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September 20, 2021

Managing Employment Issues Through Crisis

In times of crisis, employers often look at reducing labor costs. Throughout the COVID-19 pandemic, employers have used cost-saving measures such as compensation freezes and reductions, delayed bonuses and benefits, reduced work hours, and temporary furloughs. Of course, employers have also found it necessary to reduce headcount on a permanent basis.

While many businesses were compelled to take these steps early on in the COVID-19 pandemic, grants, moratoriums, and other governmental programs and interventions have provided sufficient support to allow many businesses to continue on without having to implement these measures. Although these programs will certainly sustain many businesses through the COVID-19 pandemic and allow them to carry on as before, others will suffer more lasting effects with lingering business and financial issues still to be dealt with. Now that these programs are winding down, many businesses in this latter group will again be grappling with decisions regarding workforce downsizing.

All of these decisions should be undertaken carefully. For example, reducing pay, benefits, or hours must be implemented in compliance with federal and state wage and benefit laws. These decisions may also have significant nonlegal consequences, such as unduly undermining employee morale as well as the employer’s ability to recruit and compete when conditions improve. Reductions in force where affected employees have no expectation of recall pose the greatest risk and require careful advance planning and implementation.

Voluntary Reductions

Prior to selecting employees for involuntary separation, an employer should consider whether a voluntary reduction program could meet its objectives. Voluntary programs typically involve offering exit incentives to employees who choose to resign. As a condition of receiving severance pay or other benefits, the employee is required to sign a release of claims.

Although voluntary programs reduce legal risk and are generally viewed more favorably by the workforce, there are some drawbacks. Because exit incentive programs are offered to a category of employees rather than selected individuals, the employer loses some control. The employer will not know in advance how many employees will elect to participate in the voluntary plan, and it may lose some of its higher performers. There is also the risk that not enough employees will elect to participate and the employer will still be in a position of having to conduct involuntary terminations. Finally, the employer will have to offer enough of an incentive that employees actually decide that it is in their best interests to leave employment.

Involuntary Reductions

Selecting employees for reduction affords the employer control, but presents the greatest risk of legal liability. Beginning with the reasons for the decision to reduce headcount and at each step of the process thereafter, the employer should document its analysis and decisions in order to have real-time evidence in the event of a legal challenge.

The Selection Process

The employer should have a methodology for selecting employees. For example:

  • By seniority
  • Position consolidation or elimination
  • Job knowledge and skills
  • Performance-based analysis
  • A combination of factors

The employer must be prepared to defend its selection criteria. Using objective criteria (e.g., selecting employees in reverse order of seniority or eliminating an entire function) pose the least amount of risk. By contrast, using subjective criteria, (e.g., performance alone) brings more risk in the event of a legal challenge.

Reviewing the Planned Reduction
 
Once the employer has tentatively selected employees for reduction, it should carefully review its decisions. Where possible, reviews should be done by managers who were not responsible for the initial selection decision. The employer should review each individual decision to ensure it is justifiable. For example:

  • Were performance ratings done by a “tough grader,” and can they be fairly used as a means for comparison?
  • Did the decision makers improperly consider or fail to take account of factors such as protected leave status or protected conduct (e.g., complaints of discrimination, harassment, or safety issues)?
  • Can the employee argue that the decision makers considered membership in a protected class (e.g., age, disability, gender, race, sexual orientation, etc.)?

The employer should also review the layoff as a whole to determine whether its decisions have a disparate impact on a protected class. For example, have a disproportionately large percentage of older employees been selected? If so, the employer should conduct further review to ensure that it will be able to show that its decisions were based strictly on legitimate business reasons.

Offering Severance

Most employers conducting a reduction in force offer severance benefits, such as severance pay, continued health insurance, outplacement services, or all of these, where possible. Before conducting a reduction in force, employers should check any preexisting severance plan and decide whether to follow that plan or modify it. Employers should also check their employment agreements to see if individuals are entitled to severance pay.

Where employers are not obligated to provide severance by plan or contract, they may choose to do so voluntarily. Most often, employers providing voluntary severance pay require a release of claims from the employee.

Obtaining a Release of Claims

Employers may ask departing employees for a release of claims in exchange for severance pay, continued health insurance, or anything else of value to which the employee is not otherwise entitled. Under the Older Workers Benefit Protection Act, special rules apply to releases for employees over 40 years old. Generally, these releases:

  • Must give the employee separated in a reduction in force 45 days to consider the release (21 days if only a single employee)
  • Must give the employee seven days to revoke the release after signing it
  • Must specifically identify the Age Discrimination in Employment Act of 1967 as a released claim
  • Must inform the employee of the right to consult with an attorney

Required Notices

Employers conducting a reduction in force should determine what notice obligations they may have. The Worker Adjustment and Retraining Notification (WARN) Act requires a covered employer that closes a facility or lays off a sufficient number of employees to provide 60 days advance notice to the affected employees, any union, and state and local government. Many states have mini-WARN Act requirements that apply to smaller employers not covered by the WARN Act. Unionized employers should also understand their notice and bargaining obligations under their collective bargaining agreements and the National Labor Relations Board Act.

Other Employee Termination Requirements

Finally, employers should plan to comply with all other employee termination requirements, such as paying wages and accrued vacation on a timely basis and providing notices regarding COBRA and unemployment benefits.

In times of crisis, business owners taking action to address employee issues must be mindful of the impact on virtually all facets of operations and their businesses’ legal and regulatory environments.

Barclay Damon’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area issues alerts on an ongoing basis to keep clients and friends up to date on important developments in the insolvency space. If you have any questions regarding the content of this alert, please contact Lizz Acee, partner, at eacee@barclaydamon.com, or Dan Blake, partner, at dblake@barclaydamon.com, both members of Barclay Damon’s Labor & Employment Practice Area. Alternatively, you may contact Janice Grubin or Jeff Dove, co-chairs of the Restructuring, Bankruptcy & Creditors’ Rights Practice Area, at jgrubin@barclaydamon.com and jdove@barclaydamon.com, respectively, or Robert Wonneberger, partner, at rwonneberger@barclaydamon.com, for other Restructuring, Bankruptcy & Creditors’ Rights questions.

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