Faced with a harsh economic climate, many employers are forced to explore a reduction in work force (RIF) to survive financially. An employer must take steps to ensure that the savings created by a RIF are not outweighed by the costs of potential litigation. This article explores some measures an employer should take to protect the benefit realized by a RIF, so that an employer can survive to see better times.
Why a RIF?
Before slashing the numbers of its work force, an employer must first determine whether a RIF is the appropriate solution. It may be that a hiring freeze, salary reduction, increased employee contribution for insurance premiums, or attrition would address any budgetary issues and would result in the necessary cost-savings. An employer may also wish to explore furloughs, shutdowns, voluntary or compulsory reductions in hours across the board (with a commensurate reduction in pay), or a voluntary retirement/layoff incentive program. However, if a RIF is the appropriate solution, an employer must develop, and follow, a process to minimize exposure.
After deciding that a RIF is necessary, an employer must articulate legitimate business reasons for it, such as eliminating a product or service line (due to decreased demand), closing a facility, loss or slow down of business, or general reorganization. The employer should have a clear understanding of how its current work force is structured (including how each current employee fits into that structure) and how the work force will be structured post-RIF. An employer should be able to answer the following questions: Where will the business be focused after the RIF? What structure of organization would work best for our goals? What positions will be/will not be needed in the newly created organization?
Once the “big picture” business reasons for implementing a RIF are identified, the employer should hand-select key team members to facilitate the RIF. These members should direct the decision-makers selecting employees for the RIF to base their decisions on defensible legitimate business reasons – for example, seniority, skill set, productivity/sales statistics, or performance problems. Obviously, the more objective the criteria, the less likely an employer’s decisions will be open to serious challenge. The decision-makers should be clearly identified in advance, as should the groups of employees they will each be considering, as these “decisional units” will have to be clearly identified later for releases an employer may wish to obtain in return for severance. The decision-makers should also be able to identify the factors they use in making their decisions, as these will also be subject to disclosure.
An employer must test a manager’s reasons for his RIF selections, i.e., evaluate characterizations that an employee is the poorest performer, “the weakest link” of a particular department, or the one with the most disposable skills. The employer must scrutinize the RIF list for employees currently out on protected leave (Family Medical Leave Act, Americans with Disabilities Act, Workers’ Compensation, maternity leave), who recently returned from protected leave, or who recently raised complaints of discrimination or harassment. 1 Also, an employer should be aware of employees on the list who would, by virtue of the RIF’s timing, be deprived of accruing a bonus, vesting stock options, or earning a commission. Finally, the employer should be aware of its own policies and procedures for terminating employment (e.g., handbook provisions), should look out for individual employment contracts that promise employment for a specific duration or require notice or severance, and take note of recent transfers or new hires (who may be able to raise promissory estoppel claims).
Once the list is vetted in the above manner, the employer must reevaluate the list statistically, in a way that preserves privilege, to avoid the risk of creating adverse evidence. The employer should be wary if an analysis of the proposed RIF list reveals a disparate impact on a particular protected category. For example, in a work force that is 50 percent female, one would expect that an equal number of men and women will be laid off in a RIF; if this is not the case, then the employer may be facing a litigation risk and thus needs to reevaluate, although not necessarily revise, the RIF list. This is called an “adverse impact” analysis, or an analysis of how different the actual result is from the anticipated result. The greater the disparity, the greater the exposure.
The relevant statistical analysis does not necessarily encompass the entire company as a whole, but rather each “decisional unit.” For example, each manager who is supervising a department and is making RIF selections may represent one decisional unit. The purpose of disparate impact analysis during the decision-making process is to identify decisions for a relevant decisional unit that need to be examined more closely. The presence of a statistically relevant higher impact on one group over another is then used as a reason to probe deeper into choosing one position over another, or one employee over another, for elimination. It is, in essence, the triggering event for a re-examination process. An employer must prove it has a “business necessity” for using a hiring or firing criteria that has a disparate impact on a protected group. It is not appropriate to require that decisions be made based solely on statistical impact. This can create reverse discrimination exposure. 2
If the decisions are already being carefully reviewed by someone who is a decision-maker (usually Legal or HR), then a disparate impact analysis may be unnecessary. This often occurs in smaller groupings or where particular events have caused closer scrutiny to be applied from the outset.
When instituting a RIF, employers must comply with the requirements of the federal mass layoff and plant closing law, the Worker Adjustment and Retraining Notification Act 3 (“federal WARN”), and New York’s state analog 4 (“New York WARN”). The statutes, although similarly worded, have differing requirements for employers to provide advance notice to employees prior to a RIF. Under specified circumstances and subject to exceptions, New York WARN requires 90 days’ notice while federal WARN requires 60 days’ notice.
