As the possibility of a recession looms and an increasing number of companies are announcing significant layoffs daily, employers are contemplating reductions in force (RIFs) to manage financial uncertainty in the markets. While RIFs may be necessary to conserve financial resources and refocus business priorities, they come with significant legal and business risks that demand careful planning and consideration. Employers planning a RIF for their U.S. workforce should be ready to address crucial factors to navigate and possibly reduce the risks linked with a layoff.
1. Gather the Right Team and Create Confidentiality/Privilege Protocols.
To carry out a RIF successfully, it is crucial to have thorough planning and input from key stakeholders. The first step is to identify and engage the right team for planning the RIF, typically consisting of legal experts (both in-house and external counsel), HR professionals, and senior management. It is also important for employers to establish proper protocols for confidentiality and privilege. Leaks regarding upcoming layoffs or restructuring plans can be detrimental, leading to unnecessary rumors, decreased productivity, or even the departure of valuable employees. In addition, employers must ensure that they have proper documentation and protocols for the privilege to prevent the need to disclose privileged information, work product, or risk assessments related to the RIF in potential legal proceedings.
2. Consider Other Cost-Saving Measures.
Given the situation, employers should explore alternative cost-saving measures that could potentially avoid the need for a RIF. Such measures may involve reducing employee hours, implementing temporary furloughs, or offering voluntary separation programs. However, these alternatives come with their own set of risks. Depending on the specifics of reducing employee hours or furloughing, either option could trigger the federal Worker Adjustment and Retraining Notification Act (WARN) or state mini-WARN laws, resulting in the employer being required to comply with advanced notice requirements for layoffs that will be further discussed below.
3. Create and Document RIF Objectives and Selection Criteria.
Before seBeforeindividuals for layoff, employers should establish and document the business objectives and selection criteria that will be used. Although these objectives should be tailored to the unique needs and circumstances of the company, some common objectives may include reducing overall expenses by eliminating a certain percentage of headcount across the company or specific functions/departments or discontinuing a particular business line or product. The business objectives should be consistent with the reasons and criteria used to select employees for layoff.
Employers should also develop consistent and, as much as possible, objective criteria for selecting employees for layoffs, such as tenure, elimination of certain functions or roles, consolidation of functions to minimize redundancies, performance, and other business-related factors. The more objective the criteria, the easier it is to defend in the event of subsequent litigation. However, many RIFs involve some subjective criteria, such as performance. In such cases, employers can mitigate risk by creating ranking systems for managers to select employees based on the selection criteria. Developing and documenting a ranking system that employs consistent criteria for similarly situated employees in terms of roles, levels, departments, and other factors will be beneficial if an employer has to defend claims that the criteria were applied in a discriminatory or retaliatory manner or used to conceal unlawful selections.
4. Conduct Disparate Impact Analysis and Other Risk Assessments.
Once initial selections have been made for the RIF, employers should consider conducting a disparity analysis and other risk assessments under privilege with experienced counsel to determine whether there is a heightened risk of claims or other risks related to those individuals.
Regarding Disparate Impact, employers can be held liable under federal and state anti-discrimination laws if the process for selecting employees has a disparate impact on members of a protected class, such as race/ethnicity, gender, sex, or age, even if there is no evidence of intentional discrimination. Employers should work closely with experienced counsel and potentially labor economists or statisticians to conduct privileged disparity analyses. Depending on the size of the RIF, employers may need to conduct various statistical analyses to determine if there might be statistical evidence of disparate impact. Employers should not remove certain employees from the list based on their protected class if they identify potential disparity risks, as it could create the risk of reverse discrimination claims. Instead, employers should consider updating or revising the criteria for the RIF given the potential disparity risk.
Employers should also review whether employees selected for the RIF might have recently engaged in any protected activities that could result in potential retaliation or whistleblower claims. Employers should confirm whether employees selected for the RIF have recently complained of any unlawful or unethical conduct at the company or taken a protected leave of absence, such as leave under the Family and Medical Leave Act (FMLA) or military leave under the Uniformed Services Employment and Reemployment Rights Act (USERRA). Terminating employees who have engaged in such protected activities creates a potential risk that those employees claim their termination is retaliation for their protected activities.
If any of the employees selected for layoff are represented by a union, employers should carefully review any applicable collective bargaining agreements (CBA) and past practices to see whether they are obligated to follow certain procedures for selecting employees for layoff and whether there might be certain severance or other entitlements when laying off employees. Employers should also review any applicable employment agreements or offer letters for employees selected for layoff to understand any contractual obligations and avoid inadvertently creating a breach of contract claims.
