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What if a layoff becomes necessary? Practical steps for reductions in force

Employee leaving after being fired from work

(baranq/Deposit Photos)

As communities continue to be shocked at the gas pump, soaring inflation and whispers of “recession,” there has been an increase in layoffs in certain industries — particularly technology, retail and food.

RIFs, if done correctly, can help companies ease financial constraints. But, if done incorrectly, RIFs can lead to significant legal liability that will further distract and burden the company.

For example, Company A determines it needs to let go of 20 employees in a RIF. Company A could employ a lawful, nondiscriminatory method to decide which individuals to let go. But, instead, Company A’s owner decides to finally get rid of the folks he doesn’t like — the employees who don’t look like him or speak like him. In other words, he made termination decisions based on the employee’s gender, national origin, race, etc. As a result, Company A will likely find itself in a world of legal hurt.

Employers who see the need to implement a RIF should follow these key steps to ensure that it does not unfairly impact individuals who are in protected classes.

Develop a strategy. Prepare a plan identifying the future vision and organizational structure that will most effectively meet the company’s continuing needs. A few questions you might ask include: What locations, departments, and divisions will be involved? How many full-time equivalent (FTE) positions do you need to reduce? What is your budget for severance agreements, attorney’s fees, unemployment claims and other associated costs? What is your timeline for the reduction in force? Does the company have to comply with a collective bargaining agreement?

Consider other options. Consider whether other options exist to ease the financial crunch before planning terminations or layoffs. A few options to consider include: Is it possible to have employees move to a job-share arrangement or part-time schedule or participate in a work-share program? Would a temporary shutdown be possible? Would your employees consider a pay reduction? If you decide on a pay reduction, consider fairness issues and making reductions from your C-suite on down. Do you want to ask volunteers to take early retirement or voluntary separation before the involuntary reductions? Have you frozen your current open positions?

Analyze application of WARN and any mini WARN Acts. The federal Worker Adjustment and Retraining Notification (WARN) Act applies to employers of 100 or more employees and requires that employers provide employees and certain governmental agencies with 60 days’ advance notice of a plant closing or certain types of mass layoffs. Many states also have “mini” WARN Acts and specific rules about contacting the state employment division and providing notice of a mass layoff.

Determine the objective nondiscriminatory criteria for the layoff. Regardless of whether a WARN Notice is required, companies should work carefully with in-house or contracted human resource experts or legal counsel to establish the objective criteria it will use to choose which employees will be subject to a layoff. Generally, you will want to keep your best performers and most versatile employees. You may also decide to give consideration to loyalty and long-term employees. If the business is a closely held family business, then whether the person is a family member is relevant. To the extent a company is subject to a collective bargaining agreement, make sure any criterion or process used is consistent with that agreement.

Examples of specific nondiscriminatory criteria for selection can include:

  • Temporary employees
  • Past performance
  • Positive teamwork
  • Versatility (ability to perform more than one job or function)
  • Department or project-specific closures
  • Elimination or consolidation of specific jobs
  • Relative ability of the employee
  • Training, certification, education and experience
  • Any non-discriminatory, objective criteria that you decide are relevant

Apply the objective criteria. The company should next apply the objective criteria to all employees (including employees on a leave of absence for other reasons). A company may rank or weigh certain criteria differently — e.g., strong attendance and performance can count more than the number of years with the company — so long as the company applies the criteria consistently among the employees. One way to do this is to give each criterion a set amount of points to rank all employees. For example, for past performance reviews, if the employee received excellent reviews, they get 5 points; if they received “meets expectations,” they get 3 points; and “needs improvement overall” gets no points. The company must be careful not to consider any compensation, injuries, disabilities, age or any other protected characteristic when ranking employees.

Review for bias and disparate impact. After selecting the employees, the company should work closely with human resources or legal counsel to evaluate whether there could be evidence of bias or disparate impact related to a protected class of employees. Disparate impact occurs when a particular protected class of employees is disproportionately represented in an otherwise seemingly neutral application of criteria for the RIF. This can be identified by running a statistical analysis. If there is a disparate impact or potential evidence of bias, reconsider the inclusion of those employees in the group or how the criteria are applied.

Consider communication of the RIF decision. It is always difficult to inform employees that their jobs are ending as the result of a RIF. Consider how you will communicate the RIF to your workforce and whether you will offer separation agreements to the affected employees. Separation agreements must be carefully drafted. It is best to obtain legal help with this task. Most RIFs are “exit or other employment termination programs offered to a group or class of employees” under the Age Discrimination in Employment Act (ADEA), as amended by the Older Worker Benefit Protection Act, and require specific waiver language and time for the employee to consider the separation package.

A lot can go wrong in drafting an ADEA release, and courts are willing to invalidate them if done incorrectly. We strongly urge companies to work with their legal counsel closely to ensure compliance.

RIFs are always stressful but often necessary to enable a business to keep its competitive edge. RIFs require careful advance planning and documentation to provide the best protection to the company. Following the recommendations above and obtaining legal counsel will put you at a distinct advantage and help to protect your RIF from claims of discrimination. For legal advice for your particular situation, contact an attorney.

Jean Back and Stephanie Berntsen are lawyers at Schwabe, Williamson & Wyatt, P.C.

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