Planning and Conducting an Involuntary Layoff
A reduction in force (RIF) and reorganizations are legitimate business reasons for termination, but there are legal risks if not handled correctly. A successful layoff or RIF requires careful and early planning, and may take several weeks or months, from start to finish. During this period, you will need to address various legal and practical concerns while continuing to manage operations and sustain morale.
Here are the steps to avoiding wrongful discharge claims, as well as easing the tensions of downsizing:
- Identify and document business goals.
- First, analyze, put into words and document the need for the proposed layoffs, including your business objectives and goals with the downsizing. Your business goals should serve as a guiding light for decisions about which employees to lay off and which ones to keep.
- Determine selection factors.
- The next step, and perhaps the most difficult one, is to decide how you will choose which employees to lay off. In the easiest situations, the decision is guided by the nature of the work or key activities to be maintained or eliminated (e.g., where a particular business unit or product line is being cut). In most layoff situations, employers are forced to eliminate activities as well as reduce headcount among surviving teams and business units. In any case, you must base your decision on selection criteria that can stand up to legal challenge in the event of wrongful termination claims.
Selection criteria should be based on quantifiable and objective factors, such as:
- Elimination of non-essential positions
- Preservation of key functions or core, revenue-producing activities
- Elimination of certain categories of employees (e.g., temporary, part-time or contract workers)
- Length of service or seniority (tenure)
- Level of compensation
- Pre-existing disciplinary action
- Performance records
- Review operational impact.
- Don’t lose sight of your business goals and operational needs when determining selection criteria. Though it may be easiest to select employees based on tenure alone, the reality is that you need certain employees to perform key job functions, regardless of whether the employees are newer to the organization or not. For this reason, you may need to apply a combination of selection criteria, or use a different set of criteria for each team or business unit affected. For example, you may use tenure to select among a group of workers who all perform the same manual task, but key functions or performance might drive your decisions when selecting among a multifaceted marketing or sales team.
After you’ve used the most easily and objectively identifiable criteria, review the skills sets and abilities of your remaining employees to make sure the essential job functions are covered. This view might require you to adjust your selection criteria or make exceptions based on operational necessity. If you do make exceptions, document the basis for doing so.
- Consider disparate impact on protected groups.
- Before terminating employees in a RIF, analyze the impact of your decision to make sure no particular groups of individuals are being singled out. If the numbers show that a certain group is disproportionately affected by a RIF when compared to the overall workforce (based on age, gender, race, or any other legally protected characteristic), the RIF may seem discriminatory. Often times, discrimination cases are based solely on statistical evidence, and employers may be held liable without even recognizing that discrimination occurred.
If your selection disproportionately affects one or more protected group, you should carefully review your selection criteria to ensure they are objective and justified by business necessity (or, in the case of workers over the age 40, by reasonable factors other than age). Consider making adjustments to your selection criteria if they do not interfere with your business goals. For example, if you use compensation as a factor for laying off manual workers and it disproportionately affects women or workers of a certain nationality, consider using a combination of factors, such as performance and tenure, instead.
- Review legal and procedural obligations.
- Review your company’s written policies as well as collective-bargaining agreements and executive contracts to make sure there are no layoff limitations or restrictions. If certain procedures apply, such as providing notice or severance pay, you should follow them to avoid liability. Conducting a RIF does not excuse you from legal or contractual obligations.
- Document your decisions.
- Whether you choose to use objective or subjective methods to determine which employees to lay off, you should carefully document the legitimate business reasons for choosing to keep certain employees while terminating others. This internal documentation should also reflect the business reasons for the RIF. This might include existing business plans, meeting notes, sales reports and other financial records.
- Consider offering severance benefits and other assistance.
- One way to ease the pain of layoffs and minimize legal exposure is to offer severance benefits or other nonmonetary assistance to affected employees. Helping your terminated employees is ethical and responsible, and also sends a positive message to your remaining employees about how you treat your most important assets — your people.
Severance pay is the most common benefit offered in layoffs. Most employers use a formula based on years of service to determine how much severance to offer. For example, you might choose to offer three months’ pay for employees with less than two years of service, six months’ pay for two to 10 years of service, and one year’s pay for those with more than 10 years of service. Unless controlled by contract, you can develop your own formula, but you should follow a consistent calculation method based on nondiscriminatory factors (such as rank, position or tenure) to avoid discrimination claims.
Other kinds of post-termination benefits and assistance include:
- Temporary continuation of benefits or insurance premium vouchers
- Outplacement services
- Transition/career development (e.g., support with resumes and interviewing skills)
- Individual and family counseling
- Letters of recommendation
- Ongoing access to internal job postings
- Rehire bonuses
- Waiver of noncompetition restrictions
When severance pay or other financial benefits are extended, they’re often conditioned on the employee's signing a waiver releasing you from liability against all legal claims, including wrongful discharge.
- Plan and streamline employee communications.