Employers might also consider whether employees selected for layoff might present competitive risks or whether those individuals might be needed by the company after separation. If there are competitive risks, the company might want to assess what restrictive covenants are currently in place, such as nondisclosure, non-compete, non-solicit, and non-disparagement, and whether those covenants provide appropriate protections after the employee is separated. If such restrictions are lacking or have enforceability issues, employers should consider how best to mitigate those risks.
5. Determine if Federal or State WARN Laws Apply to the RIF
The federal WARN applies to companies with 100 or more employees and requires 60 days' notice for plant closings or mass layoffs that result in a certain number of employment losses. Employers must also aggregate layoffs that occur within a certain period to determine if WARN is triggered. Limited exceptions to the advance notice requirements are available but are often litigated. Employers should review the circumstances of their layoffs carefully to determine if they qualify for an exception, and even if they do, should still provide the WARN notices as early as possible. Working with experienced counsel can help employers determine to WARN coverage and create strategies for compliance.
6. Consider Offering Severance Packages and Drafting Separation Agreements
Employers should consider offering severance packages to employees impacted by a RIF, which can help reduce the likelihood of litigation, be viewed favorably by investors and acquirers, and soften the news of termination for impacted workers. The amount and type of severance can vary based on the employer's budgetary constraints, past practice, industry, and level of employees impacted. Employers should aim to create a fair and consistent formula for severance.
When offering severance, employers should draft separation agreements carefully to include a complete release of all claims that can be released under applicable law and comply with all applicable federal and state requirements for releases. Employers should also be mindful of special notice requirements that apply to releases of age discrimination claims for employees 40 years of age and older in a layoff. Separation agreements may also include other terms such as transition assistance, ongoing cooperation for litigation or investigations, or non-disparagement clauses, and employers may consider making severance contingent on compliance with any ongoing obligations.
7. Ensure Compliance with Offboarding Requirements:
Employers must be aware of state-specific laws regarding the payment of final wages, including unused vacation time. Certain states, such as California, require full payment to laid-off employees on their termination date, while other states, such as Texas, allow employers to pay final wages on the next regular payroll date. An employer’s obligation to pay unused paid time off depends on the state and its policies. Failing to comply with state requirements could lead to statutory penalties or potential claims that could result in liquidated damages and attorney fees.
Employers should also establish procedures to comply with state regulations regarding notices to terminated employees. For example, California requires employers to provide multiple notices to terminated employees, such as information on the state's programs for the unemployed and notice of continuation, disability extension, and conversion coverage options.
Employers should also consider protecting employees and company property and resources. They should develop measures to reduce the risk of harm and respond promptly to any negative reactions from workers, including damage to company property or electronic resources. Employers should also have a process for obtaining company equipment and confidential information from impacted employees.
8. Create a Communication Strategy:
Employers can reduce the risk associated with layoffs by having a good communication strategy before, during, and after a reduction in force. The way employees perceive how their employer handled the layoff can often result in legal claims. Employers should consider creating talking points and communications for announcing the layoff, conducting individual terminations, and responding to employee questions. These communications should be reviewed by HR, managers, and experienced counsel to ensure they have the proper messaging and avoid any statements that could be used against the company in litigation.
Employers should also consider creating a public relations strategy to respond to potential media inquiries or negative publicity. Publicly traded companies should consult with experienced corporate counsel to determine any government reporting obligations resulting from the reduction in force.
9. Finalize Logistics and Monitor:
Employers should choreograph the logistics of the layoffs before executing them. This involves ensuring that the communications strategy is in place and appropriate individuals are ready to announce the layoff, conduct individual termination meetings, and respond to questions from impacted employees, remaining workers, and the media. Employers may also consider holding a training session with a manager close in time to the RIF announcement to ensure they have the proper messaging and tools to respond to employee questions. These logistics should be planned as far in advance of the RIF as possible. Once the RIF has been announced, employers should continue to monitor the situation, have contingency plans for addressing threats or claims by impacted employees, and consider addressing poor morale among remaining workers.
10. Address International Issues:
Employers planning RIFs impacting employees outside of the U.S. must consider local laws that apply to RIFs, which can be complex and vary by jurisdiction. Employers may need to consult with employees or their representatives before carrying out any dismissals, negotiate severance packages with unions or works councils, and obtain employees' agreement to the termination of their employment. Failing to meet local law requirements can result in costly and protracted litigation, jeopardizing the RIF in some countries. Employers should consider obtaining local law advice before implementing any proposals for global RIFs.