The concept of mass layoff is similar under both statutes. Under New York WARN, however, a mass layoff is triggered when 250 employees (other than part-time) are being terminated at a single site of employment (half the number referenced in the federal WARN statute), or if fewer than 250 are being terminated, 33 percent of the employees (other than part-time) and at least 25 employees (other than part-time) at the site of employment are being terminated (also half the number required by the federal statute). The single-site concept is the same under New York WARN as it is under federal WARN. 5
WARN notices should go to affected employees, unions that represent them (a federal WARN notice for a unionized employee goes only to the union, not to the employee), and governmental offices stated in the statute. The content of the notice is identical under both statutes. 6 Employers should also be aware that layoffs within a 90-day period are aggregated under federal and state law to determine if notice is required, which may trigger a retroactive notice obligation.
In limited circumstances, federal WARN allows certain exceptions or potential reductions to its 60-day requirement (such as for a plant closing due to a faltering company, unforeseeable business circumstances, strikes, lock-outs or natural disasters) and New York WARN makes similar exceptions to its 90-day requirement. However, the curious drafting for mass layoff exceptions has clouded the extent to which exceptions are available under New York WARN. 7 The Department of Labor’s Emergency/Proposed implementing regulations attempt to clarify these ambiguities. 8 Failure to comply with the requirements of federal and state WARN can lead to substantial damages and penalties.
ERISA Severance Plans
Employers implementing a RIF and providing severance payments to laid-off employees may wish to consider establishing a severance plan governed by the Employee Retirement Income Security Act (ERISA). 9 While not necessarily addressing claims regarding whether a particular employee should have been chosen for a RIF, an ERISA-governed plan can address issues like severance amount and eligibility.
One advantage in having an ERISA-governed severance plan is that it provides protections to employers who are sued by employees in connection with severance benefits, because an employee would have to exhaust an internal “claims procedure” before suing in court. Also, pursuant to the terms of an ERISA-governed severance plan, an employer may construe ambiguous terms in its sole discretion as long as its determination is not arbitrary and capricious. Finally, claims brought in state court can be removed to federal court. This is critical because many state laws regarding severance are more favorable to employees than federal law.
In order to establish an ERISA-governed severance plan, an employer will need to prepare a plan document and a summary plan description and distribute it to eligible plan participants (generally those who would be eligible to participate in the plan in the event of an eligible termination of their employment). The employer will also need to file certain forms (Form 5500 annual reports) with the government. A valid plan must provide for an ongoing administrative scheme, so, ideally, its provisions should be used for more than a single work-force reduction. It is permissible for the plan to provide some discretion to an employer to provide greater benefits than the formula-based benefits contained in the plan, so a plan is no bar to employer flexibility.
It should be noted that once an ERISA-governed severance plan is developed, compliance with ERISA’s rules must be taken seriously, or an employer could face substantial penalties. Nonetheless, the advantages of maintaining an ERISA-governed plan should outweigh the administrative requirements imposed on employers.
One of the best defensive tools for an employer is a release signed by an employee, in which an employee waives potential claims. To maximize the protections a release offers and to withstand a challenge, it should be drafted in plain and clear language. It should also specifically identify the claims being released (e.g., Title VII, Age Discrimination in Employment Act (ADEA), state and city discrimination laws, negligence, etc.). The employer should give the employee a reasonable opportunity to review the release before signing, and should offer, as consideration for the release, compensation in an amount greater than the amount to which an employee is otherwise entitled under the law.
For employees 40 and over, the Older Workers Benefit Protection Act (OWBPA) requires that a waiver of claims under the ADEA be “knowing and voluntary.” 10 For example, employees must be advised in writing to consult an attorney. 11 In addition, an employee must be given at least 21 days to consider the agreement; and if a waiver is requested in connection with an employment termination program offered to two or more employees, the employee must be given a period of at least 45 days to consider the agreement. 12 Finally, the employee must be given seven days to revoke the release. 13 It is important that these safeguards be followed, because the regulations under the OWBPA restrict the rights of the employer to prevent actions challenging the validity of a release of age discrimination claims. 14
Employers should be aware that there are some claims that simply cannot be released. For example, an employee cannot waive his or her rights under the Fair Labor Standards Act without Department of Labor (DOL) supervision; 15 or vested benefits under ERISA. Employees cannot waive their right to file a charge with the Equal Employment Opportunity Commission (EEOC) 16 or the National Labor Relations Board (NLRB), 17 although they can release the employer of all monetary damages that might result from violations that fall under the jurisdiction of these agencies, 18 thereby limiting the incentive to file charges. Similarly, an employer cannot force employees in New York (or most other states) to waive the right to file for unemployment insurance, 19 or for Workers’ Compensation (unless approved by the New York Workers’ Compensation Board), 20 and there is some authority which suggests an employee cannot waive Family Medical Leave Act (FMLA) claims; 21 or Uniformed Services Employment and Reemployment Rights Act (USERRA) claims. 22
An employer should establish a protocol to safeguard its information from theft or sabotage, which would include changing passwords to networks, voicemail, and e-mail. Employers should also request the return of company property, such as keys, laptops, computers and identification cards.
