Dealing with Downsizing

Our current economic tough times may require businesses to take drastic actions to cut costs, including laying off employees.   Legal claims by unhappy former employees inevitably increase when the economy is bad and they cannot easily find new jobs.   Here are a few things an employer should consider when implementing a reduction in force (RIF), in order to minimize the risk of liability to laid-off employees:

1. IDENTIFICATION OF EMPLOYEES TO BE LAID OFF. The decision which employees are to be retained and which employees are to be laid off should be based on a variety of factors, including their skills, experience, job performance and tenure with the company.  At the same time, the lists of employees to be retained and to be laid off should be reviewed to make sure that the layoffs are not targeting or adversely affecting some protected group.

2. UNION. If some of the company’s employees are represented by a union, the company will have a duty to bargain with the union both about the decision to lay off employees and the effects of the layoff.

3. WARN ACT. The Worker Adjustment and Retraining Notification Act of 1988 (commonly referred to as WARN) generally applies when a business has 100 or more full-time employees, and lays off at least 50 people at a single site of employment over a 30-day period.  When WARN applies, the company must give the affected employees at least sixty (60) days prior written notice of their job loss.  The notice must provide specific information required by WARN.  There are three main exceptions to the 60-day notice requirement:  (a) the company is in financial trouble, is actively seeking new business or capital, and reasonably believes that an announcement of its planned job cutbacks could jeopardize the efforts to obtain capital or new business; (b) the plant closing or mass layoff was caused by business circumstances that were unforeseeable; or (c) the plant closing or mass layoff was the direct result of a natural  disaster.

4. COBRA. If a company has more than 20 employees, it must provide a COBRA notice to employees who lose their health insurance coverage as a result of job loss.    The affected employees and their dependents have the right to continue their health insurance for 18 months (or in some cases longer) at their own expense.  As part of the Obama administration’s economic stimulus package, a new subsidy is available to employees who lose their health insurance coverage as a result of a layoff.  The employees have to pay 35% of the cost of continuing their coverage.  The federal government pays the other 65% through tax credits to the employer.  (A separate article on page 2 deals with the new COBRA subsidy.)

5. FMLA. Employees on a leave of absence under the Family and Medical Leave Act (FMLA) are protected against a reduction in force unless it can be demonstrated that they would have lost their position even if the FMLA leave had not been taken.

6. SEVERANCE PACKAGE. No federal or state statute mandates that a severance package be given to an employee who is being laid off.  However, a company policy on severance pay could create an enforceable contract.  If an employer decides to give severance pay, then a Settlement Agreement and Release should be required as a condition of the payment.   In other words, in exchange for a voluntary payment of severance pay to the employee, the employer will be assured that it will not face litigation from the laid-off employee.

The severance agreement needs to contain certain specific language to be enforceable, particularly if the employee is 40 years of age or older.   The Older Workers Benefit Protection Act (OWBPA) requires certain provisions for the severance agreement to be enforceable.  It may also require that the affected employees be given information on the job title and ages of all employees being laid off, as well as the same information for the employees that are being retained.
The severance agreement should also allocate the severance pay to specific weeks, to reduce the company’s unemployment liability in connection with the layoff.

7. PENSION, 401(k) AND OTHER EMPLOYEE BENEFIT PLANS. These plans should be carefully reviewed to determine the rights of employees.  The layoff could affect their vesting or right to obtain distributions.

This is a complicated and risky area of the law.  You should consult legal counsel before any layoff decisions are made or implemented.

This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm. Click here to view his professional resume.