United States: An Overview Of Employers’ Legal Obligations During Reductions-In-Force

Last Updated: August 1 2001
Article by Susan Sampson Esq

Co-written by James J. Rooney, Esq.

Laying off employees is, without a doubt, one of the most difficult aspects of running a business. Unfortunately, this area of employment law is governed by a host of state and federal laws and regulations posing traps for the unwary and compounding the difficulty of the situation. This article provides both an overview of certain significant laws, plus practical advice, in navigating these potentially turbulent waters.

Ensure That The Relationship Is One Of Employment-At-Will From The Outset.

Use offer letters that clearly state that the employment relationship is at-will, and can be terminated at any time by either the employer or employee, for any or no reason. Ensure that no additional documents, such as a non-disclosure, noncompetition, and inventions agreement, or an employee manual or handbook, destroy this employment-at-will relationship.

Refrain From Implementing Progressive Discipline Policies Or Performance Programs.

Progressive discipline policies and performance programs may limit the company’s ability to sever an employee’s employment relationship as swiftly as business necessity mandates. Such policies typically provide for a timeframe for the employee to show improvement, or procedures for an employee to appeal a decision concerning an adverse employment action (including a layoff) prior to that adverse action being taken. These policies, it also may be argued, may void the parties’ employment-at-will relationship. It is preferable to treat each issue that is discipline or performance-related (and, hence, that could potentially lead

to termination of employment) on an individual, case-by-case basis. However, in handling a discipline or performance issue individually, take care to treat all similarly situated employees consistently so as to avoid any appearance of discriminatory preferential treatment.

Set Employees’ Expectations Realistically To Help Minimize Elements Of Surprise And Unfairness.

Lay the appropriate groundwork to help minimize employees’ sense of surprise and unfairness. Be candid and forthright in giving reviews; do not try to minimize or avoid performance or disciplinary issues. Refrain from setting any unreasonable expectations, for example, during changing economic times, or in context of an acquisition or business refocus, with respect to job security.

It is no secret that recent reversals in many companies’ economic fortunes have led to an increasing number of workforce reductions. Layoffs, however, will only enhance a company’s efficiency if they are executed in accordance with applicable law. Indeed, a mishandled reduction-in-force can lead to litigation, which may offset the benefits associated with a reduced workforce. From discrimination lawsuits brought by disgruntled employees to wage claims initiated by federal and state administrative agencies, the legal actions that emanate from layoffs are difficult to defend and sure to undermine the morale of the surviving workforce. Employers contemplating a reduction-in-force, therefore, must be mindful of their legal obligations under a variety of federal and state laws. This is not necessarily an easy task. The laws regulating layoffs are significantly broader and more complex than many employers appreciate. For that reason, while some of the principal issues associated with layoffs are discussed briefly below, employers should ordinarily seek guidance from legal counsel before laying off any portion of their workforce.

At-Will Employment

Despite the increasing number of statutes that govern the workforce, the bedrock principle of employment law remains the at-will doctrine, whereby an employee may be terminated for almost any reason and at any time. The first and most fundamental step toward executing a layoff is to ensure – long before the layoff is even considered – that one’s employees are employed on at at-will basis. This begins when employees are first hired. Indeed, employers should use offer letters that clearly state that the employment relationship is at-will and can be terminated at any time and for any reason by the employer and employee alike. Likewise, employers must ensure that no additional documents, such as non-competition agreements and employee manuals, jeopardize the employment-at-will relationship.

Discrimination Issues

A reduction-in-force must be fully defensible in the event of a challenge under any of the various anti-discrimination

statutes, including Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and Massachusetts’ own state anti-discrimination law. Not surprisingly, the most effective means of achieving this objective is to carefully assess the impact of the layoff. An employer must make certain not only that the reasons for the layoff are not in any way discriminatory, but also that the impact of the layoff does not disproportionately affect a particular class of employees. Often this sort of review is most effectively performed with the assistance of counsel, as it allows most if not all of the documentation that is created to fall within the attorney-client privilege. The privilege will protect a company from being compelled to divulge potentially damaging documents should it later face a discrimination lawsuit arising out of the layoff.

Workers Adjustment And Retraining Notification Act

The federal Workers Adjustment and Retraining Notification Act ("WARN") requires employers with 100 or more employees to provide 60 days’ notice to employees and governmental authorities in the event of a plant closing or mass layoff. Notification requirements under WARN can, in some circumstances, be triggered by a layoff of as few as 50 employees. There are certain exceptions to the advance notice requirement, as where a company suffers unforeseen business losses that do not allow for the full 60 days’ notice. Yet employers should not be too aggressive in seeking a way out of their WARN obligations, as non-compliance can subject an employer to substantial liability.

