Planning a reduction in force is no piece of cake. Watch as we serve up practical guidance for organizations navigating layoffs with care and compliance.
Transcript:
Introduction
Andy: Today we will be diving into a critical topic that many organizations—regardless of size or industry—face at some point: reductions in force. While layoffs are often driven by economic or operational necessity, they carry significant legal and reputational risks. A misstep can result in discrimination claims, contract disputes, or noncompliance with federal and state laws. Whether you are planning a reduction in force, managing the aftermath, or simply preparing for the possibility, our hope is that today’s presentation will give you some practical knowledge on how to move forward with clarity and confidence.
Please note that we will not be discussing reductions in force related to unions or governmental workers today. This webinar applies only to reduction in force in private and publicly-traded companies.
What is a reduction in force?
Madeline: A reduction in force is the group elimination of positions due to business needs, restructuring, or economic pressures. It can involve involuntary permanent layoffs or long-term furloughs or even involve voluntary buyout programs or reduced workweeks. Unlike performance-based termination, reductions in force are not based on employee conduct. They can be spurred by several reasons such as cost savings, elimination of redundant roles or operational restructuring. No matter the reasoning, it is important to consider the legal implications and have a proper plan in place to protect the company from unwanted and unnecessary outcomes.
Do employers need a legal reason for a reduction in force?
Madeline: No specific legal justification is required provided the impacted personnel are employed at will. However, when the need for a reduction in force arises, employers should identify the legitimate business reasons driving the reduction and clearly document these reasons. For example, budget cuts or corporate restructuring. In doing so, the company should document why other, less drastic measures such as hiring or promotion freezes, reduction of employee hours, or transfer of employees to other locations are infeasible or insufficient to avoid implementation of the reduction in force. This step will be critical if decisions are later challenged and will help defend against potential discrimination or wrongful termination claims.
What are the legal risks associated with reductions in force?
Madeline: Any company that is considering the implementation of a reduction in force should ensure that the planned reduction in force is in compliance with U.S. federal, state, and local legal requirements, as there are many laws governing the structure and implementation of this method of personnel reduction. While there are a variety of risks that come along with terminating employees, some of the most common legal risks an employer may run in conducting a reduction in force include:
• Discrimination claims, which could be brought based on age, race, gender, disability, etc.
• Retaliation claims, especially if recent complaints or leave occurred.
• Breach of contract claims if employment agreements or policies are not followed.
• WARN Act violations, which we will discuss later on in this presentation.
What are the key considerations in deciding the necessity of a reduction in force?
Andy: Before deciding to implement a reduction in force, the company should be able to respond effectively to the following questions in order to minimize legal risks associated with reduction in forces under U.S. labor and employment laws: (1) why is the reduction in force necessary and what documented justifications does the company have for the reduction in force; (2) how will employees be selected for the reduction in force; and (3) how will the company treat employees subject to the reduction in force? This is because, in the event that employees affected by the reduction in force initiate litigation, the company will be required to address these issues to defend its personnel decisions.
To minimize risks under U.S. labor and employment laws, a company should follow certain steps in assessing the need for a reduction in force, determining the scope of the reduction in force, selecting employees to be included in the reduction in force, and implementing the reduction in force.
What are the key considerations when selecting the employees for the reduction in force?
Andy: When selecting individuals or departments impacted by the reduction in force, employers should develop objective selection criteria (such as skills, performance, and seniority) that align with the business rationale driving the layoffs. The company in this step should identify the number of positions to be cut in each work unit, along with the criteria to be used in implementing the reduction in force. During this process, the company must ensure that its documented business justifications remain valid with respect to the contemplated reduction in force and the number of employees affected. Employers should always avoid using subjective or inconsistent criteria (such as age, gender, race, religion, or disability) that could give rise to allegations of bias or discrimination.
If one or more of the employees selected for the reduction in force is on a legally protected leave of absence, including under the Family and Medical Leave Act, the company should consider any related job reinstatement and anti-interference rights associated with the leave of absence. In addition, employers should review the terms of handbooks and individual employee agreements to determine if there are limits on the employer’s discretion.
What is the WARN Act and what does it require?
Andy: The Workers Adjustment and Retraining Notification Act (a.k.a. the WARN Act) requires employers to provide employees with 60 days’ advance notice of plant closings or mass layoffs. It applies when employers with 100 or more full-time employees is laying off at least 50 people at a single site of employment OR employs 100 or more workers who work at least a combined 4,000 hours per week, and is a private for-profit business, private non-profit organization, or quasi-public entity separately organized from regular government.
