Key Considerations for Navigating Workforce Reductions During Uncertain Economic Times
Key Considerations for Navigating Workforce Reductions During Uncertain Economic Times
With a potential recession looming and a growing number of companies announcing significant layoffs almost daily, employers are increasingly considering reductions in force (RIFs) to weather the financial uncertainty in the markets. Although RIFs can be a necessary measure to preserve financial resources and help to refocus business priorities, RIFs can present significant legal and business risks and require thoughtful and careful planning. Employers anticipating a RIF for their U.S. workforce should be prepared to address the following key considerations to help navigate and potentially mitigate the risks associated with a layoff.
Executing a RIF often requires significant planning and input from key stakeholders. As an initial step, it is important to identify and engage the right team to help plan the RIF. The team usually involves members of legal (in-house and outside counsel), HR, and senior management. Employers should also ensure proper confidentiality and privilege protocols are in place. Leaks about upcoming layoffs or restructurings can be particularly damaging and lead to unnecessary rumors, lower productivity, or even departures of key performers. Additionally, employers should ensure they have proper privilege documentation and protocols to avoid having to turn over privileged communications, work product, or risk assessments about the RIF in any subsequent litigation that might occur.
Depending on the circumstances, employers might consider other possible cost‑saving measures that might avoid the need for a RIF. Such measures may include reducing employees’ hours, temporary furloughs, and voluntary separation programs. These alternatives, however, are not without risk. For example, depending on the specifics of a reduction in hours or furlough, either action could trigger the federal Worker Adjustment and Retraining Notification Act (WARN) or state mini-WARN laws, thereby requiring the employer to comply with the advance notice layoff requirements discussed further below.
Before selecting individuals for layoff, employers should align on the business objectives and criteria that will be used to select individuals for termination. Although business objectives for a RIF should be tailored to the company’s unique business needs and circumstances, a few common objectives include, for example, reducing overall expenses by eliminating a certain percentage of headcount companywide or by function/department or discontinuing a certain business line or product. Whatever the reason, the business objectives should be consistent with the reasons and criteria used to select employees for layoff.
Employers should also create consistent and, to the extent possible, objective criteria for selecting employees for layoff. Criteria might include, for example, tenure, elimination of certain functions or roles, consolidation of functions to reduce redundancies, performance, and other business factors. The more objective the criteria, the easier it is to defend in any subsequent litigation. Many RIFs, however, involve some subjective criteria, such as performance. Regardless of the criteria, employers can mitigate risk by creating ranking systems for managers to select employees based on the selection criteria. Creating and documenting a ranking system that uses consistent criteria for employees that are similarly situated in terms of roles, levels, departments, and other considerations will be helpful if an employer has to defend claims that the employer applied the criteria in a discriminatory or retaliatory manner or fabricated the criteria to mask unlawful selections.
After the criteria is in place, employers should decide which managers or company officials will make layoff selections based on the approved criteria and ranking systems. After selections are made, employers should review those selections to ensure they are consistent with the RIF objectives and criteria. Depending on the circumstances, creating a diverse team of managers in terms of race, gender, and age to independently review the selections may also help to defend discrimination and other claims if those arise.
Once initial selections for the RIF are made, employers should consider conducting disparity analyses and other risk assessments under privilege with experienced counsel to determine whether there is a heightened risk of claims or other risks related to those individuals.
Depending on the size of the employer and the number of layoffs, a RIF may trigger notice obligations under the federal WARN or related state mini-WARN laws. Although the triggers and notice periods vary, these laws generally require employers to provide 60 days’ advance notice (and, in some states, 90 days’ advance notice) before layoffs occur. Failure to comply with these laws can lead to significant class actions and liabilities, including damages, penalties, and attorney’s fees.
The federal WARN, for example, requires companies with 100 plus employees to provide 60 days’ advance notice for either of the following:
In addition, the federal WARN and some state mini-WARN laws require employers to aggregate layoffs that are staggered over time for purposes of determining coverage. For example, the federal WARN requires employers to count any layoffs in the 90-day period before and after the applicable layoffs to see if WARN is triggered.
These laws generally have a few limited exceptions to the advance notice requirements, including exceptions for faltering companies, unforeseen business circumstances, natural disasters, and liquidating companies. These exceptions, however, are often litigated, and courts narrowly construe them. So employers should review the circumstances of their layoffs closely to determine how comfortable they feel qualifying for these exceptions. Even where employers qualify for an exception, they must still provide the WARN notices as far in advance as possible.
Employers might consider working closely with experienced counsel to determine WARN coverage and create proper WARN notices and strategies for compliance if those laws are triggered.
Companies often offer severance to employees who are impacted by a RIF. There are various reasons for offering severance, but one of the primary reasons is for the employer to get a release of claims in exchange for severance. Obtaining a release not only lowers the likelihood of potential litigation, but it also tends to be viewed favorably by investors and acquirers if the company is looking for strategic investors or buyers in the coming years. Severance also helps to soften the news of termination for impacted workers and might look less heavy-handed to the remaining workforce if they are concerned about being selected in future RIFs. Unless the employer has a severance policy or practice or the employee is entitled to contractual severance, the amounts and types of severance can vary based on the employer’s budgetary constraints, past practice, industry, and level of employees being impacted. Generally, companies should aim to create severance based on a formula that treats employees fairly and consistently (e.g., 1 week per year of service).
