Managing a Reduction-In-Force Potential Issues, 0919 SCBJ, SC Lawyer, September 2019, #26

• Author: By Phillip A. Kilgore and James R. Silvers
• Position: Vol. 31 Issue 2 Pg. 26

Managing a Reduction-In-Force Potential Issues

Vol. 31 Issue 2 Pg. 26

South Carolina BAR Journal

September, 2019

By Phillip A. Kilgore and James R. Silvers

For years, your client, ACME, LLC, has been bullish on its business plan and the future. Strong sales. Double digit annual revenue growth. Strong market demand for services and products. Recognition by a regional business journal as a “Best Place to Work in South Carolina.” But then, you get the call from your client.

Whether due to a breakdown in negotiations between the United States and a trade partner, political unrest in a nation that has been an important market, a catastrophic event that disrupts the global economy, or some other event or trend beyond ACME’s control, its business takes a downturn. ACME must reduce its workforce by 35%. Immediately. How do you advise your panicked client?

Introduction

This example may seem extreme, but it is not unrealistic. De-spite a national economy with record low unemployment rates and interest rates, a downturn or recession could happen at any time. And an employer can find itself in need of a reduction-in-force (RIF), even in a good economy. Unfortunately, a RIF or layoff might be the only way to return to profitability, or even survive.

In addition, a RIF can occur in the aftermath of a merger or acquisition, to eliminate unnecessary or duplicative positions or functions. A RIF also may occur where a company has grown too fast and must right-size.

Whatever the reason, RIFs involve significant costs and can give rise to potential bad publicity. A poorly executed RIF will add to these costs, and it can spur lawsuits and cause a loss in productivity.

This article provides tools for implementing a systematic RIF process and an overview of legal issues surrounding involuntary RIFs.

RIF Procedures: Preparation and Execution

A. Planning and Preparing for the RIF

Navigating through a RIF can be a challenge, and employers should have a clear path mapped out in advance. Thus, planning and preparation prior to execution are critical. An employer will want legal counsel involved throughout the RIF process and especially until the list of to-be-RIFed employees (“RIF list”) is finalized. All documents generated in the RIF process should be designated “Attorney-Client Privileged” and/or “Attorney Work Product.” Once the RIF list is finalized, the notations should be reviewed, and any prior drafts held by anyone other than inside or outside counsel should be shredded, deleted or otherwise properly destroyed.

Below is a suggested model employers may use to reduce potential litigation.

1. Advance written RIF plan A well-written plan documents the clear business justification for the RIF and provides decision makers with consistent and meaningful guidance. Upper management should take the time to develop the explanation of the reasons for the layoff, under the supervision of counsel, in anticipation of litigation, with appropriate “Attorney-Client Privileged” and/or “Attorney Work Product” designations.

2. The decision maker Next, the employer should identify and designate the “RIF decision maker.” The RIF decision maker typically has functional leadership over affected units and should be an individual in a very good position to review the selections. The decision maker also should be someone able to explain the employer’s RIF decisions in court if necessary.

Employers may choose to rely upon more than a single RIF decision maker. While a single decision maker can foster consistent messages and articulate the grounds for selection, the employer may wish to insulate this manager against accusations of personal bias or animosity. Additional RIF decision makers increase the diversity of perspective and balance to the process. Multiple RIF decision makers, however, can create inconsistent explanations for selections, which would make a defense of the RIF more difficult.

If the employer is reducing a specific unit, it is best for the RIF decision maker to consult with the Human Resources representative for that unit. The RIF decision maker should have a firm understanding of the legal issues that may arise from the selections.

3. Layoff criteria

After choosing the RIF decision maker, it is time to identify the relevant layoff criteria. Objective criteria are easier to defend. For example, seniority-based, or “last in – first out” policies are easy to understand and leave little leeway for a jury to find unfair treatment. This method is also known as “forced ranking.” Subjective criteria or the “skills and abilities” ranking model, however, often is preferable to objective criteria. A subjective approach does increase legal exposure.

Many employers rely on annual performance reviews to rank employees for RIF selection. Although relying on performance ratings may seem to be an objective way to make layoff decisions, they often reflect individual subjective assessments. In fact, performance evaluation tools frequently measure mostly subjective criteria. Moreover, supervisors reporting to the RIF decision maker have varying views on how to score certain subjective criteria, such as “Meets Job Expectations.”

