Chapter 27 - § 27.4 • LAYOFFS AND REDUCTIONS IN FORCE
| Jurisdiction | Colorado |
"Downsizing" has become a fact of corporate life in America. Now more than ever, companies must consider the possibility of lawsuits as they consider whether to downsize, and, if so, how to structure their reductions in force (RIFs).
Although common law claims can arise from RIFs, the most fertile grounds for liability arising from RIFs are discrimination claims. Any individual in a protected class (e.g., age, sex, race) who loses a job in a RIF may contest the RIF on grounds of discrimination, either individually or on behalf of a class of similarly situated individuals. Consequently, in planning a RIF, companies should consider whether separations will affect these groups.
Although there is no foolproof way to avoid litigation completely (with the possible exception of basing decisions purely on seniority), employers considering a RIF can take several steps to minimize both the possibility of being sued and the possibility of an adverse verdict should a lawsuit occur.
§ 27.4.1—Planning A Reduction In Force
The key to any reduction in force is developing a sound plan and sticking to it. Employers who try to make things up as they go along, or who try to move too quickly without a plan, almost always suffer significant negative consequences.
Understanding and Articulating the Business Reason
Regardless of the type of claim a plaintiff who has been laid off in a RIF may assert, an employer defending such a claim must be able to articulate a legitimate business reason for the layoff. In discrimination cases, such a reason is necessary to overcome a plaintiff's prima facie case. In other cases, it simply may be a key element of persuasion for the jury.
Defensible reasons for undertaking a RIF include a lack of work or business downturn,67 a merger or consolidation of units,68 elimination of departments or jobs,69 and closing a plant.70 Courts generally will not substitute their judgment for the company's business reasons for making a decision, nor will they allow a jury to do so.71 Nevertheless, severed employees frequently attack employers' RIF decisions as being incorrect, poorly reasoned, or financially imprudent in an effort to demonstrate that a RIF is a pretext for discrimination or other forms of wrongful discharge. Accordingly, charts or graphs showing decreasing sales or demand for product can be compelling evidence to a jury. Similarly, reports discussing a poor financial outlook or a need to reduce labor costs to remain competitive usually will be sufficient to persuade a jury of a real need to reduce the size of the workforce.
Analyzing and Documenting Necessary Changes
Once the business need is identified and articulated, the employer must consider how many employees must be displaced to meet the company's goals. Goals or targets should be established. If possible, the employer should articulate the bases for determining the number of positions to be cut in each work unit.
Then, the employer should take a snapshot of its current workforce by gathering and maintaining department lists, organizational charts, employee lists, or any other documentation that can be used to evaluate layoff decisions as they occur. These documents may prove extremely useful in later litigation to demonstrate a "before" and "after" view of the company.
Next, using the reduction goals and current snapshot, the employer should determine whether cuts need to be made equally across the board, or whether some departments or work groups will be affected more than others. For example, a slowdown in sales may require cuts in production or manufacturing areas with no impact on the sales force.
Finally, the employer should develop an organizational chart depicting what it wants the company to look like after the RIF is complete. This will help the company test whether the new organizational structure will help achieve the business goals that the employer had in mind.
Voluntary RIF Programs
Voluntary resignation programs include early retirement incentive programs or enhanced severance programs. RIFs accomplished through voluntary resignations are much less likely to result in litigation than involuntary separations. At the same time, a company's best employees often take advantage of such programs because they believe they will be able to find a new job relatively easily, and they therefore view the offered severance package as a bonus.
The key to avoiding liability for voluntary reductions in force is to ensure that employees' decisions to quit or retire are completely voluntary. Eligible employees should be reassured that their refusal to participate in the program will not affect their future job prospects, positively or negatively. "Voluntary" resignations will be actionable if the employer engages in coercion or creates intolerable working conditions. Where an employee was given no alternative — accept the "voluntary" program or be discharged — courts are likely to find the program involuntary. See, e.g., Paolillo v. Dresser Indus., Inc., 865 F.2d 37, 40 (2d Cir. 1989).