On top of the federal requirements, employers should always be aware that some States (like California, New York and Illinois) and other local jurisdictions have “mini-WARN” acts that may lower the federal thresholds, require longer notice periods, and include stricter requirements. The Illinois WARN Act has different thresholds than the federal statute. For example, the Illinois WARN Act applies to employers with 75 or more employees and covers layoffs of 25 or more employees at a single site of employment.
Should employers offer severance when conducting a reduction in force?
Madeline: While offering severance to the employees selected for the reduction in force is not required, we always recommend offering employees severance in exchange for a release of claims against the company. We generally call this a severance and general release agreement, but for purposes of this webinar, we will refer to them as severance agreements. Of course, providing severance packages to all of the employees terminated as part of a reduction in force can be an expensive proposition. However, obtaining a valid release of all potential claims by terminated employees, in exchange for valuable consideration like severance, will help to prevent employees from later suing the company.
It is important to note that even though a severance agreement is offered to an employee, it does not necessarily mean that the employee will sign it and release the company from claims that occurred during their employment. However, in our experience, it is more likely that the employee will take the severance rather than lose the chance and gamble on a possible payout via a lawsuit or governmental agency proceeding.
Some of the key statutes and regulations one must consider in preparing severance agreements include, but are not limited to:
• Section 409A
• The Older Workers Benefit Protection Act (which I will discuss later in this presentation);
• The Age Discrimination in Employment Act; and
• Laws governing restrictive covenants.
An important consideration here, however, is that a release of claims will inhibit the employee from bringing most but not all claims against the company. Some claims cannot be waived including those related to workers’ compensation, unemployment insurance, unpaid wages (including overtime), and the right to file a discrimination charge with the EEOC, to name a few, as the corresponding laws prevent waiver of such claims.
From our perspective, obtaining legal counsel to assist with preparing severance agreements is imperative to ensure they are effective and lawful and can be enforced. We have seen far too many severance agreements that are illegal and unenforceable, leaving the company helpless in protecting its interests as well as liable for the illegal provisions and attempting to enforce them.
What are the requirements of the Older Workers Benefit Protection Act when terminating employees?
Madeline:The Older Workers Benefit Protection Act must always be considered when providing an employee with a severance agreement. There are special requirements with respect to separation agreements, waivers, and releases for workers over the age of 40, due to the federal statute known as the Older Workers Benefit Protection Act. The primary purpose of the Older Workers Benefit Protection Act is to ensure that employees over the age of 40 do not waive any potential age discrimination claims unless they do so knowingly and voluntarily. The Older Workers Benefit Protection Act specifies minimum conditions that must be met before a release agreement is valid and enforceable, including:
- The release agreement must be written in a way that can easily be understood by the worker;
- the release must specifically refer to rights or claims specifically arising under the Age Discrimination in Employment Act so that the worker is made aware of their rights under this law;
- the worker cannot be asked to waive future claims that may arise after the date the release is executed;
- in return for signing the release, the employer must give the worker something of value above and beyond that to which he or she is already entitled;
- the worker must be advised in writing to consult with an attorney prior to executing the agreement;
- the worker must be given at least 21 days within which to consider the terms of the agreement; and
- the release must provide that for a period of 7 days following the execution of the agreement, the worker has the absolute right to revoke the agreement if for any reason he or she has second thoughts and changes their mind (and the release will not become effective or enforceable until the revocation period has expired).
The OWBPA is even more onerous in its requirements if the release is proposed to a group of older workers in connection with a plant closing or a reduction in force. In this situation, each worker in the group or class of employees must be given a period of at least 45 days (not just 21 days) within which to consider the release agreement. Additional notice and disclosure obligations are also mandated concerning the ages and job titles of all persons affected by the group lay-off. These notification memoranda are required by law to be furnished to every employee in the company (and not just those included in the reduction in force).
As should be apparent, the process of obtaining a severance agreement in the context of a reduction in force can be quite complex. One concern that is commonly raised by employers is that if a worker takes the proposed release to a lawyer within the 45-day period, the lawyer will advise the worker to pursue a strategy of threatening litigation to obtain more money from the employer. While this is a valid concern, employers are well-served in obtaining a release from terminated employees in the reduction in force context wherever possible.
What is required under COBRA when conducting a reduction in force?
Maura Ann: Under a federal law known as the Consolidated Omnibus Budget Reconciliation Act of 1985 (commonly referred to as “COBRA”), an employer is required in most circumstances to provide a terminated employee with the opportunity to purchase replacement health insurance coverage. The law requires employers to give notice to employees of their right to buy replacement coverage for a period of up to 18 months.