Relying on past evaluations has additional shortcomings. Supervisors sometimes issue annual reviews in positive terms, with a view to motivate, an objective that is irrelevant to the process of selecting employees for a RIF. Moreover, prior annual reviews evaluate past work and may not to address potential value for present and future needs.

If an employer intends to use subjective review criteria in the selection process, it might consider identifying those relevant to the skills and abilities needed for the future. Employers may wish to re-evaluate employees with customized criteria and re-rank all employees accordingly. If an employer chooses to utilize a new “skills and abilities” review, it is important to analyze prior annual reviews to identify and be able to explain inconsistencies with prior annual reviews.

Whether an employer intends to utilize a skills and abilities rating or a forced ranking approach, the employer should provide supervisors detailed and explicit written guidelines on completing such evaluations.

4. Staffing, policies and practices

An employer rarely implements a RIF in a vacuum. In developing its plan, the employer must consider the possible effect of its current hiring, promotion and transfer programs as well as its use of contingent workers. If such programs and hiring practices continue during or following the RIF, they can create unintended liability.

Once other employment programs are identified, the employer should determine whether they should be suspended or modified and create a well-understood plan to address workplace decisions. What if, during a RIF, the company has current vacancies for critical positions or may wish to offer transfers or demotions to good employees to fill positions to be vacated in the RIF? The plan should address whether there will be an internal job posting procedure and whether affected employees will have a placement preference over outside applicants. These concepts are discussed in more detail below.

5. Mitigation steps

A well-designed RIF plan also will include steps to avoid adverse reactions from affected employees and reduce the likelihood they will seek redress in the courts. These steps may include the communication plans, transition services and severance payments and agreements. These concepts also are discussed below.

B. Beginning Implementation of the RIF

1. Immediate staffing decisions

Before conducting a RIF of regular employees, an employer should evaluate whether current contingent staffing or employment practices and policies should be reviewed and modified. The employer may choose to implement certain staffing decisions at the start of the RIF process. These may include: • Eliminating leased or temporary employees. Retaining such employees while eliminating regular company employees has employee relations and legal implications.

• Imposing a hiring freeze before the RIF. Hiring individuals while terminating others will cast doubt on the business justifications for the RIF.

• Instituting a pre-layoff promotion and transfer freeze. A judge or the average juror will not likely understand why an employee was selected for elimination based on a performance-based rating after a recent promotion or transfer.

• Implementing a post-layoff hiring freeze for the affected unit. Again, credibility is the concern. The trier of fact will not understand why the plaintiff was selected for layoff, when someone is hired after the RIF for a position similar to the plaintiff’s.

2. Selection of proposed affected employees

While the employer may not know up front how many employees need to be laid off, it is critical to prepare a confidential and protected preliminary list of potentially affected employees. This list will change over time as the RIF preparation progresses.

3. Avoidance of disparate impact on protected classes A very common challenge to a justified RIF is a suit claiming discrimination on account of a “protected class,” such as age, race or gender. After preparing the RIF list, the employer should consider performing a disparate impact analysis. The objective of this analysis is to identify patterns that may show that the RIF has a disproportionate effect on employees in protected classes.

4. Preparation for supervisors

Finally, the employer should train supervisors to ensure an understanding of the employer’s financial position, the rationale for the RIF, and the company’s RIF programs and procedures. Supervisors should feel comfortable discussing the RIF with employees, understand likely employee questions and reactions and, if necessary, be prepared to assist in the actual termination. Supervisors also should have a general understanding of potential liabilities facing the company if employees are treated unfairly or discriminatory.

C. Executing the RIF

1. Communication to affected employees

Each affected employee should receive the final decision personally and privately, although an exception may be made if an entire facility or department is being closed. The statute of limitations for RIF-related decisions begins with the “clear and unmistakable” communication of the decision; mixed messages or implications of a quick turn-around can only create false hopes, cloud the situation and possibly toll the limitations period.

If the employee specifically asks about the selection process, those handling communications should generally describe the procedure used in making the selection decision. The company representative should avoid discussions about relative scoring or specific reasons an employee was selected for the layoff.

The message to affected employees also should include easy-to-understand explanations regarding severance pay, coverage under Consolidated Omnibus Budget Reconciliation Act (COBRA), and procedures for applying for unemployment compensation, outplacement assistance, and employee assistance programs.

