Managing RIFs during Tough Economic Times

October 2002

Paul Siegel presents guidelines for how employers can implement a reduction in workforce and avoid potential employment law challenges.

by Paul J. Siegel, Esq.
Jackson Lewis LLP

With the current economic downturn likely to continue for the near future, many employers are looking at ways to reduce labor costs and increase operational efficiency. If a reduction in force (RIF) becomes necessary, it must be carefully planned and executed to minimize the risks of incurring the unwanted liability and costs of employee lawsuits. While issues arising in the context of workforce reductions present numerous employment law challenges, with proper planning and advice, employment claims can be either avoided or appropriately managed.

Alternatives to Layoffs May Reduce the Risk of Claims

For a number of reasons, alternative methods to achieve an employer’s economic and organizational objectives should be considered as part of the decision whether to undertake a reduction in force. While short-term payroll and benefits savings may make an RIF an attractive solution, employers actually may incur substantial hidden costs, especially with large layoffs, over the long term. For example, an economically driven RIF may require the involuntary termination of good employees, along with marginal ones. Such undesirable effects may impact negatively on the production efficiency, product quality, and morale of remaining employees.

In addition, large scale terminations may eliminate disproportionate numbers of older, female, and minority employees. This creates the potential for class action and individual wrongful discharge lawsuits. In the absence of—and perhaps even with—proper documentation, an employer may find it difficult to convince a jury, court, arbitrator, or administrative agency of the true reasons for its actions.

Finally, and particularly with large layoffs, employers often must recall employees soon after the layoff because of a change in circumstances or simply because of poor planning. Before planning a reduction in force, employers should consider whether other options are available. They may include the following.

• hiring freezes
• wage freezes
• postponement of wage increases
• reducing fringe benefits, including employee sharing of insurance premiums, increased insurance deductibles, and limited benefit eligibility for newer employees
• work furloughs
• reducing work hours with proportionate pay cuts
• assessing expected job attrition
• allowing affected employees to transfer to other vacant positions within the organization
• job sharing
• terminating employees with substantial performance problems
• terminating recent hires within their introductory periods
• discontinuing the use of temporary and part-time employees and redistributing their work.

Some employers look to early retirement programs, while others ask for volunteers by offering enhanced severance benefits. While less severe than involuntary layoffs, these measures still require sensitivity to the manner in which they are communicated and the effect on employee morale.

Proper Planning When Layoffs Are Unavoidable

Once a determination is made that a reduction is necessary, the task generally falls to legal counsel, operations, and human resources functions to devise a plan which accomplishes the economic objectives with the least amount of workforce disruption while minimizing the risks of litigation. The following outline summarizes some of the steps that should be considered before any adverse employment actions are taken.

LAYING THE GROUNDWORK

Document the financial conditions necessitating the RIF. Identify the goals of the staff reduction, in terms of labor costs to be eliminated and/or the number of employees by which the organization is overstaffed. Identify the job functions and/or skills essential to successful operations after the RIF. Eliminate and/or consolidate unnecessary jobs. Set a timetable for carrying out the RIF. (Unless business conditions require a series of reductions, attempt to act quickly and decisively in an effort to minimize morale problems.) Be careful of cases where an employee can show he was laid off close to the time he would have qualified for a benefit (e.g., pension vesting rights, retirement eligibility). Even if technically lawful, these cases can appear so inequitable a judge might be tempted to stretch the law. Do not use a layoff as a substitute for terminating an employee based on poor performance. Check state laws regarding: payment of wages, insurance benefit continuation, severance benefits, letters of recommendation, personnel record access, and the like. Many states have specific requirements applicable to involuntary terminations. Investigate whether the layoff will trigger vesting in pension or benefit plans for employees laid off. Also determine whether the layoff is a partial termination of a pension or benefit plan, requiring a reportable event under the Employee Retirement Income Security Act (ERISA). Check to be sure that the terminations do not constitute withdrawal from a multi-employer pension plan, which can result in substantial liability. Avoid using form letters when denying benefits to plan participants. Deliver news of the layoff decision very carefully to the employee affected. Inappropriate or poorly communicated notification can result in claims of emotional distress. Be prepared when notifying employees about a layoff; have answers ready for potential inquiries, and avoid the appearance the decision was poorly or hastily made. Consider the timing of the layoffs under the federal plant closing law—the Worker Adjustment and Retraining Notification Act (WARN)—or under applicable state laws (see below). Determine what notices are required under ERISA (e.g., Summary Annual Reports, Summary Plan Descriptions) and ensure the employees receive all notices required. Assess limitations or liabilities created by collective bargaining agreements, employment contracts, and the like. Establish eligibility for severance benefits very specifically, and do not preclude retiring employees from severance pay eligibility. Determine whether a de facto severance pay plan already exists for employees involuntarily terminated. Such plans may require compliance with ERISA reporting requirements and may already bind the employer to provide a benefit to all affected employees. Avoid discriminatory transfer policies. Workers should have the same transfer opportunities regardless of age or other protected categories. Do not use age as a distinction in early retirement benefits provided as a result of a workforce reduction. For example, do not offer different benefits to employees under age 60 than those age 60 or older. Do not make layoff decisions solely on the basis of payroll dollars saved; this could be deemed age discrimination.

