Newspapers these days are full of stories about reduced profits, job losses, and cost cutting by large and small employers.
The most recent report by the Bureau of Labor Statistics reported that 80,000 jobs disappeared in March, the third consecutive month of significant job losses. The economic forecast remains bleak for the coming months.
Increasingly, companies are proactively seeking to reduce costs to offset lower than anticipated revenues. Of course, when looking to reduce costs, employers immediately look to their payroll.
Indeed, a reduction in force (RIF) can be an effective cost-cutting technique when implemented with sound business judgment. However, if not implemented correctly, a RIF can have disastrous consequences including low morale, reduced productivity, and expensive litigation.
This article will explain what pre-RIF planning employers should undertake to minimize their exposure to claims of unlawful discrimination, and will describe statutory requirements that employers must navigate when implementing the RIF.

Business justification

Before a RIF is implemented, employers should identify the precise reasons for seeking to reduce its workforce, and consider how reductions will affect operations and employee morale.
This will allow an employer to determine how functions will be performed with the projected reduced workforce. Identifying and understanding the reasons for the RIF will enable the employer to implement the RIF in a manner most closely designed to meet pre-established goals.
RIFs that appear arbitrary, or implemented with no clearly articulated reason, are much more likely to be challenged in court. Ideally, the specified business needs justifying the RIF should be documented in order to enhance the employer’s defense in the face of subsequent challenges.

Articulate selection criteria

To further minimize arbitrary decision making, the employer should review existing policies, handbooks, and collective bargaining agreements to determine if the company has existing selection criteria (i.e., seniority or performance rankings) in place.
If no such policies exist, the employer should identify criteria for the selection of employees that are based on factors that are business-related and consistent with the business justification for the RIF.
The criteria do not have to be completely objective. However, in general, the more subjective the criteria, the more vulnerable they are to criticism and legal challenge. Ideally, the criteria used for selection should also be documented.

Severance packages

Finally, once an employer fully identifies and understands the reasons for the RIF, the employer should consider what, if any, severance packages it will offer affected employees. For example, employers should consider whether severance pay will be salary continuation or a lump sum payment. The employer also needs to assess the amount of health insurance premium contribution continuation, and the extent, if any, of out-placement assistance.
Employers should also consider the effect of the termination on existing confidentiality and non-compete agreements.
The reasons necessitating the RIF and any applicable company policies will influence the specific terms of a severance package. It is highly recommended that an employer offer similar packages to similarly situated employees to help avoid claims of disparate treatment. Often employers use a formula based on years of service. Such an approach, if uniformly applied, has the advantage of offering a strictly objective explanation for the particular package.

Due diligence

Once the needs for the RIF and selection criteria are established, managers should begin the selection process. It is essential that the human resource department and in-house or outside counsel be involved as well.
Employers should perform statistical analysis of all legally protected categories to assess if the RIF will have a disparate impact on a particular group. Additionally, a risk analysis review for each selected employee, considering recent leaves of absence, sexual harassment investigations, workers’ compensation incidents, and potential “whistleblowing” claims should be undertaken. Finally, the human resource department, with involvement from counsel, should review each selected employee’s personnel file to ensure documentation pertaining to that employee is consistent with the employee’s selection. For example, if an employer claims it is selecting employees based on job performance, and a selected employee has outstanding performance evaluations, the employer should consider this potential risk to the company before ultimately selecting that employee for a RIF.
It is imperative to make each decision “with eyes wide open.” Many employers make the mistake of using a RIF as a way to manage performance problems that are not supported by the documentation.
The 10th Circuit in Pippin v. Burlington Resources Oil and Gas Co. recently observed that a plaintiff may establish pretext in a number of ways, including showing that his or her own selection does not accord with the RIF selection criteria, or that the selection criteria were manipulated in order to terminate the particular employee.
Claims of pretext can be minimized if employers engage in the appropriate due diligence before finalizing the list of selected employees.

WARN Act

Once the selections have been made, employers must navigate federal and state requirements in implementing the RIF.
The Worker Adjustment and Retraining Notification Act (WARN) is a federal law requires companies with 100 or more employees, to provide 60 days written notice of a layoff. It’s designed to protect workers, their families, and communities by requiring employers to provide advance notice of a covered “plant closing” and covered “mass layoffs.”
The notice must be provided to affected workers or their representatives (i.e., a labor union), as well as appropriate government entities.
An employer that fails to give notice is liable to affected employees for back pay and benefits for each day for which notice was required but not given. The employer may be subject to other fines and penalties as well.

Release agreements

Often, employers will provide employees a separation package in exchange for a release of claims. In recent years, there has been a tremendous amount of litigation over whether employees subjected to a RIF have released claims of age discrimination even though they seemingly signed an enforceable release.
When an employer seeks to obtain a release of claims under the Age Discrimination in Employment Act (ADEA) from an employee who is at least 40 years old, the Older Workers Benefits Protection Act (OWBPA) comes into play. The OWBPA and its implementing regulations contain procedural and substantive requirements for a valid ADEA release.
Pursuant to the OWBPA, agreements that contain releases of ADEA claims must be “knowing and voluntary.” As explained by the U.S. District Court in Massachusetts meeting this standard requires that employees subject to an “employment termination program” be given at least 45 days to review the agreement and seven days to revoke his or her acceptance (Commonwealth of Mass. v. Bull HN Information Systems, Inc.).
Furthermore, they must be advised to consult an attorney; the waiver must be presented in a manner calculated to be understood by the average person selected for the program; and the waiver may not interfere with the protected right of an employee to file a charge or participate in an investigation conducted by the EEOC.
Finally, employers must provide information about the pool from which the employees were selected. This requirement causes the most confusion for employers and is most likely to cause an ADEA release to be deemed invalid.
Pursuant to the OWBPA’s regulations, employers must provide selected employees with, among other things: (i) information about “any class, unit, or group of individuals covered by such [group termination program, and] any eligibility factors for such program”; (ii) the job titles and ages of all individuals eligible and selected for the program; and (iii) the ages of all individuals in the same job classification or organizational unit that are not eligible or selected for the program.
This information, known as the “decisional unit,” is determined on a case-by-case basis. In Kruchoswski v. Weyerhauser, the 10th Circuit struck down an ADEA release of claims because the “decisional unit” was not accurate. The original “decisional unit” described by the employer was too broad, and the court concluded that it precluded employees from making a knowing and voluntary waiver of an ADEA claim.
The impact of the decision and its progeny is that employers must carefully and accurately define the “decisional unit” from which the affected employees were selected in order to secure a valid ADEA release.

State laws

Many states have plant closing laws like WARN that impose obligations to provide specified notice and benefits. Moreover, some states require specific terms or language to be used in a release to make it valid.
Similarly, state law will govern when the final paycheck must be distributed and whether the final pay distribution must include bonuses, commissions, and accrued vacation and sick leave.

David M. Cogliano is a shareholder in the employment law and litigation groups at Davis Malm & D’Agostine, P.C. in Boston. He advises employers on labor and employment issues, with a focus on wage and hour compliance, defending claims of discrimination, drafting and implementing employment related policies, as well as ADA compliance, and litigating non-compete agreements.