Vance D. Miller, Robert A. Kaiser, John A. Vering, III, and Joan Z. Cohen, Editors
Armstrong Teasdale LLP

Vol. 18, No. 4
June 2008

REDUCTIONS IN FORCE

Avoiding legal pitfalls during a recession

John Vering

While economists might debate whether we are technically in a recession, there's no dispute that the U.S. economy lost almost a quarter of a million jobs in the first three months of 2008, and it appears that more layoffs are likely ― at least for some employers. A recent survey by HRhero.com showed that most HR professionals are concerned not only about morale problems in connection with staff reductions but also about allegations of discrimination that could arise from layoffs. Read on to see what steps you can take to minimize your risk of getting hit by a lawsuit if you have to undergo a reduction in force (RIF).

Consider alternatives to a RIF

Implementing a RIF during a recession creates the greatest hardship on employees because it throws them out of work at a time when there is limited hiring by other employers. As a result, you're wise to consider alternatives to a layoff, including a hiring freeze, a temporary shutdown of a facility or of certain job functions, reducing employee hours and/or overtime, reducing employee wages and benefits, retraining or reassigning employees, and voluntary early termination incentive programs.

Some of these options have pitfalls for the unwary. For example, if a company closes down operations for part of a week because business is slow, exempt employees would still have to be paid for the entire week. If it shut down for two days out of the week, an employee on Family and Medical Leave Act (FMLA) leave who was absent that week would only use three days, not a full week, of FMLA leave.

If you're pursuing a voluntary incentive program option, make sure the incentive is actually voluntary. Get help from experienced labor counsel in both drafting your program and making sure that releases comply with legal requirements, including the very detailed requirements of the Older Workers Benefit Protection Act (OWBPA), which we'll address later in the article.

Look before you leap into a RIF

When determining who will be let go in a RIF, note that objective criteria (e.g., dollar volume of sales by a salesperson) are more legally defensible than subjective criteria (e.g., gets along well with coworkers). It's usually a good idea to have legal counsel assist in conducting an adverse impact analysis and any due diligence before making a final decision about who will be laid off. Doing so will eliminate the sudden realization that you've laid off a disproportionate number of minorities or persons in a protected age group. Your due-diligence analysis should ensure that anyone who is laid off doesn't happen to have recently complained about discrimination or blown the whistle on alleged illegal activity at the company.

A case pending before the U.S. Supreme Court will likely resolve a dispute among the courts regarding whether the employer or the employee has the burden of proof in RIF cases when the criteria for selection are questioned by the employee. In those cases, the employee often claims that one or more criteria used in the RIF had an adverse impact on older employees. As expected, the employer usually contends that its decisions were based on reasonable factors other than age. However, until that decision is reached, it would be wise to assume that the burden of proof will rest on you, the employer.

Severance benefits

A determination needs to be made about whether to grant severance benefits to employees being laid off and, if so, how much. In recent years, employers have gradually reduced the number of weeks of severance granted in connection with RIFs to reduce costs. Some companies facing hard times pay no severance at all. When it is paid, it's sometimes conditioned on the employee signing a release of claims. As mentioned earlier, any such release should be drafted to comply with the OWBPA.

If the severance plan contains an ongoing administrative scheme, it will likely fall under the Employee Retirement Income Security Act (ERISA). When that's the case, the severance package must meet the requirements for an ERISA plan. However, if the employee is only receiving a one-time lump-sum payment of severance triggered by a single event, such as the need to reduce the number of employees, it's unlikely that the package will qualify as an ERISA plan.

WARN Act

The federal Worker Adjustment and Retraining Notification (WARN) Act and its regulations are quite complex. First, you must determine if you are a covered employer. If so, are you laying off enough workers that a WARN notice is required? In determining whether and when notice must be given, don't forget your obligation to look at past and potential layoffs within both 30 and 90 days. For businesses with a single site, a layoff of 50 or more employees during a 30-day period triggers the requirement for WARN notices. If multiple sites are involved, the period extends to 90 days.

In other words, the WARN Act sometimes requires an aggregation of separate layoffs that on their own would be insufficient to require a WARN notice. Some federal courts have been extremely strict in construing the wording of any release of WARN Act claims. Therefore, be sure your employment counsel has reviewed any release you ask employees to sign. Also, remember that some states have their own WARN Act. Examples include California, Illinois, New Jersey, and Maine.

Continuing obligations

Remind departing employees of continuing obligations they may have under a noncompete, nonsolicit, or nondisclosure agreement. If you are terminating an at- will Missouri employee without cause (e.g., lack of work), you may find that the noncompete agreement she signed when she was hired is no longer enforceable. To prevent a laid-off worker from competing with you, you should obtain a separate agreement from the employee in exchange for consideration (something of value).

You may also want to consider whether there might be a need to have the employee consult or give testimony in the future. If that's the case, it may be worthwhile to pay at least some employees an additional sum to obtain their agreement to consult or give truthful testimony in the future.

Releases

It's critical that releases be clear and understandable and that they comply with both federal and state law. Remember, not all claims can be released without government agency approval. For example, there are special requirements with respect to the release of claims rising under workers' compensation, unemployment compensation, and wage and hour laws. There's also a split of authority among the courts regarding whether claims under the FMLA can be released.

As part of the release and settlement agreement, consider whether you want a provision stating that the employee will not reapply to work for your company. While you can waive that stipulation if you like, you need to consider whether you would want certain employees to reapply if economic conditions improve and you need to expand your workforce. Without such a clause, the terminated employee could reapply and then sue you for not rehiring him.

You must be careful, however, not to include a provision barring the employee from filing an Equal Employment Opportunity Commission (EEOC) charge of discrimination or participating in an EEOC investigation. A court would likely find such a provision unenforceable and void as a violation of public policy. However, an employee can waive the right to recover in his own EEOC lawsuit. To guard against a dispute over the enforceability of the release, consider whether you want to require that any dispute over the release be subject to binding arbitration or whether you prefer to have it decided by a court.

OWBPA

The OWBPA requires that the waiver of federal age discrimination claims be knowing and voluntary, and it sets forth very detailed requirements regarding what "knowing and voluntary" is. If the waiver of claims is in connection with an exit incentive or other employee termination program in which two or more employees are essentially being offered the same type of package in return for a release or waiver of age discrimination claims, the individual employee is entitled to 45 days to consider the settlement agreement. Normally, when dealing with just one individual, the consideration period is 21 days.

In addition, if a release is being sought in connection with an exit incentive or other employment termination program, you must inform the individual in writing of the following:

• the group covered by the program;
• the eligibility requirements and time limits of eligibility;
• the job titles and ages of all individuals who are eligible or who were selected for the program; and
• the ages of all individuals in the same job classification or organizational unit who are not eligible or who were not selected.

Copyright 2008 M. Lee Smith Publishers LLC

MISSOURI EMPLOYMENT LAW LETTER is intended for general information purposes only and does not constitute legal advice. The reader should consult qualified legal counsel to determine how laws apply to specific situations.