- Before announcing layoffs, make sure those involved in the decision-making process keep the information confidential and take active measures to prevent any premature disclosure or leaks of information. It is helpful to prepare a script or outline of points to assist you and your managers when delivering the news to affected employees. Follow the general guidelines provided in Chapter 1 for planning and conducting termination meetings. In addition, be prepared to discuss the business reasons and selection criteria for the layoffs, eligibility for rehiring and, if applicable, severance benefits and the availability of outplacement, transitional services or other assistance.
It’s also important to plan how you will communicate the news to the employees you’re keeping. Be aware that RIFs have a significant impact on all employees, both those laid off and those remaining. Employees who keep their jobs may feel a combination of guilt, resentment and fear of additional downsizing. They might be asked to take on additional work or new job duties to shoulder the loss of their coworkers, and this can be overwhelming coupled with the news of a RIF. If not handled properly, these changes can demotivate your employees and decrease their focus and productivity — at a time when the company needs their best efforts to survive.
Keep in mind that the company’s ability to generate profits, compete effectively or maintain the innovation required to survive in the marketplace depends on those who remain employed. For this reason, it is important to foster open and honest communication and give them an outlet to discuss their concerns and fears. Designate leaders and managers to explain the reasons for the RIF, and the company’s strategy to endure the times and implement positive changes.
You should also brief your supervisors on how to position the news and respond to questions before announcing the layoffs. Let your employees ask questions, and be prepared to give candid but positive responses. Finally, show sensitivity toward their former coworkers and let them know what measures you are taking to assist them (e.g., outplacement services, severance, etc.).
The Ins and Outs of Voluntary Separation Incentive Programs
One option to consider before conducting layoffs is a voluntary separation incentive program. This can include offering voluntary early retirement and/or voluntary resignation in exchange for financial incentives, such as severance pay or continuation of benefits. By offering voluntary separation, you may be able to achieve your financial objectives of reducing payroll costs with fewer layoffs or perhaps none at all.
Voluntary separation programs have additional benefits that should not be overlooked.
By avoiding layoffs, you are more likely to maintain positive morale and strong employee relations with those who choose to remain.
Employees who understand your company’s financial struggles will appreciate your decision to make terminations voluntary. In harsh economic times, employees obviously will prefer having the choice to resign with severance pay rather than being unexpectedly fired with no financial safeguards. Severance pay and other incentives allow them to make a transition to a new situation with some financial security, and those seeking new opportunities may feel more confident looking for a job without the negative stigma of being “involuntary terminated” from a previous employer.
You never know — some employees may welcome the opportunity to start a new career, get an education, concentrate on family obligations or retire from the workforce. By offering voluntary separation, you also might benefit indirectly by weeding out employees who are disengaged or underperforming due to job dissatisfaction, leaving you with a productive and refreshed staff more likely to rise to the occasion and meet your financial goals when you need it the most.
Voluntary separation programs also help minimize your exposure to employee lawsuits. Employees who choose to leave voluntarily are less likely to sue your company than individuals who have been forced to leave against their will. Also, voluntary separation programs with financial incentives typically require each affected employee to sign a waiver releasing your company from liability for all claims, serving as an automatic bar to most legal disputes.
To avoid claims of discrimination, voluntary separation programs should be offered to all employees or select groups of employees based on neutral, nondiscriminatory factors such as facility location, business unit or team, job position or classification, tenure, etc. You may not place additional pressures or offer special incentives to influence certain individuals in a group to participate. For example, if you offer voluntary separation to all non-management employees of a certain facility hired within the past two years, you must be prepared to accept resignation from anyone who meets those criteria. You can’t have off-the-record discussions to let certain employees know they are safe from termination if they don’t participate.
If you offer a voluntary incentive program — especially early retirement — consider the following tips:
- Clearly define eligibility requirements. Put your eligibility requirements in writing, and share them openly with affected employees. Remember to make your selection criteria neutral and nondiscriminatory.
- Offer the same terms and conditions to each affected group. To avoid discrimination claims, offer the same financial incentives to each affected group, unless differences are based on legitimate, nondiscriminatory factors such as a calculation method based on seniority, rank or compensation.
- Centralize employee communications. Direct your employees to communicate only with authorized company representatives if they have questions or concerns about the voluntary separation program. This will prevent managers and supervisors from possibly pressuring or discouraging certain employees from participating.
- Present honest information. Be upfront about the financial condition of your company and the potential for future layoffs so employees can make informed decisions about what to do. Also avoid misleading employees about compensation and benefits, whether they stay or go. You’re at risk of liability for fraud under federal laws such as the Employee Retirement Income Security Act of 1974 (ERISA) for giving incorrect information or withholding information about current or future benefits options to plan beneficiaries.
- Make sure the offer is truly voluntary. Your offer must be explained to employees in a way that makes it clear their decision to retire or resign is entirely voluntary. In other words, you should not tell an employee that he or she has a choice between retiring now and being laid off next month.
- Document everything. Carefully document your selection criteria and all communications with employees about voluntary retirement or resignation. This will protect you if employees later claim you misled them, withheld key information, or placed undue pressure to encourage or discourage them from participating.