Massachusetts, it should be noted, has its own version of the WARN statute. For the most part, though, the Massachusetts statute does no more than establish voluntary standards of conduct.

The Older Workers Benefit Protection Act

Many employers are unaware of their obligations under the federal Older Workers Benefit Protection Act ("OWBPA"), which applies to employers having at least 20 employees. OWBPA sets forth certain notification requirements in the event that an employer seeks a waiver or release from anyone at least 40 years old in connection with an "exit incentive or employment termination program." Specifically, employers in these circumstances must provide affected employees with, among other things, information concerning the job titles and ages of all individuals eligible for the exit incentive or termination program. The details of this requirement are complex and, in many regards, open to some interpretation. Nevertheless, the failure to provide this information properly will jeopardize the enforceability of any release that the employer obtains from its employees, leaving the employer vulnerable to claims of age discrimination.

OWBPA further provides that releases must be carefully worded in order to effectively waive claims of age discrimination under the Age Discrimination in Employment Act. Generally, such releases must be drafted in such a way that they are easily understood, allowing an employee to waive any claims knowingly and voluntarily. To this end, a release of age discrimination claims must contain language confirming, among other things, that the employee has been advised to seek the assistance of an attorney. In the context of a layoff, a release should also expressly state that the employee has at least 45 days to consider the release and an additional 7 days to revoke it. Compliance with these and other similar requirements is essential, for no employer wants to pay an employee severance, only to learn later that the release is defective.

Massachusetts Payment Of Wages Statute

Under the Massachusetts Payment of Wages Statute, employees who are terminated, whether for performance reasons or as part of a layoff, must be paid their final paycheck on their last day of employment. Significantly, this payment should include not only salary, but all unused, accrued vacation. Employers who are uncertain as to the manner in which to calculate accrued

vacation may consult an advisory recently issued by the Office of the Attorney General, which can be found at the following site: http://www.ago.state.ma.us/vacadv.pdf. Employers should also be aware that, in most circumstances, they may not offset an employee’s final pay by any amounts owed to the company by the employee, as this typically is considered a violation of the Payment of Wages Statute.

Continuation Of Benefits Under COBRA

The Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") provides that employers with 20 or more employees must afford laid-off employees the ability to continue coverage under their employer’s group health plan, albeit at their own expense. A comparable statute known as Massachusetts’ "mini-COBRA" has similar requirements for companies with fewer than 20 employees. Both under the federal COBRA and the state mini-COBRA, employers must furnish terminated employees with a written notice explaining their rights and obligation under the law. Employees have 60 days within which to elect coverage. Generally, coverage continues for up to 18 months. Under additional Massachusetts benefits laws, coverage under group hospital-medical plans must be extended for a period of time after an employee is terminated or laid off. The length of this extension depends on the type of coverage offered by the employer.

Unemployment Compensation Notification Requirements.

Under Massachusetts law, employers must provide certain written documentation to terminated or laid-off employees concerning the procedure for applying for unemployment compensation benefits. Along with a final paycheck, such documentation should be provided to employees on their last day of employment.

Conveying The Bad News

On a final note, employers should develop a thoughtful, reliable plan for informing employees that they have been selected for a reduction-in-force. In this regard, when informing an employee that he or she has been selected for a layoff, it is important that two appropriate representatives of the employer meet with the employee. If there is any discussion during this meeting about the reasons for the employee’s termination, it is imperative that the employer describe the reasons in a truthful and accurate manner. The failure to do so may make it difficult to defend the termination should the employee later bring a lawsuit. In addition, as part of an exit interview, the employer should provide the laid-off employee with a copy of any non-competition, non-solicitation, confidentiality, and inventions agreement that was signed. One also needs to ensure that the employee returns all company property, such as a laptop, cell phone, and keys, as well as all confidential and proprietary information belonging to the company. Taken collectively, such actions will go a long way toward protecting the company’s assets and discouraging the sort of dispute that could give rise to litigation.

Comply With Laws Governing Reductions In Force – Which May Impact The Timing Of Terminations Or Layoffs.

The federal statute, Workers Adjustment and Retraining Notification Act (commonly known as "WARN"), requires employers of 100 or more employees, as defined under the act (which typically excludes employees working 20 or fewer hours per week), to provide 60 days’ notice of plant closing and mass layoffs to employees and certain governmental authorities. Notification requirements under this act can be triggered by as few as 50 employees being laid off in certain circumstances. A Massachusetts law, which has fairly limited coverage with Massachusetts employers, suggests voluntary standards of employer behavior in plant closing situations. Because these statutes impact the timing of layoffs, employees and others can sue employers for violation of WARN, and noncomplying employers can be sanctioned, it is important to closely analyze the applicability of this statute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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