United States: Reduction-In-Force Guidelines: Minimizing The Company´s Claims Exposure

The number of announced employee layoffs by U.S. companies in January 2001 reached the highest number since 1993. Companies, which only a few months ago were focused on attracting and retaining a talented workforce in a historically tight job market, must now ask how to cut the workforce while minimizing exposure to potentially costly wrongful discharge claims. In this new environment, a review of basic reduction-in-force ("RIF") guidelines is essential.

Because of the potential risks associated with RIFs, i.e., disruptions to business, lawsuits, damages, negative publicity, RIFs should be utilized as a last resort and only after other cost saving alternatives have proved ineffective. At the outset, the RIF process must be closely managed from a number of different perspectives — business, human resources, public relations and legal.

The three key principles that should guide the RIF process are (1) adherence to legitimate business goals and established procedures; (2) fair and consistent treatment of employees; and (3) compliance with all applicable laws.

The first item to be considered is the business need for the RIF. A committee (comprised of a diverse group of individuals) should be established that will have overall responsibility for the selection and implementation of the RIF to ensure consistency in treatment and compliance with all applicable laws. The economic and/or strategic need for the RIF should be established and documented. It is imperative to recognize that any such documentation will likely be "discoverable" by any employee who files suit as a result of the RIF.

Once a goal (or goals) is set, the company must develop the strategic plan to achieve the goal. The goal will dictate whether the company as a whole or a particular department or region will be targeted. Likewise, the employer must consider whether the RIF will be achieved through involuntary or voluntary terminations, job elimination and/or consolidation. It is important to review where cuts are necessary based on a "position" analysis before assessing individual employees. It is equally important when selecting positions for elimination that there will be no need to fill the position in the immediate future.

When assessing individual employees, it is useful to establish protocols or formulas to rank employees’ skill sets so that they may be fairly compared with others and the business needs. For example, these formulas may include a weighing of several factors, including skill sets, recent performance ratings, seniority, etc. Before creating a formula, the employer should assess what is appropriate for its organization and what criteria is least subjective, e.g., skill sets, seniority.

Managers play an integral role in the selection process. It is essential that they receive the guidelines established for the selection process and follow them consistently. One manager should not base her retention decisions on seniority, while another manager bases his decisions on most recent performance ratings. Deviation from the guidelines, although not in and of itself unlawful, may create an adverse inference of discrimination.

Termination and retention decisions should be based on legitimate, job-related reasons. There must be a review to ascertain whether there are any existing employment contracts, collective bargaining agreements, offer letters or handbooks, which set forth procedures for a RIF or otherwise alter the "at will" nature of the employment. In addition, careful attention must be paid to ensure that illegal factors are not considered, such as an individual’s age, race, national origin, sex, religion, disability or membership in any other class protected under federal, state or local law. Age discrimination is often the issue employers need to be particularly cautious about, because as a cost cutting measure, more highly compensated senior employees may be terminated as a result of the RIF. Under the guidance of counsel, "disparate impact" analyses should be conducted prior to the implementation of the RIF to ascertain whether any protected group is receiving adverse treatment.

Wherever possible, it is advisable for termination decisions to be supported by adequate documentation, as the employer may be called upon to defend its decision to terminate a particular employee or group of employees. The conclusion of a well-handled RIF does not mean that the company has insulated itself against potential discrimination claims. For example, if an older employee is terminated and shortly thereafter replaced with a younger employee, a prima facie case of age discrimination may be established.

Most employers that undergo a workforce reduction offer the affected employees severance benefits. Typically, the severance payment is calculated based on the employee’s position level, current salary and seniority. In addition, some companies offer outplacement assistance to terminated employees to assist in the job search process. For the sake of the departing employees, as well as to limit the company’s potential damages exposure for lost wages, outplacement should be considered where practicable.

In exchange for providing severance benefits, it is recommended that the employee be required to sign a waiver and release agreement, waiving any and all claims against the company relating to his or her employment and its termination, in exchange for receiving the severance benefits. Waiver and release agreements must be drafted carefully to satisfy the requirements of the Older Workers Benefit Protection Act and the regulations promulgated thereunder by the Equal Employment Opportunity Commission. Among these requirements is the provision of information to terminated over forty employees relating to the ages and job classifications of the other individuals terminated and retained; the employee must be given a certain period of time in which to consider (45 days in a group discharge), and an opportunity to revoke the agreement; the employee must also be advised in writing to consult with a lawyer.

Employers conducting mass layoffs or plant closings need to be aware of the federal plant closing legislation, the Worker Adjustment Retraining and Notification Act ("WARN") and any similar state laws.

Before notifying affected employees of the RIF, the company should address any security risks posed by the RIF. Finally, there should be a notification session with all affected employees to advise them about the termination, as well as options available to them in terms of a severance package, and benefits continuation available under COBRA. The manner in which this notification process is handled is critical. It is important that a script be followed to avoid inconsistencies and to ensure that all of the important issues are covered.