Eliminating a Job Position
Regardless of financial hardship, you may be faced with situations where you need to eliminate an employee’s job position. Common reasons include:
- Position is non-essential or no longer a business necessity
- Shift in business demands or strategy
- New equipment or technology makes the job obsolete
- Job duties can be rolled into other positions to save costs
- Job can be outsourced at a lower cost
- Department or team is restructured to improve processes, increase efficiency, or better leverage employee strengths
Elimination of a job position is a legitimate business reason for termination. However, as with any termination decision, it is subject to legal challenge if not handled properly.
If you are eliminating an employee’s job position, document the specific reasons for making the change. Your documentation should explain the purpose and objective (e.g., whether it’s a cost-cutting measure or a new business strategy) and the business plan for handling the change (e.g., how it will affect operations, other positions, etc.). Be prepared to discuss the reasons for your decision with the employee upon termination. Though you are not legally required to share the details behind your decision, it will go a long way toward preventing a wrongful discharge claim.
Before terminating the affected employee, explore other options for employment within the organization. If the individual is qualified for an open position, consider making a transfer or encouraging the employee to apply.
Mass Layoffs and Business Closures
The federal Worker Adjustment and Retraining Notification (WARN) Act provides protection to employees by requiring 60 days’ notice of plant closings and mass layoffs. The purpose of this law is to protect workers and communities from unexpected job loss and to give affected employees and their families time to consider their options and make plans. It also alerts your state’s Rapid Response Dislocated Worker Unit so it can help employees find new jobs or retrain them.
Your company is covered by WARN if you employ more than 100 people. This does not include employees who have been with you less than six months (in the past12-month period). Also excluded from the count are those who work fewer than 20 hours a week. Both private and nonprofit employers are covered, but not federal, state and local government entities that provide public services.
The notification provisions don’t apply if:
- You are closing a temporary facility
- You’ve ended a temporary project and workers knew when they were hired that the job was short-term
- Workers are striking or locked out
There are a few instances where you can give fewer than 60 days’ notice. For example, notice isn’t required if the closing or layoff is the direct result of a natural disaster or unforeseeable business circumstance. The burden is on you to prove that one of these exemptions applies. In these situations, you must give as much notice as possible under the circumstances.
To comply with the notice provisions, you must provide a written notice outlining the specifics of the layoff (e.g., effective dates, payment information, etc.), but there is no required form to complete. You must notify your employees as well as the state’s Rapid Response Dislocated Worker Unit and the chief elected official of your local government.
If you violate WARN, you can be liable to each affected employee for back pay and benefits for the period of the violation, up to a maximum of 60 days. You also can be liable to your local government up to $500 for each day of the violation.
Using Separation Agreements to Avoid Liability
Sometimes, it’s in your best interest to have an employee sign a separation agreement with a waiver and release of claims upon termination. In these agreements, employees get an of incentive (e.g., severance pay or extended benefits) in exchange for their agreement to release, or give up, all legal claims against the employer.
For the agreement to be valid, the incentive (also known as “legal consideration”) must be something you don’t already owe the employee. This includes anything the individual is otherwise not entitled to by law or under the terms of any employment contract, collective-bargaining agreement, policy or handbook provision, or other written or verbal agreement.
Examples of legal consideration include:
- Money (i.e., severance pay)
- Continuation of health benefits
- Forbearance on employee loans
- Payment for unused vacation, sick or personal pays (unless required by law or policy)
- Outplacement assistance
- A neutral or positive letter of reference
- The right to keep certain company property such as a laptop computer or cell phone
- Modification or elimination of a valid noncompetition agreement
Note that you may not use any of these incentives as legal consideration if you already owe them to the employee. For example, agreeing to extend an employee’s benefits to the end of the month is not sufficient legal consideration if your policies already extend benefits through the end of the calendar month for all terminated employees. Similarly, if company policy states that unused vacation pay will be paid upon termination, offering unused vacation pay wouldn’t be a legal consideration.
Be aware that some states require employers to compensate employees upon termination for unused accrued time such as vacation or sick days. If this is the case in your state, the accrued time may not be used as legal consideration.
When to use a separation agreement, and exactly what it should say, depends on the specific situation. Maybe a disgruntled employee has made vague threats about seeing a lawyer; maybe your documentation on the performance problems that led to a termination is spotty or non-existent; or maybe you’re planning a layoff that hits a protected group disproportionately.
Separation agreements are most commonly used when layoffs affect a group of employees because that is when legal exposure is at its highest. When deciding whether to use a separation agreement on an individual basis, you should weigh the benefits of obtaining a legal release (based on the likelihood of a lawsuit and the potential legal exposure if you lose) against the possibility that the agreement itself will trigger legal claims.
To be valid, waivers must satisfy strict legal requirements, especially when used to release age discrimination claims. It is important to work with an attorney to weigh the pros and cons of using a waiver and to ensure it’s drafted properly to protect your rights and hold up in court.