Doing Layoffs the Right Way

By Annette Berezin

Dec. 8, 2008

Today’s troubling economy is forcing many employers—both large and small—to adopt new ways of dealing with their challenges. While some companies are looking to outsource work, other companies are cutting back to four-day workweeks. When these and other less draconian measures fail, employers are often faced with the difficult decision of reducing their workforce through involuntary layoffs.

    Not surprisingly, layoffs often lead to lawsuits for wrongful termination, and while some may say that lawsuits are an inevitable part of doing business, there are ways to minimize the risk of litigation that so often accompanies these difficult layoff decisions. Employers must understand that there is no one-size-fits-all approach to formulating a layoff strategy. For that reason, companies should consult with legal counsel before implementing a reduction in force to ensure that employees in one or more protected categories—such as age, race, gender, national origin or disability—are not adversely affected by the selection process.

Develop and test a layoff plan
    A successful layoff begins with the development of a plan that addresses the reason for the layoff and the scope of the workforce reduction. In developing the layoff plan, ask yourself: Will the reduction include employees from all divisions or segments of the company, or will it focus only on those areas of the company that are underperforming? How many employees will be included in the layoff? Will there be one layoff, or more than one, staggered over time? Management should also decide whether the layoff will be permanent, or whether the company anticipates recalling workers as the need arises. If the goal is to “backfill,” or rehire employees, companies are well-advised to prepare a recall list in conjunction with the layoff plan.

    Once you have answered these questions, you must decide on the criteria that will be used for selecting the employees who will be laid off. The selection framework is perhaps the most important component of the layoff plan, and the area that exposes employers to the greatest risk of lawsuits. For that reason, employers are urged to rely on objective, measurable criteria that correspond to the company’s legitimate business needs for reducing its headcount. While not exhaustive, the objective employee factors in guiding retention or layoff may include, in no particular order:

  • Possession of multiple skill sets

  • Performance

  • Education

  • Experience

  • Attendance

  • Tenure (first hired/first terminated)

  • Job classification (part time versus full time, for example)

  • Productivity

    If a selection criterion is based on performance evaluations, be mindful of the fact that performance evaluations oftentimes measure both objective and subjective criteria, such as initiative or attitude. Because subjective criteria are much more difficult to assess in a fair and consistent manner, they should have little, if any, bearing on who is ultimately chosen for the layoff. To the extent possible, employers are urged to rely on objective criteria such as those outlined above to minimize the risk of future wrongful termination claims.

    If the company plans to use multiple criteria in selecting employees for the layoff, it is advisable to assign a value (1 to 5, for instance) to each criterion, based on how important it is in the selection process. For example, having multiple skill sets may be very important and be assigned a value of 5, while tenure may be the least important and therefore assigned a value of 1.

    Once the values are assigned, rank the employees in order to identify the potential list of candidates who may be laid off. After the list has been compiled, it is important to ensure that one or more groups of employees who are protected by anti-discrimination laws, such as women, minorities and persons over 40, have not been disproportionately affected by the layoff. If there has been a disparate impact on a protected group, modify the selection criteria to achieve a more neutral impact. That in turn will help minimize the risk of wrongful termination claims.

    Understandably, a reduction in force creates a tremendous amount of turmoil in the workplace. Therefore, when announcing the layoffs, be prepared to answer questions regarding recall, severance, outplacement services and the availability of employee assistance programs. If the company routinely offers severance, be certain that the severance agreements include a full and final release of all claims against the company. Bear in mind that some states, such as California, have certain requirements for release agreements. That’s why you should consult with legal counsel to ensure that the severance agreements are sufficiently broad to include a release of all potential claims by an employee, and are enforceable under the laws of the states where the employees work.

    Finally, give some thought as to whether the layoffs are a short-term fix. If, so, decide whether you anticipate the need to rehire in the foreseeable future. If so, maintain a recall list—using objective criteria to avoid a “failure to hire” claim—and let the employees know that you hope to bring them back later. Employees are less likely to bring suit against their employer if they anticipate being rehired once market conditions improve.

Other legal issues to keep in mind
    Employees on approved leaves of absence: Developing and implementing a layoff strategy that includes the use of objective criteria will certainly help minimize the risk of wrongful termination claims. There are, however, additional factors that cannot be overlooked.

    For instance, it is important to identify employees receiving workers’ compensation benefits, those who are on short- or long-term disability, or those who are on an approved leave under the Family and Medical Leave Act. While these employees are not necessarily immune from termination, their status raises additional legal issues that need to be evaluated before terminating their employment. Therefore, companies that face these situations should consult with legal counsel before laying them off.

    Compliance with the WARN Act: Under the Workers Adjustment and Retraining Notification Act, commonly known as the WARN Act, employers with 100 or more employees must provide 60 days notice to employees, unions and local government prior to closing a plant or laying off at least 33 percent of their workforce. Other requirements may also apply.

    Compliance with the Older Workers Benefit Protection Act: Compliance with this law is essential to obtaining valid releases of Age Discrimination in Employment Act claims from employees who are over 40 years old. Under the act, for instance, a valid release of an employee’s age claim must include, among other information, the job titles and ages of all individuals selected for the layoff, as well as the ages of all individuals in the same job classification or organizational unit who are not selected for termination. The act establishes other specific requirements for valid releases, and companies should consult with legal counsel to ensure that releases are drafted in compliance with the act and any state laws governing age discrimination claims.

    State laws affecting layoffs: Finally, many states have specific laws that apply to workforce reductions. For example, in New Jersey, companies must comply with the Millville Dallas Airmotive Plant Job Loss Notification Act, which is similar to the federal WARN Act but establishes different notice requirements and imposes greater penalties for noncompliance. In California, employees who are terminated without advance notice must receive their wages at the time of their termination (other rules apply if advanced notice is provided). Employers who fail to comply with the California wage laws are at risk of “waiting time” penalties that can prove to be quite significant depending on the amount owed and the number of employees involved.

Final thoughts
    For most employers, few decisions are more difficult than the decision to terminate employees, particularly when those employees are loyal, productive and integral to the company’s business. For this reason, employers should not only develop a plan that is based on evenly and fairly applied objective criteria, but should also use compassion when dealing with the employees who are affected by the layoffs. To that end, treat them with respect and dignity. Allow them to say goodbye to their colleagues. Give them time to gather their personal belongings. Avoid treating them like the “bad guy” and ensure that they retain their self-respect as they leave the premises. More often than not, employees make the decision to file suit based on their last interaction with their employer. Work hard to make a bad situation as painless as possible for the employee. In the end, it may be the difference in their decision whether or not to file a claim for wrongful termination.

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