By: Stephen E. Fox, Esq. and Jonathan E. Clark, Esq.
There is a certain distrust of corporations today, even more so than 10 years ago. The popular view is that corporations hide information and make decisions in a way that is best economically for the company, without thinking about the human factor. Given this atmosphere of distrust, it’s more important than ever to develop sound practices in implementing layoffs.
In a recent webinar, “Reductions in Force: Minimizing Your Employer Liability,” we discussed the economics of a Reduction in Force (RIF) as well as the legal liabilities associated with layoffs, and some techniques for employers wanting to maintain a good employer brand, reduce costs, and avoid the risk of being sued because of the implementation of a RIF. As a part of that discussion, we offered suggestions for best practices to help avoid the pitfalls associated with reductions in force.
Here are 5 ways you can help your organization limit the legal liability associated with a layoff:
#1 Lay the groundwork
While there is no magic bullet to prevent litigation that arises out of a RIF, organizations can limit their liability through careful planning, working with qualified legal counsel and other experts, and having all the appropriate documentation and processes in place.
The first, and most important thing, we recommend employers do is to provide a business justification memo to explain why the layoff is necessary and what the reduction in force will achieve. Establish, in writing, a business-related objective for implementing the RIF and be sure to include the who, what, when, where, and why of your business decisions.
Include pertinent information, such as:
- How will the organization be structured post RIF?
- What are the company’s future goals?
- How will the reorganization help to achieve the stated goals?
- Why is a RIF necessary?
- What alternatives to a RIF were considered?
- How will the company implement necessary changes?
- Who will be selected for the layoff?
When considering a reduction in force and preparing a justification memo, people often forget to include which alternatives were discussed - and discarded - and why alternatives to a RIF were deemed to be unworkable. No matter who else is involved, members of the leadership team – at least the CEO and president- should be involved in crafting the RIF justifications based on sound business decisions. We often recommend that a team be formed that includes the leadership team and the department heads of affected business units. The process of developing a justification memo gives organizational leadership an opportunity to consider all the benefits and potential limitations of a reduction in force event.
#2 Consider alternatives to a RIF
To avoid the risks associated with a RIF, companies often consider alternative ways to address their economic needs, such as:
- Hiring freezes
- Wage freezes
- Postponing salary increases
- Targeted terminations
- Work hour reductions
- Voluntary reduction in force
Some organizations implement a voluntary reduction in force – essentially allowing employees to self-select themselves out of the workforce. In order to implement that kind of a program, it’s important that the business leaders seek benefits counsel. The implementation of a voluntary reduction in force program will very clearly implicate ERISA and other benefit plans that the company may have in effect. So, contacting and speaking to benefits counsel is important.
By offering a voluntary reduction in force, and allowing a group of employees to choose to leave, employers are able to limit the risk of litigation while garnering good will among their alumni employees. There are some risks associated with a voluntary reduction plans, such as losing control over who stays and who leaves; and if too few people elect to participate, you’ll still end up having to conduct a layoff.
As an incentive to employees, you can structure different severance packages for people who participate in the voluntary program as opposed to those who participate in an involuntary program. It’s the basic carrot and stick approach. The carrot – take this opportunity to leave voluntarily and you’ll get a better severance package. The stick – if you elect to leave under an involuntary RIF, your severance package will not be as desirable.
Before you move forward with an involuntary RIF, consider other cost-cutting measures and programs that can help you achieve your financial goals, while limiting your legal liability and opportunities for litigation.
#3 Establish selection criteria for involuntary transitions
Once all the alternatives are considered and discussed, your leadership team may determine that a RIF is still the most cost-effective and efficient way to achieve financial and corporate goals. Once you’re on the path to a RIF, put first things first. It’s important to gather and record your workforce statistics. Involve outside counsel and related experts in this field early. At this stage, organizations often neglect to include pre- and post-statistics. In other words, a record comparing the make-up of your workforce now and how it will look after the RIF. Looking at these statistics side by side will help you to identify any areas that may leave you open to litigation.
Selection criteria is the biggest minefield associated with a reduction in force. Why wouldn’t you be able to just RIF all the low performing employees – make a clean sweep and clear out the “dead wood”? It seems logical. What could go wrong? Plenty. Many employers seek to use performance criteria in order to keep their most valuable employees, it goes without saying.
Before using performance as criteria for a RIF, ask yourself these questions:
- What are your performance criteria?
- Are they subjective or objective?
- Are they well documented?
- Are they neutral?
To be clear, purely subjective methods of evaluating performance can be risky if not done with care. If you plan to use performance as criteria, be sure that performance evaluations are formal, in writing, measurable, clearly identified, and known both by the employee and the direct supervisor.
Another potential pitfall arises when employers expose themselves to legal liability when they employ measures to avoid litigation based on things like age or other demographics. Remember that discrimination works both ways. For instance, an organization that tries to avoid age issues by retaining an overwhelming majority of senior employees is still at risk of age discrimination laws. The key to avoiding legal risks is to know your demographics pre- and post-RIF and comparing those side by side to identify any inequities.
#4 Provide management training and transparency
It’s important to train the business people who are communicating the message of the layoff to employees, as well as the HR representatives who may be asked by the affected employees about the selection process. Keep the message clear and concise by limiting the number of people who are involved in messaging - from the management and supervisors to the HR reps. When employees have questions, they should be referred to this select group of people who will be trained to field questions about the business justification for the implementation of the RIF, the selection criteria, and specifically why a particular individual was selected to be laid off.
You have to assume that word about the RIF is going to spread quickly in the workforce once people are told that a RIF is being implemented. As soon as possible, the general workforce population should receive communication from the CEO, or other senior management, that clearly states why a reduction in force was the decision that management felt had to be made in lieu of a less significant alternative that wouldn’t have achieved the goals that are being sought through the reduction in force.
When notification is made to individual employees, avoid ambiguity about the employee status. It’s important that the person communicating the message treat the affected employee respectfully and with dignity. Having a script prepared for the manager, supports the manager in this difficult situation while sending the best possible message to the affected individual.
#5 Deliver releases and determine severance
Finally, to mitigate risk, ensure your release agreements and severance packages adhere to government guidelines. For instance, release agreements must provide affected employees with pay or benefits to which they would not otherwise be entitled. Some examples of release agreements that do NOT sufficiently qualify as valid, include:
- Salary in lieu of WARN
- Severance pay already part of a preexisting contract or policy
- COBRA continuation
Outside counsel, or in-house legal teams can help you determine if ADEA releases conform to the Older Workers Benefit Protection Act. The release must meet these standards to be “knowingly voluntary”:
- Written in plain English
- Refers directly to employee rights under ADEA
- No waiver to rights or claims is requested
- Waiver is only in exchange for additional consideration
While this is an overview of some of the common pitfalls associated with releases and severance package determinations, companies should seek legal counsel to confirm that they are conforming to industry best practices, as well as the national and state employment laws that may be applied to the particular business.
The real risk to conducting a reduction in force is that litigation will arise out of your actions. It should come as no surprise that in a jury trial, employers are generally at a disadvantage because jurors are composed of employees who, typically, do not have significant roles in management. Since the jury will naturally sympathize and empathize with people who lose their jobs through no fault of their own, our advice is to seek legal counsel early in the process. Carefully examine all your options and actions as you enter into, and conduct, a reduction in force to reduce your legal liability and protect your employer brand.