2. Continued employment for certain affected employees

By now, the employer has a plan to address the prospect of offering some affected employees the opportunity to continue in employment after the RIF. If such jobs will be available, an employer can avoid claims based on failure to transfer by: • Informing employees of open positions;

• Allowing them to submit applications; and

• Considering each application carefully.

Company representatives handling the RIF discussions should be well versed on these opportunities to provide lawful and accurate responses to questions.

The employer might consider providing each affected employee with a list of open positions for which he/she may be qualified or offering to place “surplus” employees in open positions which exist at the time of the layoff. If employees question their selection for the layoff, the company representative(s) should be polite but maintain the employer’s decision.

3. Transition services

An employer can mitigate the legal risks of a RIF by having ready-to-implement transition programs to help minimize the effect of the RIF on impacted employees. Outplacement assistance to laid-off employees, for example, helps potential plaintiffs transition to new employment and reduce their losses, and evidences the employer’s good intentions, all of which reduce the chances of lawsuits or liability in the event of a lawsuit. The employer might consider having a staff counselor ready to provide affected employees with contact information for the state unemployment agency and help affected employees adjust to the notification.

C. Post-RIF considerations

Once the reduction is complete, important work remains. Post-reduction measures are equally important to maintaining a compliant, cost-effective RIF. Questions that were not answered in the initial notification meeting will arise. A variety of methods exists to address follow-up questions, such as a toll-free phone number, on-site information meetings, and written materials (e.g., FAQs regarding job retraining).

Affected employees will be upset and angry. An employer should consider possible precautions to deal with a disgruntled employee seeking retribution for perceived unfair treatment. Major risks include workplace violence, computer and e-mail sabotage, and release of confidential information.

Strategies to reduce legal risks

A RIF can create a legal mine-field for employers. It is not uncommon for an affected employee to allege that the layoff decision was not based on business necessity, but because of absences under the Family and Medical Leave Act, claims for workers’ compensation or military obligations. RIFed employees may assert that race, age, disability or other protected classifications under various anti-discrimination laws caused their selection.

The claim most frequently alleged in RIF-prompted lawsuits is age discrimination under the Age Discrimination in Employment Act (ADEA) and the Older Workers Benefit Protection Act (OWBPA). Employers can minimize potential liability by using seniority-based layoff criteria. The seniority-based criteria, however, are seldom consistent with a company’s operational needs. Many employers turn to criteria such as performance, skill or ability.

Other risks include claims under the Employee Retirement Income Security Act (ERISA) or the Worker Adjustment and Retraining Notification Act (WARN). These complex statutes give rise to expensive class action suits and can cause companies significant financial distress.

The following is a discussion of strategies for reducing legal risks.

A. The option to resign

It may be appropriate to give an affected employee the option to resign. As a legal matter, an employer is no better off if an employee agrees to a forced resignation or is discharged. Resignation, however, does allow the employee to say he or she resigned when applying for a new job. The sooner a former employee gets a new job, the less likely he or she is to dwell on the past and sue the company. And, even if the former employee sues the company, the interim earnings from a new job will reduce potential liability.

B. Severance packages

Employers frequently offer affected employees severance packages. Properly constructed, a severance program may limit the adverse effects of a plant closing or layoff. The components of a severance package typically include monetary assistance for the employee, generally based on length of service, in exchange for a written release of claims. Sometimes the package includes an incentive for employees to remain and provide an orderly transition. Severance plans (whether voluntary or involuntary) must be drafted and implemented very precisely, as they may invoke the protections of ERISA and OWBPA.

1. Severance pay

No law requires employers to give severance pay to affected employees. However, the employer should disburse severance pay if it has a past practice or written policy stating that it will pay severance. If the employer is not already obligated to provide severance, doing so reduces the economic effect of a termination on employees and lessens the likelihood of legal action against the employer. The severance pay can constitute consideration for a release of claims, discussed below.

2. Releases

Employers often try to preempt a discharged employee’s potential claim by obtaining severance agreements with release at the time of discharge. An employer needs to consider the risks associated with this strategy. For example, a request for a release may prompt an employee to seek legal counsel. The employer must provide independent consideration for a release, often in the form of a cash severance payment; the payment must be some benefit to which the employee would not otherwise be entitled. Moreover, the employer must assure that the employee knowingly and voluntarily enters into the release for it to be effective. This can be tricky, given that effective releases often involve extensive and legally complex language.

