Nine Ways to Protect Your Company During Staff Reductions

By Paul Bressan

May. 8, 2008

In good times, companies tend to hire employees with abandon. With business on the rise, individual employee performance problems become less important than having a sufficient number of employees to handle the increasing workload. Problem employees are retained in the face of potential litigation over employment terminations.

    When business slows down and profitability turns, companies consider reorganization, which generally includes a reduction in staff—a layoff—to reduce fixed costs. The priorities change as companies seek to terminate those whom the company has “carried” for years, despite performance problems. Now the prospect of wrongful discharge litigation becomes an important economic consideration as the company weighs the two seemingly unattractive alternatives of either: (a) keeping the poorer performers despite the negative impact on the business, if their termination poses a threat of litigation, or (b) terminating the poor performers (thereby helping the business) in the face of potential costly litigation.

    Although there is no simple answer to this dilemma, companies faced with a downsizing can minimize the risk of litigation by taking the following steps in the reorganization process:

1. Consider the documents
    Most employees are “at-will,” permitting either the company or the employee to terminate the employment relationship with or without cause or advance notice. Nevertheless, some employees have employment agreements that may limit the ability of their employer to terminate the employment relationship, or that may provide for severance benefits in the event of termination. Likewise, an employee handbook or company policies may limit employee terminations or establish severance requirements in the event of layoffs.

2. Establish the reason for the layoff
    No employee welcomes his or her employment termination in a layoff. However, if an employee understands the need for the layoff—that the company is losing money, for example—the employee is more likely to accept the necessity for a layoff. Moreover, in certain types of litigation, it may be necessary for the company to establish a business justification for the staff reduction.

3. Determine the scope of the layoff
    The layoff may be companywide, but this is not necessarily true. For example, a company may see a need to reduce employees in certain departments, or at midmanagement levels, while perceiving a need to retain its current sales force.

4. Timing of the layoff
    In the majority of cases, companies that finally decide to implement a layoff want to accomplish it “now.” In fact, there may be good business reasons to keep an upcoming layoff quiet until the last minute, and to make the layoff effective on the date it is announced to the affected employees.

    However, federal law requires 60 days’ notice to affected employees if certain thresholds are met concerning the size of the employer and the number of affected employees at each work site. Generally speaking, if 50 employees are being let go in the reduction, the company must determine whether the 60-day notice requirement is triggered. There also may be state or local laws that impose notification requirements.

5. Selection of employees
    As stated above, employees generally will understand the need for a layoff if there is a sufficient business justification. However, it is not as likely that each affected employee will agree with his or her selection for termination. Accordingly, it is important for the company to make the selection process as clean as possible, by doing the following:

  • Establish the selection criteria: Job elimination is usually one criterion. For jobs that will remain with fewer employees performing them, companies generally select either seniority or performance as the guiding criterion. The former is more objective and generally results in a reduced risk of age discrimination claims, but sometimes results in keeping poor performers that have been carried for years. Using performance as the criterion is less objective and has a greater risk of litigation, particularly with respect to age discrimination claims, but results in retention of the best employees who are needed by the company to weather the storm of a downturned economy. Note also that selections based on performance must be consistent with performance evaluations.

  • Educate decision-makers on illegal considerations: The company should instruct the persons who will make the tentative selections for termination that there are prohibited considerations in the selection process, such as age, race, national origin, sex, disability and leave status.

  • Analyze the tentative selections: Before finalizing the tentative selections for termination, review them with labor counsel (a privileged conversation) to see if there are any hidden issues or traps. Also, analyze whether the planned layoffs will have an adverse impact on any group, such as workers over the age of 40, women or minorities.

6. Notification
    When the time has come to announce the reorganization, two notices are generally used: (a) a general notice to all employees regarding the reorganization and the business reason for the layoffs, and (b) a specific notice to the affected employees regarding the details of their separation, such as the time and the severance package.

7. Severance packages
    In the absence of a contractual commitment, the law generally does not require a company to provide severance packages to laid-off employees, and companies that are going through difficult financial times sometimes resist providing severance packages for economic reasons. Nevertheless, upfront severance packages tend to avoid later litigation costs, and therefore should be considered.

    Among other things, a severance package might contain all or some of the following elements:

  • A severance payment, usually based on years of service.

  • Payout of medical insurance (COBRA) premiums for a period of time.

  • Outplacement services.

  • A retention bonus, if and as needed.

  • A general release of claims by the terminated employee (including special release requirements for employees over 40 years of age).

    Moreover, companies should consider the possibility of relocation/transfer options, if applicable, and should consider helping terminated employees file for unemployment benefits.

8. Dealing with others
    In addition to notifying the affected employees, companies will need to determine:

  • How to respond to job reference requests.

  • How to notify customers of the changes.

  • Whether a press release is advisable.

  • How to handle the employees who remain after the reorganization, in the context of uncertainty and their increased workload and responsibility.

9. The overriding principle
    It is not just what you do; it is how you do it. Employees who are treated with dignity and respect in this difficult transition period are far less likely to seek legal redress for their termination than employees who receive a modern-day version of the “pink slip.” Designate authorized spokespersons to give the employees truthful information. Take time to deal with their problems as well as yours.

    There is no surefire way to avoid employment litigation in a staff reduction. However, the old adage “An ounce of prevention is worth a pound of cure” rings true here. Taking the time to follow the steps outlined above will minimize the risk of litigation, and will put your company in the best position to defend itself in any post-reorganization employment litigation.

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