Employers should also take steps to safeguard remaining personnel. Displaced employees, who “have nothing to lose,” may return to the workplace seeking to harm their managers or their former co-workers. An employer should not take “off-handed” threats lightly, and should be on alert for employees who previously joked that they would harm their supervisors if laid off, or are known to possess a weapon. Many employers have found that Employee Assistance Programs and Out-Placement programs are useful in identifying and preventing potential workplace violence issues.
Conducting a RIF in a haphazard manner could create liability for an employer which will eliminate, or reduce, the benefits of a RIF. With appropriate safeguards and advance planning, an employer can reduce liability, to survive, and even succeed, in these challenging times.
A. Michael Weber is the senior shareholder of the New York office of Littler Mendelson. Elena Paraskevas-Thadani , an associate in the New York office, and Lisa Griffith , an associate in the Melville office, assisted in the preparation of this article.
1. In Crawford v. Metropolitan Government of Nashville & Davidson County, 129 S. Ct. 846 (2009), the U.S. Supreme Court ruled that internal complaints of discrimination, or participating in an internal investigation, may properly be the predicate for a retaliation claim.
2. See Taxman v. Bd. of Educ. of the Twp. of Piscataway, 91 F.3d 1547 (3d Cir. 1996) (holding that employer violated Title VII when it retained an African-American employee over a Caucasian employee in a reduction in force where employees were equally qualified and race was used as “tie-breaker”). See also 42 USC §2000e-2(j) (Title VII prohibits preferential treatment on account of existing number or percentage imbalances); Smith v. Xerox Corp., 196 F.3d 358 (2d Cir. 1999) (reduction-in-force case noting that it was Congress’ intent “that employers not be required to treat any individual or group preferentially because of a protected characteristic or to establish a numerical quota system”).
3. 29 USC §§2101 et seq.
4. N.Y. LAB. LAW §§860 et seq.
5. N.Y. LAB. LAW §860-a(4)(b). Like federal WARN, the New York law excludes part-time employees from the first part of the count, and it has a similar definition of part-time employees: i.e., a part-time employee is one who on average works fewer than 20 hours per week, or one who has worked fewer than six of the 12 months preceding the date on which notice is required. Since under New York WARN, the notice date should be 90 days before the layoff (under federal WARN, it would be 60 days), anyone first employed within six months of the notice date (about nine months before a stand-alone layoff) would be excluded from the count as a part-time employee, regardless of the number of hours that person works. However, if an employer employs 50 or more employees, including part-time employees, and they work in the aggregate 2,000 hours or more in a week, the employer is covered. New York WARN (but not federal WARN) would have the employer include in that count all overtime hours. As noted above, because New York WARN requires 90 days’ notice while federal WARN requires 60 days’ notice, the dates on which an employer determines whether an employee is part-time are different under each statute.
6. N.Y. LAB. LAW §860-b(2).
7. 29 USC §§2102(b)(2)(A), 2102(b)(2)(B),2103. Compare 29 USC §2101(b), with N.Y. LAB. LAW §860-c.1.
8. See 2009-7 N.Y. Reg. 8 (proposed Feb. 18, 2009) (to be codified at N.Y. COMP. CODES R. & REGS. tit. 12, §921-6.
9. The Supreme Court has recently held that a claims administrator could have a conflict of interest if it was also the payor of benefits and that this fact might need to be taken into account in determining whether a claims decision was arbitrary or capricious. Metropolitan Life Ins. Co. v. Glenn, 128 S. Ct. 2343 (June 19, 2008). However, it is still widely believed that the deferential standard of review in an ERISA-governed plan will be superior to that of a plan that is not governed by ERISA.
10. 29 USC §626(f)(1)(A)-(H).
11. 29 USC §626(f)(1)(E).
12. 29 USC §626(f)(1)(F)(i)-(ii).
13. 29 USC §626(f)(1)(G).
14. See 29 CFR §1625.23.
15. 29 USC §§1053(a) & 1056(d).
16. See Enforcement Guidance on non-waivable employee rights under Equal Employment Opportunity Commission (EEOC) enforced statutes, EEOC Notice 915.002 (April 10, 1997).
17. See 29 USC §158(a); U-Haul Co. of Cal., 347 NLRB No. 34 (2006).
18.. See EEOC v. Eastman Kodak Co., No. 06-c.v.-6489 (WDNY Oct. 11, 2006).
19. N.Y. LAB. LAW art. 18, §595 (1).
20. N.Y. WORKERS’ COMP. LAW §32. Although a waiver will be valid if it is approved by the Board.
21. See 29 CFR §825.220(d). The DOL recently amended this regulation to permit waivers of past claims but not prospective rights. See 73 Fed. Reg. 67,934 (Nov. 17, 2008).
22. At least one case has held that a USERRA claim cannot be waived by private agreement. See Perez v. Uline Inc., 157 Cal. App. 4th 953 (2007) (relying on 38 USC §4302(b)).