Many employers tend to administer their health insurance plans through the use of a third-party administrator. These third-party administrators typically handle providing the required COBRA notice and offering continuing health care coverage to departing employees. However, the duty is that of the employer. If the company fails to fulfill its COBRA obligations, it may be exposed to significant damages, penalties, and fees in an enforcement action.
Employers should also always check state and local law, as some States and local jurisdictions have “mini-COBRA” acts that may have different requirements from federal COBRA that must be adhered to.
What impact will a reduction in force have on unemployment insurance?
Andy: Those employees who are terminated as a result of the reduction in force will likely file unemployment insurance claims. Under most state unemployment compensation laws, workers terminated as part of the reduction in force qualify for unemployment compensation, and such costs should be considered when planning the reduction in force. However, if employees voluntarily quit, employees generally are not entitled to unemployment compensation benefits.
Many states, including Illinois, require that employers provide notice to their employees of their unemployment compensation rights upon termination. Such notice can usually be found on the State unemployment agency’s website.
What benefit and ERISA considerations are there?
Maura Ann: The company implementing a reduction in force will be required to fully comply with any benefit obligations imposed under the terms of its employee retirement or welfare benefit plans, including any requirements pertaining to the withdrawal from such benefit plans. If the company fails to comply fully with its benefits obligations, it may be exposed to significant damages, penalties, fees and interest in an enforcement action brought under the Employee Retirement Income Security Act of 1974 (a.k.a. ERISA). Therefore, the company’s welfare or pension plans, if any, should be carefully reviewed by legal counsel in advance of the reduction in force.
Are there any immigration issues to consider?
Andy: Yes. The company should take an accounting of the immigration status of any employees terminated in the reduction in force. For any terminated employee on an employer-sponsored nonimmigrant visa (such as an H-1B, L-1, or TN visa), the company should send a letter to the U.S. Immigration Naturalization Service (commonly known as the “INS”) withdrawing support for the nonimmigrant visa, as well as informing the INS of the change in the employment relationship and the date that change took effect. The company is also obligated to pay the reasonable cost of return transportation home for any employees on H-1B status that are terminated before their H-1B status expires. Accordingly, the company should offer to purchase a one-way, nonrefundable airline ticket for the alien to the alien’s home country (if the alien accepts the offer within a specified period, such as ten business days).
At what point in the reduction in force process should a company retain involvement of legal counsel?
Andy: When it comes to reductions in force, we generally recommend retaining legal counsel at the planning stage, before any decisions are finalized. It is important to select legal counsel that practice in employment and benefits law, as such is a specialized area that is not generally known to all attorneys, even corporate attorneys or in-house counsel. Attorneys can help document the legitimate business reasons behind the reduction in force, which can later be crucial in defending against claims of discrimination or retaliation. Legal counsel can assist in developing and reviewing selection criteria to ensure they are objective, job-related, and non-discriminatory. They can also conduct or advise on disparate impact analyses to identify any potential unintentional discrimination.
Never underestimate the significance of being proactive in seeking legal counsel in all employment situations so you don’t have to be reactive mistakes made along the way that could have been avoided, which will in most cases be more costly than having paid an attorney for help in the first place.
What are some additional considerations in implementing a reduction in force?
Madeline: Some other considerations include:
1. Establishing a committee of legal staff, human resources officials or other representatives to assess managers’ initial selection of employees for a reduction in force to help decrease the likelihood of discriminatory decision-making.
2. Assessing the impact of a reduction in force on remaining employees and any retention programs for key employees, and on relationships with vendors, customers, clients and other stakeholders.
3. Preparing a communication plan and/or public relations strategy.
4. Having a plan regarding remaining employees, customers and stakeholders. Public company employers should assess whether a Form 8-K disclosure with the Securities and Exchange Commission is required.
5. Meeting individually with each affected employee (although not legally required) to explain the reason for termination, present the separation documents noted above, and discuss the return of any company property and other administrative tasks ahead of departure.
6. Considering providing access to counseling services to employees included in the reduction in force, and working with and providing extra support to social service organizations within the geographic areas impacted by the reduction in force since the occurrence of a reduction in force frequently triggers sharp increases in child, spousal, and substance abuse.
Conclusion
Madeline: If you are going to remember anything about today’s presentation, the most important legal takeaway is to plan ahead, document your decisions, and involve legal counsel early. A carefully executed reduction in force protects both the business and its reputation.