Employers may limit eligibility to individuals in particular job classifications or facilities. Employers can and probably should reserve the right to reject participation by key employees or to reject applications if too many employees in a particular job or facility seek to participate.
Eligible employees must be given reasonable time to decide whether to participate. If legal releases are obtained in connection with such programs, as discussed below, the release must comply with the requirements of the Older Workers Benefit Protection Act (OWBPA), 29 U.S.C. § 626, to be a valid release of age discrimination claims.
Employers should document the voluntary nature of each employee's participation in the plan. If it is not possible to obtain a release, the company should, at a minimum, ask the volunteering employees to sign a document stating that he or she is volunteering for layoff.
Involuntary RIF Programs
Because of the many problems with voluntary RIF programs — chief among them the probable loss of many of an employer's best workers — most employers seeking to downsize opt for some form of involuntary termination program. In most circumstances, employers select employees for discharge based on a combination of such factors as performance, skills, and seniority, and offer some form of severance pay, usually in exchange for a legal release. Even more so than with a voluntary RIF program, planning and careful execution is essential for any involuntary RIF, both to limit legal liability and to protect the dignity of departing workers and the morale of those who will remain after the RIF.
RIF Selection Criteria
The key to an involuntary RIF, from the viewpoint of avoiding litigation, is to use valid, objective criteria to select which workers will be discharged. Clearly stated criteria, particularly when coupled with a thoughtful process for applying those criteria, will go a long way toward minimizing, if not eliminating, liability.
The employer should standardize the criteria for selecting individuals for layoff. The criteria should be applied in the same manner to all selected employees, absent some legitimate reason for treating groups of employees differently. Possible criteria include:
• Seniority. Seniority is the most defensible characteristic upon which to base RIF decisions. Most antidiscrimination statutes specifically allow the use of bona fide seniority systems. Frequently, however, the use of seniority does not achieve the desired results in that it may eliminate good, productive employees while protecting less productive workers....
• Positions and job functions. RIFs often involve the elimination of an entire function or work group. To the extent that the company plans to eliminate one entire area of its business, or to outsource an entire function (e.g., payroll or maintenance), the RIF decision generally is readily defensible if all employees in the function or group are discharged as a group, rather than selectively. Allowing individual employees to transfer to other positions outside the eliminated group raises a host of potential claims, and generally must be justified based on objective information concerning performance and skill.
• Employee performance. Documented poor performance is strong evidence against an employee's discrimination charge. Even "[m]isguided and unfair personnel assessments are not actionable under the ADEA unless age played a role in the evaluation." Robinson v. PPG Indus., 23 F.3d 1159, 1164 (7th Cir. 1994). Thus, properly documented concerns about employee performance often are a highly appropriate RIF selection criterion. To use this criterion, however, an employer must have done its homework before deciding to undertake a RIF. "Performance" evidence is of little value where an employer lacks predischarge documentation of performance problems, see, e.g., Dennison v. Swaco Geolograph Co., 941 F.2d 1416, 1421 (10th Cir. 1991); Lloyd v. Georgia Gulf Corp., 961 F.2d 1190, 1194-95 (5th Cir. 1992), or where employee performance has been evaluated without stated criteria. See, e.g., Hernandez v. Data Sys. Int'l, Inc., 266 F. Supp. 2d 1285, 1305 (D. Kan. 2003); Glover v. McDonnell Douglas Corp., 12 F.3d 845, 847-48 (8th Cir. 1994); Walther v. Lone Star Gas Co., 952 F.2d 119, 12 1-22 (5th Cir. 1992). Employers also will find trouble where: there is inconsistency between prior performance ratings and a rating given just before or at the time of the RIF; the employer failed to communicate unsatisfactory performance to an employee; performance criteria are used that imply age bias by using such terms as "potential" and "innovativeness"; and irrelevant or inappropriate criteria are used to evaluate employees.
• Skill. Often, the business reason for the RIF will cause some skills to grow in importance, whereas other skills will no longer be necessary. Again, however, predischarge
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