Employee Position Eliminations And Reductions In Force: Best Practices

A version of this article originally appeared in Business Law Today, the ABA Business Law Section's digital magazine offering in-depth articles, quick summaries of the month's key developments by practice area, checklists and other practical tools, and more.

In Brief

• This article offers practice pointers on employee position eliminations and reductions in force.
• Learn how to establish and document legitimate business reasons supporting a legally sound reorganization.
• Understand risk factors and strategies for reducing legal exposure.

I regularly advise clients on employee separations, and often, clients inquire whether it would be better to style a performance-based separation as a "reorganization." The answer is almost always no. Quite simply, semantics do not insulate employers from wrongful termination claims. This article addresses best practices for employers with respect to position eliminations and reductions in force ("RIFs"), with a focus on nonprofits.

Most nonprofit employees are at-will employees, meaning that they can be terminated for any reason or no reason, except an unlawful reason. The employer must be able to prove that a legitimate business reason prompted the termination. A position elimination or a RIF prompted by a strategic reorganization is a legitimate business reason for an employee termination.

Simple, right? Well, not exactly. Assume that you eliminate a position due to a strategic reorganization. An aggrieved employee may argue that the position elimination was a pretext for an unlawful motive. The nonprofit organization must be able to prove otherwise. But how? The following practical advice sets forth best practices for structuring lawful position eliminations and reorganizations.

1. Identify the Triggering Event.

A position elimination or reorganization is a strategic undertaking that should be orchestrated with great thought and memorialized in written business records. A range of events may trigger a reorganization. Perhaps the organization is facing some sort of financial exigency. Perhaps a consultant identified redundancies or gaps in organizational structure. Perhaps a recently appointed executive director desires to pursue a new vision and, in so doing, de-emphasizes old priorities. Whatever the underlying motive for the position elimination or reorganization, it should be documented at the outset of restructuring efforts in an internal memorandum or emails among senior leadership.

2. Identify Relevant Policies and Contracts.

While it is most common for nonprofit organizations to execute written contracts only with the CEO or executive director, sometimes, nonprofits execute written employment agreements with other senior-level executives as well. Employment contracts may influence how an employer carries out a position elimination or reorganization. You must read contractual terms carefully, in consultation with counsel, if a potential reorganization implicates an employee with an employment contract. Similarly, an employee handbook may guarantee employees certain procedural protections in connection with position eliminations or reorganizations. As is the case with all policies, you must follow your policies to a tee.

3. Consider Alternatives.

Especially when a reorganization is driven by financial strain, leadership may want to evaluate alternative options. Might a furlough allow the employer to recover enough costs to continue standard operations during a financial downturn? Might salary reductions (if federal and state law allow them) save enough money to carry the organization through the end of the fiscal year without eliminating any positions? Might voluntary sabbaticals, voluntary leaves of absence, or voluntary separations allow for cost savings? Would a hiring freeze allow unrestricted funds to be reallocated? Is it possible to freeze staff overtime to recapture enough funds to continue operations without interruption? It may be that the only sound business decision is to eliminate a position, but alternatives should be considered if they exist.

4. Establish and Document Objective Selection Criteria.

Once you have determined that a reorganization is necessary (whether it ultimately impacts one position or more), establish and document lawful and objective selection criteria, consistent with the business needs of the organization. Objectivity is key: The most defensible criteria are objective criteria. A nonexhaustive list of objective selection criteria includes but is not limited to:

• Elimination of grant that previously funded the equivalent of one or more full-time employees
• Organizational redundancies that could be consolidated more efficiently
• Outsourcing certain responsibilities to contractors for financial cost savings
• Program discontinuation
• Length of service to the organization
• Job classification

This is just a sampling. While it is not unlawful to consider job performance as a component of a lawful RIF, it does open the door to arguments about pretext, so proceed with caution.

Once you have identified objective selection criteria, memorialize the criteria in writing in a business record. This could be through a memorandum or an email. Most optimally, have a separate decision-maker approve the recommendations. For example, the chief operating officer or human resources director could present the objective criteria as recommendations to the executive director in an internal, confidential memorandum, with the executive director approving the objective plan. Though not required as a matter of law, this kind of arrangement best shields the organization from individual employee claims that the position elimination or restructuring was a pretext for intentional discrimination targeting a single individual.

5. Conduct a Case-by-Case Analysis.

No employee termination is without risk. In consultation with counsel, conduct a case-by-case risk analysis looking at each impacted employee. Did any of the impacted employees recently blow the whistle on alleged fraudulent activity? Take protected leave to care for themselves or a family member? Report discrimination or harassment? Participate in an internal investigation? Disclose a disability or request a disability accommodation? These are protected activities, and while none of these facts preclude you from proceeding with a position elimination or a reorganization, they do impact the risk of doing so, especially when the protected activity occurs in close proximity to the adverse action (position elimination). The risk calculus may inform whether to offer severance pay (in exchange for a release of all claims) and how the organization structures severance packages.

6. Conduct a Disparate Impact Analysis.

You should also analyze the impact of the reorganization on employee diversity, again in consultation with counsel. Imagine that you employ ten full-time employees. You must eliminate five positions. As it turns out, all five of the separated employees are over age sixty, and all five of the retained employees are under age thirty-five. The optics of this outcome are not ideal and again impact the risk calculus. In this circumstance, you will want to make sure that biases did not infect the process in any way, such that a separated employee could reasonably suspect that age discrimination played a role in the decision. As with the case-by-case analysis, the disparate impact analysis may also inform whether to offer and how to structure severance packages.

7. Consider Severance Packages.

Reorganizations usually are not based on performance. Almost always, they take place at no fault of the separated employee or employees. When equipped with the financial resources to do so, nonprofit organizations typically offer severance packages to separated employees in exchange for a full release of all claims. Nonprofit leaders sometimes want to offer transition services (usually at a de minimis cost to the employer) as part of severance packages to help separated employees obtain new employment. Where an employee separation results from a position elimination as opposed to performance concerns, severance packages often guarantee a positive or mutually agreed-upon job reference. The terms of any severance package are negotiable, although again, it will be important to cross-check internal policies, as some employee handbooks specify a minimum amount of severance for position eliminations.

Conclusion

Getting back to the original question—would it be better to call it a reorg? At the end of the day, semantics are meaningless unless you can show your work. Only then can you overcome a claim that the legitimate business reasons underlying the decision to eliminate a position are not a pretext for an unlawful motive.

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.