Mass Staff Cuts Dont Slam the Brakes on New Hires

By Fay Hansen

Feb. 9, 2009

CEO Steve Ballmer rocked the high-tech world with his January 22 e-mail to Microsoft employees announcing that the company would eliminate 5,000 jobs in the next 18 months, including 1,400 immediately.

The layoffs and other cost-saving measures will help Microsoft save $600 million in the first quarter of 2009 and $1.5 billion for the full fiscal year ending June 30.

Ballmer noted, however, that net employment would contract by only 2,000 to 3,000 jobs. He explained the company would simultaneously “open new positions to support key investment areas during this same period of time.”

Microsoft’s decision to hire new employees in the middle of a mass layoff reflects a broader trend now under way. Nearly two-thirds of employers plan to lay off workers in 2009, but many will not freeze hiring, according to the latest surveys.

Instead, companies will continue to hire new employees for their still profitable units, upgrade their talent and replace higher-cost employees with lower-cost new hires. Hiring during layoffs, however, increases the likelihood of a discrimination lawsuit.

“We suggest to our clients that there is opportunity in the recession to hire talent if a company is able to do so,” says Michael Rosen, partner and employment law specialist at law firm Foley Hoag in Boston. “There is some inherent risk, but it can be minimized as long as the company is sensitive to it.”

The risk continuum
The lawsuits generated by layoffs are complex. Dell is now facing a $500 million class-action suit claiming the company targeted female and older employees in layoffs affecting 8,900 workers. The company is moving through a massive restructuring designed to cut $3 billion in spending by the end of fiscal 2011.

The lawsuit, filed in October by four female and older human resources managers who lost their jobs, states that Dell executives manipulated performance ratings to justify terminations and informed them that there were no other available jobs at a time when there were open positions. The complaint is a virtual catalog of the legal issues that arise in layoffs.

The risks entailed in hiring during layoffs run along a continuum, Rosen explains. The lowest levels of risk occur at companies with multiple divisions that are not equally affected by the downturn. The company may lay off workers in an affected unit while still hiring in units that are not.

“There is no legal requirement that you must move people from one division to another,” Rosen notes.

The risk level is lower when a company lays off workers but then consolidates or modifies jobs and hires new workers to fill them.

But it rises when a company lays off workers from within a group of employees and simultaneously hires new workers for that same group without changing the skills required or the job titles.

“These actions need to be defensible,” Rosen cautions.

Although hiring during a layoff may trigger charges of discrimination based on race, gender or age, employment law experts generally agree that lawsuits based on a claim of age discrimination are among the most difficult to defend.

In any mass layoff, the employer should test for disparate impact on protected groups.

“If you are laying off employees with a disproportionate impact on those over age 40, you need to be prepared to explain why you are hiring and justify who you are hiring,” Rosen notes.

The matrix approach to structuring layoffs now common among employers often ranks employees on factors that include salary and performance. Historically, disproportionate numbers of older employees, who tend to be more senior and more costly, are swept into the layoff list.

The Supreme Court has made it clear that layoff and hiring decisions based on compensation costs can be defended, Rosen notes. Although it is illegal to discriminate against employees age 40 and over because of their age, it is not illegal to lay off those who are at higher salary levels, even if this policy has a disproportionate effect on older workers.

Hiring younger workers to replace older workers increases exposure to a lawsuit, however.

“The real issue is not just whether you will win or lose a case, but the odds that you are going to have to spend the money to defend a case,” Rosen says.

Cases may turn on whether hiring during a layoff causes a shift in workforce demographics so that the average age drops substantially.

“On pure numbers, it exposes the employer to age discrimination claims,” Rosen cautions. “That doesn’t mean you can’t do it, but you need to be prepared to defend both the layoff and the hiring decisions.

“If an employer lays off 10 employees who are over age 50 and costly and hires 10 who are under 30 at lower salaries, you can defend that. But this sort of one-to-one scenario produces the most glaring numbers, and I like a case where the numbers are not glaring.”

Business justification
A sharp increase in discrimination lawsuits triggered by recent layoffs is already apparent, according to Kevin Shaughnessy, partner at Baker Hostetler in Orlando, Florida.

“We’ve seen an extreme rise in claims nationwide, and not just age claims, but race and gender discrimination claims as well.

“Employer concerns about laying off older employees are well founded, but these actions can be managed. If money is the only issue and you can hire cheaper, you have to justify the disparate impact on older workers.”

Business justifications include the need to lower costs.

“The company can still be profitable, but it becomes more difficult to justify the layoff if there are no pressing economic factors,” Shaughnessy says.

Exposure to a lawsuit can be reduced if the employer considers the laid-off employees for the open positions and those positions can be distinguished from the jobs included in the layoff.

“If the job title is similar, employers must carefully evaluate the job description for the open position,” Shaughnessy notes.

Shaughnessy advises employers to keep careful records on the business reasons for the layoff, the selection process used and the difference between the jobs that were eliminated and the jobs where hiring is taking place.

“In a large layoff of thousands of employees, there is some safety in the numbers, and it is less likely that the company would have engaged in discriminatory actions,” Shaughnessy says. “Financial considerations are paramount.”

Shaughnessy notes, however, that laying off senior people and hiring new employees at lower salaries can undermine trust in the company. The remaining employees may wonder at what age they will be terminated.

“There is a tremendous morale upheaval during a layoff and this is exacerbated by bring in new employees,” he says.

Employers should issue effective communications to all employees.

“There should be an explanation for the layoffs and the new hiring that is taking place,” Shaughnessy advises. “For example, explain that one product line is not profitable and layoffs are needed, but another product line is profitable and requires a slightly different skill set from the first. This doesn’t end the angst, but it can go a long way to ensuring less upheaval.”

During a layoff, hiring new employees into consolidated job functions and reorganized job titles is more common than simply replacing older workers with younger ones in the same job, according to Lisa Cassilly, partner in Alston & Bird in Atlanta.

“The law does not prohibit restructuring to reduce pay for jobs,” Cassilly says. “What is important is the need for clearly defined, essential job duties. This is a fact-intensive issue, and the clearer the demarcations, the better. For the open positions, there must be identifiable minimum qualifications. It is also wise to post the positions internally.”

If an employer lays off older workers and posts openings for the same position at a lower salary, Cassilly suggests that the employer should identify the position and the compensation and offer it to more senior employees.

“If they are qualified and willing to accept the compensation, they can be retained or hired back,” she says. “There may be morale issues, however.”

If an employer is using a layoff to clean out low performers, Cassilly advises that the performance criteria for any open positions should be specified.

“Be mindful of the temptation to include performance-related reductions in a layoff without noting that they were performance related,” she says. “If data-gathering for the layoff includes performance considerations, be honest about that.”

When hiring for the open positions, Cassilly advises employers to clearly define the qualifications required and measure them against the performance record of the employees who were laid off.

“If there are attendance or productivity problems that the employer hopes to remedy, for example, the minimum attendance or productivity criteria should be noted,” she says.

Employers that provide severance payments may be able to reduce the risk of a lawsuit.

“It is possible that we may see fewer claims than in earlier downturns because more employers are conditioning severance payments on obtaining releases from the terminated employees,” Rosen notes. “Releases are not always effective, but they will preclude a portion of claims.”

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