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Legal Considerations for Workforce Reductions

people-woman-coffee-meeting.jpgSince the collapse of the U.S. economy several years ago, many employers have been in survival mode and/or looking to improve efficiencies. For that reason many cost-cutting measures have been put in place, including close scrutiny of the biggest costs attributable to employees—salaries and benefits. But reducing costs through terminations and layoffs can have a variety of adverse consequences. Employers must be aware of numerous employment and employee benefits laws when considering these drastic measures. 

Impact on Qualified Retirement Plans

A significant reduction in the workforce may result in a "partial plan termination" of the employer's 401(k) plan or other retirement plans. In addition, any amendment to exclude a group of participants from the plan could also trigger a partial termination. 

If a partial plan termination occurs, the plan must fully (100%) vest the accounts of all affected participants since the plan is treated as terminated with respect to those participants. A facts and circumstances test is applied to determine whether a workforce reduction will result in a partial termination of a retirement plan. IRS guidance indicates that if there has been a turnover of 20% or more of the workforce, a partial plan termination has occurred. Legal defenses are available to an employer when a partial plan termination claim is asserted, but the employer must be aware of this possibility when reducing the workforce. A gradual reduction of the workforce over the course of two or more years will also be factored into this determination. 

Employment Laws

There are several employment laws that must be considered before deciding to move forward with a workforce reduction. These laws include:

  • Family and Medical Leave Act (FMLA)
  • Americans with Disabilities Act (ADA)
  • Uniform Services Employment and Reemployment Rights Act (USERRA)
  • Age Discrimination in Employment Act (ADEA)/Older Workers Benefit Protection Act
  • Equal Employment Opportunity Act and other related laws
  • Consolidated Omnibus Budget Reconciliation Act (COBRA)

All of these laws could come into play when making termination or workforce reduction decisions. For example, if an employee is absent from work due to ADA, USERRA or FMLA, or was recently out on leave in accordance with one of these laws, there are significant legal concerns if you attempt to layoff or terminate that employee. 

When determining which employees will be terminated and/or laid off, an employer must ensure that the criteria used is non-discriminatory and does not create a disparate impact on a protected class. Employers often mistakenly use compensation as the sole criteria for determining which employees will be terminated. This approach is problematic because employees with the highest wages and in higher positions tend to be older with salaries that have increased over time. Discrimination issues are prevalent in these situations, particularly under the ADEA or state employment laws. To prevent age-related discrimination claims in workforce reduction situations, employers should ensure they are using objective, legitimate business criteria to make their selections. 

In addition to making termination decisions based solely on compensation criteria, some other common—and potentially costly—mistakes include the following. 

Failure to Give Advance Notice Under WARN: Larger companies (50 or more employees under Wisconsin law and 100 or more employees under federal law) have notice obligations under the state plant closing laws and the federal WARN act. These laws require large employers to give specified advance notice of a "plant closing," "business closing," or "mass layoff" as those terms are defined in the statutes. There are significant penalties for failure to provide this advance notice. 

Failure to Have a Written Layoff or Reduction of Force Plan and Process: The layoff or reduction in force (RIF) process should be in writing. It should be consistent, non-discriminatory and otherwise fair. Once a decision has been made regarding a particular position or department, there should be written documentation as well as a business need to support the decision to reduce the workforce. The written documentation should set forth the selection criteria and should be utilized throughout the process. 

Not Utilizing Severance Agreements Where Appropriate: Severance agreements are not appropriate in all situations, however, severance agreements serve to compensate the affected persons (some money is better than no money) and protect the employer if the agreement is signed since the agreement provides valuable releases to many, if not all, employment related claims. Employers should never offer compensation to a terminated employee without having the employee sign a severance agreement, or you may have just funded the employee's legal fees should he or she file suit against you. 

Calling a Termination a Layoff: Some companies are afraid to hurt employees' feelings when making terminations, so they label a termination as a layoff. Other companies continue to give poor employees good reviews or annual pay increases, thereby negating any opportunity to properly document performance-based terminations. Managers must be trained to give appropriate and accurate performance reviews. A termination for poor performance, violation of company policy or some other type(s) of misconduct is not a layoff. 

A layoff occurs when there is a legitimate business reason to eliminate a position or positions from the corporate structure, such as an off-season slow down. An employer loses all leverage when it structures a termination as a "layoff" or it fails to produce documentation exhibiting the poor performance.

Failure to Know Applicable Discrimination Laws: Older workers (those over age 40) are members of a protected class whose role must be assessed during the adverse impact analysis under any RIF process. Employers who offer older workers a release agreement (severance agreement) must also ensure that it is a "knowing and voluntary" release under the Older Workers Benefit Protection Act. 

The agreement must: 

  • specifically reference claims under the ADEA
  • offer an extended period to consider the release language in the agreement (45 days for "group terminations" and 21 days for individual terminations)
  • allow older workers 7 days to revoke the release agreement after signing
  • inform the older worker that he or she has the right to consult with an attorney prior to signing the release

These should be separate and distinct paragraphs in the severance agreement. Failure to provide this consideration and revocation language will void any waiver of the ADEA laws.

Generally, those over age 40 who are subject to a layoff due to a RIF are entitled to receive data under the ADEA laws. The employer must provide information about the ages (not the names) and job titles of the employees selected and those not selected from the group of employees considered during the RIF process. A group of employees is often a specific department, office location or job classification.

Employers must be aware of the numerous compliance and legal considerations before implementing any terminations or workforce reductions. If a terminated employee decides to sue, your decision suddenly becomes far more costly. 

Employers can reduce their liability exposure by purchasing employment practices liability insurance and thoroughly consulting with advisors up-front when facing difficult employment situations. 

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