Making Key Policy Decisions for the Selection Process. A number of lawful criteria may be used to establish policies for selection of employees for layoff: (1) by length of service/seniority; (2) by identifying and eliminating unnecessary job classifications; (3) by classes of employees, e.g., eliminating all temporary, part-time, or contract workers initially. When using preexisting job appraisal data, initially select employees who have been disciplined for severe or persistent performance problems; thereafter, select from remaining employees by evaluating and comparing their ability to perform the essential job duties remaining after the RIF is completed.

To ease the stress of a layoff and to enhance the perception of a benign but necessary employment decision, consider providing outplacement services for displaced individuals.

Comparing Job Qualifications and Skills. An RIF committee established to implement the selection policies and standardize the procedures may be advisable. The committee would function as the “gatekeeper” for the selection process. For example, the committee might evaluate selection decisions to determine whether individuals in protected classes are disproportionately affected. If a disparate impact exists, and cannot be justified by business necessity, alternate selections should be made. The committee also would analyze the comparative performance of employees with emphasis on comparing the job functions and skills remaining to be performed after the RIF is completed. Wherever possible, performance comparisons should be made on the basis of ratings given on prior performance appraisals. New performance appraisals should be conducted for any employee who has not been evaluated within a reasonable period of time preceding the RIF.

There are certain factors that may automatically militate against the layoff of certain employees, regardless of the other criteria being used to determine selections. They are:

1. Can employees be transferred into existing vacancies?
2. Is special high-level management review warranted for certain highly-paid or long-term employees?
3. Are older, minority, or female employees disproportionately affected by the company’s initial selection procedures? If so, can the selection of these individuals be justified by business necessity? If not, alternative selections of individuals outside such protected classifications should be considered.

Advising Employees in a Professional and Supportive Manner. The RIF process can be professionally and sensitively handled by following these guidelines.

1. If possible, two members of management should meet with affected employees individually.
2. The communicators should be brief, direct, and firm as to the company’s decision.
3. The communicators should be able to briefly explain the basis for the decision, if asked.
4. The communicators should also explain: a) recall/rehire rights, if any; b) severance benefits (if any), health insurance conversion rights, and other monetary issues; and c) outplacement or other transitional services being offered, if any.
5. The communicators should be prepared to cope with employee shock, surprise, and inability to absorb the information being imparted.

Post-RIF Considerations for Remaining Employees. The following guidelines can be helpful for addressing the concerns of remaining employees.

1. Often, RIFs are not isolated events. Business conditions may require a series of RIFs before budgetary or manpower goals are satisfied.
2. To the extent possible, consecutive RIFs should be scheduled in close proximity to each other.
3. Remaining employees should be provided with prompt and accurate information about the desired goals and anticipated timetables associated with the RIF(s).
4. If possible, remaining employees can be provided with modest economic or noneconomic incentives for increased productivity.

Requirements for Negotiating Severance Agreements for Older Workers

Legal considerations for proceeding with an RIF while avoiding employee claims of discrimination and other illegalities may be complex, depending upon whether any segment of the workforce is unionized, for example. One of the most treacherous areas is terminating employment for individuals covered by the Age Discrimination in Employment Act and who enjoy protection from discharge and other potentially discriminatory actions regardless of the total number of individuals affected.

When seeking a release and waiver of claims from such individuals, the federal Older Workers’ Benefit Protection Act and the implementing regulations issued by the Equal Employment Opportunity Commission impose many procedural requirements which must be satisfied before a release or waiver of federal ADEA claims will be considered enforceable.

Conclusion

There may be additional requirements, such as those under federal and state plant closing notification statutes for covered employers. Despite these requirements, for many employers faced with the difficult task of trimming operational costs, a reduction in force may provide an attractive solution. However, the risk of employee lawsuits, even class action litigation, mandates careful legal review and analysis of all aspects of an RIF, including selection criteria and execution strategy. In-house counsel with employment law responsibilities must be involved in the planning and execution from the early stages through the residual effects. Among other considerations, severance agreements containing waivers and releases of age discrimination claims must comply with specific statutory provisions, and mass layoffs must be conducted in accordance with federal, state, and local notification laws. As long as the RIF is carefully and lawfully planned and executed with the steady input of legal counsel, employers can realize the savings while minimizing the potential for liability.

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