Human Resources & Safety -navigating the downsizing process

Navigating the downsizing process: What to consider if you're facing a reduction in force

By David A. Kulle, Esq., and Richard Vitarelli, Esq.; Attorneys with Robinson & Cole LLP in Hartford

From CBIA News, March 2001

The scenario is a familiar one: a company posts meager, disappointing profits - or a loss - during one or more quarters, and investors, shareholders and company officers begin to realize serious steps must be taken to improve the company's financial position. Company officers, charged with the daunting task of developing a strategy to improve profits and overall company performance, conclude it will be necessary to cut the work force.

In our current fast-paced, competitive business climate, prudent employers must commit the time and resources necessary to avoid the potential pitfalls of reductions in force. A meticulously planned and implemented downsizing represents a company's best chance to minimize legal liability while achieving business goals.

A company should consider the following recommendations in structuring a reduction in force (RIF).

Develop an RIF team to plot initial strategy. Nobody likes the prospect of a downsizing - especially employees who may feel particularly vulnerable to being laid off - and the mere mention of the word can trigger widespread hysteria and morale problems. At the early stages of the initial strategy phase, a company should limit discussion of downsizing to a trusted core of high-level management personnel and consultants.

For large companies considering large-scale layoffs, the RIF team ideally should include the chief financial officer, the chief executive officer, the chief operating officer, a senior-level human resources or employee relations executive, an upper-level payroll specialist, an employment law attorney, and a public relations consultant. The RIF team has to be trusted to keep all discussions confidential.

One member of the RIF team should be charged with coordinating and overseeing the entire downsizing process. To the extent possible, outside consultants or attorneys should compile information and draft memoranda and correspondence concerning the team's dealings to avoid leaks. If possible, meetings should be held away from the company.

Once initial strategy is developed, the RIF team will need to be expanded to include the company personnel who will prepare notices, tally benefits owed, verify reasons for selecting employees for termination, and prepare final paychecks.

Plan the goals and timing of the RIF. The first task is to determine the magnitude of savings that need to be realized from a layoff. This task is part of an overall cost-cutting plan, which could implicate other costs and expenses in addition to those related to personnel.

Second, the RIF team should consider ways to realize the desired savings, such as subcontracting; consolidation of divisions, operating units or functions; the sale of the company or a work unit; and shutdowns.

Next, the team should determine the desired timing of an RIF. If more than one employee will be paid severance in exchange for a release that waives discrimination claims under the Age Discrimination in Employment Act, the company should give affected employees at least 45 days' notice, to accommodate any review periods required for these releases to be enforceable. At least 60 days' notice is required under the WARN Act, as more fully discussed below. If unionized, a company may be obligated to bargain over the decision or effects of its decision to lay off employees. Collective bargaining obligations should also be identified and considered in determining the timing of layoffs.

Perform an overall workforce analysis and an analysis of each proposed termination. The most complicated and difficult aspect of the RIF process is determining which employees will be laid off. The most common legal challenges to layoffs are administrative charges and lawsuits premised on discrimination based on age or other legally protected characteristics. Accordingly, it is crucial for an employer to be able to give legitimate, nondiscriminatory reasons for every termination decision. Those reasons need to be easy to articulate and logically consistent. Examples of legitimate nondiscriminatory reasons for selecting employees for layoff can include seniority, job performance or skills, or job function.

Besides analyzing each termination decision, the RIF team should consider whether employees of any legally protected class are disproportionately impacted by the RIF.

Review employment policies, individual contracts of employment, separation benefits and stock-option agreements under which affected employees may claim rights or benefits. The RIF team should perform a due-diligence review of potential liabilities and verify whether, by policy or contract, the company has limited its ability to lay off employees. Likewise, where a collective bargaining agreement or policy dictates a priority for reductions in force, or "bumping rights," such procedures should be examined. The company should also review policies and agreements to determine eligibility for severance benefits and accrued benefits such as paid time off, vacation or sick leave.

For highly competitive businesses, the RIF team should verify that employees who have had access to sensitive information in the course of their jobs have signed confidentiality, nondisclosure or noncompetition agreements, and that such documents are on file. Exiting employees should be reminded of their obligations under these agreements.

Also, the RIF team should review the provisions of any stock-option agreements implicated by the RIF and consider the consequences of such provisions on the overall cost savings goals.

Ensure compliance with the Worker Adjustment Retraining and Notification (WARN) Act. Generally, employers with 100 or more employees are subject to the WARN Act. Covered employers are required to give 60 days' advance written notice of a "plant closing" or "mass layoff." A "plant closing" is defined as the permanent or temporary shutdown of at least one facility or operating unit that results in an employment loss of 50 or more employees at a single site of employment. A "mass layoff" is

a loss of employment at a single site of employment that affects at least 50 employees and one-third of the covered employer's work force.
a loss of employment of 500 or more workers at a single site of employment.

To determine if notice is required, employers must look backward and forward 90 days and tally the total number of actual or planned job losses. If, during this period, an employer suffers employment losses that, in the aggregate, would trigger the notice requirements under WARN, notice is deemed to be due as of the first employment loss.

WARN requires that the 60 days' notice of the closing be given to affected employees, employee representatives (that is, unions), the chief elected official of the local government, and the state dislocated-worker unit where the job loss occurs. There are several exceptions to providing notice under the WARN Act, but these should be carefully considered with the company's labor counsel.

The WARN Act may be enforced by individual or class-action lawsuits, or by the state or federal government.

Special considerations for unionized employers. The National Labor Relations Board maintains that, with certain exceptions, employers must bargain with employee representatives over the effects of layoffs stemming from entrepreneurial decisions such as closing a plant or transferring bargaining-unit work. In the case of layoffs that do not constitute a business closing or a transfer of bargaining-unit work, employers generally must bargain over the effects of such decisions and, depending on contract language, the very decision to lay off employees.