When providing severance, employers should carefully draft separation agreements to (a) include a complete release of all claims that can be released under applicable law and (b) comply with all applicable federal and state requirements for releases, including complying with the growing trend of federal and state laws requiring certain notices and carve-outs for employees to discuss sexual harassment, abuse, and assault claims (and, in some states, claims related to unlawful conduct, discrimination, and retaliation). Employers should also be mindful of special notice requirements that apply to releases of age discrimination claims for employees 40 years of age and older in a layoff. Under federal law, employers must provide those employees: (i) 45 days to consider the agreement (although employees can opt to sign it sooner); (ii) seven days after signing to revoke their signature, which almost never happens; and (iii) a notice that provides a list of all employees in the impacted employee’s decisional unit, identifying each employee by job title and age in that decisional unit who was and was not selected for layoff, and includes a list of the factors considered when making the termination decision. Because these notices are often challenged in litigation, creating these notices requires consideration of various legal and strategic issues to ensure the form is legally compliant and effectively waives age discrimination claims.
Employers should also consider whether there are other terms that might be needed as part of the separation agreements, such as transition assistance, ongoing cooperation for litigation or investigations, or non-disparagement clauses. If so, employers may also want to consider making severance contingent on compliance with any ongoing obligations, such as complying with restrictive covenants.
Employers will need to be mindful of any applicable state requirements relating to timing for payment of final wages, including paying accrued, unused vacation. For example, some states, like California, require laid off employees to be paid in full on their termination date, while other states, like Texas, allow employers to pay any final wages on the employer’s next regular payroll date. Whether an employer must pay accrued, unused paid time off will vary from state-to-state and will depend on the employer’s policies. Failure to comply with these laws could lead to statutory penalties or potential claims that allow for recovery of liquidated damages and attorneys’ fees.
Employers should also ensure they have processes in place to comply with any state requirements for providing notices to terminated employees. For example, California requires employers to provide terminated employees with the following notices: (i) Notice to Employee as to Change in Relationship; (ii) pamphlet on California’s programs for the unemployed; (iii) Health Insurance Premium Payment notice; (iv) COBRA and Cal-COBRA notices; and (v) notification of all continuation, disability extension, and conversion coverage options under any employer sponsored coverage for which the employee may remain eligible after employment with that employer terminates.
Employers might also want to consider the strategy for protecting employees and company property and resources. Measures should be put in place to mitigate the risk of such harms and quickly respond to any negative reactions from workers, including workplace violence or damage to Company property or electronic resources. Employers should consider the process for obtaining company equipment and confidential information from impacted employees.
An employer’s communication strategy before, during, and after a RIF can make a difference in the level of risk associated with the layoffs. Legal claims often arise from how employees perceive their employer handled the layoff. If employees believe their employer was not transparent, honest, or fair regarding the layoff decisions or process, they may be more inclined to consider pursuing legal action.
Creating a good communication strategy requires careful preparation to ensure communications are accurate, consistent, and thoughtful. Before conducting the RIF, employers should consider creating talking points and communications for announcing the layoff, conducting individual separations, and responding to employee questions. These communications should be reviewed by HR, managers, and experienced counsel to ensure the communications not only have the proper messaging, but also avoid any statements that could be used against the company in any subsequent litigation.
Employers may also want to consider creating a good public relations strategy to timely and appropriately respond to potential media inquiries or negative publicity. Publicly traded companies should also work with experienced corporate counsel to determine whether the RIF will trigger any government reporting obligations.
As a final step, employers should choreograph the logistics of the layoffs before executing them. This involves ensuring that the communications strategy is put in place and appropriate individuals are ready to announce the layoff, conduct individual termination meetings, and respond to questions from impacted employees, remaining workers, and the media. Employers may also consider holding a training session with a manager close in time to the RIF announcement to ensure they have the proper messaging and tools to respond to employee questions. These logistics, and others, take time to coordinate and should be planned as far in advance of the RIF as possible.
Once the RIF has been announced, employers should continue to monitor the situation. It can be important to have contingency plans for addressing any threats or claims by impacted employees to pursue legal actions against the company or poor morale among remaining workers that could lead to departures of key talent.
Employers considering RIFs that could impact employees outside the U.S. will need to factor into their plans the (often varied and complex) local laws that apply to RIFs. Depending on the jurisdiction and the number of employees potentially impacted, this could involve, among other things, the requirement for a detailed—and, at times lengthy—consultation with employees and/or their representatives before carrying out any dismissals, negotiating severance packages with unions or works councils, and, in some countries, obtaining the employees’ agreement to the termination of their employment.
The consequences of failing to meet the requirements of local law can be significant and result in protracted and expensive litigation, which could ultimately jeopardize the planned RIF in certain countries. As a first step, therefore, employers considering global RIFs should consider obtaining local law advice before moving forward with any proposals.