each of these alternatives raises many of the same legal challenges described above, and thus employers are well-advised to consult with employment counsel prior to implementing any of these RIF alternatives.


In tough economic times, employers possess several alternatives to reduce labor costs – but each alternative raises the potential for legal risks and lawsuits.  Thus, employers considering these RIF alternatives should consult with experienced labor and employment counsel to ensure that these cost-cutting measures do not trigger preventable legal claims that could later outpace the costs that were cut.