3. The Older Workers Benefit Protection Act

For employees over the age of 40, a release in a severance agreement must comply with OWBPA, which regulates releases of claims arising under the ADEA. OWBPA, together with the federal regulation (the “Regulation”) enforcing ADEA, imposes requirements for valid waivers of ADEA rights.

a. “Knowing and voluntary” releases

Under the Regulation, all waivers of ADEA rights must be “knowing and voluntary.” To be “knowing and voluntary,” a waiver must: • Be in writing. 29 U.S.C. § 1625.22(b)(2).

• Be drafted in plain language geared to the level of understanding of the individual waiving rights under the agreement. In the case of “Exit Incentive” or “Other Employment Termination Programs Offered to a Group or Class of Employees,” the waiver must be written in a manner calculated to be understood by the “average participant.” Therefore, if the “average participant” is not literate in English, the release should be translated into a language the participant can read and understand. 29 U.S.C. § 1625.22(b)(3).

• Not mislead, misinform or fail to inform participants of any advantages or disadvantages described in the document, nor exaggerate any benefits or minimize limitations. 29 U.S.C. § 1625.22(b)(4).

• Specifically refer to rights or claims under the ADEA. 29 U.S.C. § 1625.22(b)(6).

• Advise persons being asked to sign such waivers “in writing to consult with an attorney prior to executing the agreement.” 29 U.S.C. § 1625.22(b)(7).

• Not require the individual to waive rights or claims that may arise after the date the waiver is executed.

An age waiver is not effective unless the individual waives rights or claims in exchange for something of value to which the individual is not already entitled (e.g., accrued vacation or other earned benefits).

b. Minimum periods to review and revoke

An employee is allowed a minimum time-period to consider the agreement before signing. OWBPA and the Regulation apply to two types of waivers, each of which has a different time period. Employees offered waivers “in connection with an exit incentive or other employment termination program offered to a group or class of employees” (two or more employees), must be given at least 45 days to consider the offer. 29 U.S.C. § 1625.22(e) (1)(ii). All other waivers require a minimum 21-day consideration period to be valid. 29 U.S.C. § 1625.22(e)(1)(i).

Both types of waivers must provide the employee a revocation period of at least seven days to revoke the agreement. 29 U.S.C. § 1625.22(e)(2). The consideration period can be waived by the employee, but the revocation period cannot be altered, even by agreement between the parties. 29 U.S.C. § 1625.22(e)(5). The agreement is deemed neither effective nor enforceable until the revocation period has expired.

c. Specific informational requirements

OWBPA requires employers to provide certain information to eligible participants. For RIFs involving two or more employees, employers must provide: (1) the identity of group of individuals covered by the program; (2) any eligibility factors for such program; (3) any time limits applicable to such program; (4) the job titles and ages of all individuals eligible or selected for the program; and (5) the ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program.

29 U.S.C. § 1625.22(f)(1). The format by which this information should be “packaged” to eligible employees is open to interpretation.

Only employees who are asked to sign a waiver of ADEA rights must be given the eligibility/age information. Therefore, the employer is not required to give this information to employees under the age of 40 who are laid off and offered releases. In fact, employers need not include OWBPA language to laid off workers under the age of 40. As a practical matter, some employers use one agreement with the same language for all RIFed employees to ensure consistency and to avoid inadvertently presenting the “under 40” agreement to an employer over 40.

C. WARN Act issues

In advance of a RIF, certain employers should consider the legal requirements under the WARN Act. The WARN Act requires that qualifying employers provide 60 days advance notice of a “plant closing” or “mass layoff.” 29 U.S.C. § 2102(a). A qualifying employer is a business enterprise that employs either: (1) 100 or more employees, excluding part-time employees; or (2) 100 or more employees, including part-time employees, who in the aggregate work at least 4,000 hours per week, exclusive of overtime. 29 U.S.C. § 2101(a)(1)(A)-(B).

A “plant closing” is defined as the permanent or temporary shutdown of a “single site of employment,” or one or more “facilities or operating units” within a single site of employment, if the shutdown results in an “employment loss” during any 30-day period at the single site of employment for 50 or more employees, excluding any part-time employees. 29 U.S.C. § 2101 (a)(2).

A “mass layoff” is defined as “a reduction in force which (1) is not the result of a plant closing and (2) results in an employment loss at the single site of employment during any 30-day period for (i) at least 33% of the active employees, excluding part-time employees, and (ii) at least 50 employees, excluding part-time employees.” 29 U.S.C. § 2101(a)(3). Notably, when 500 or more employees (excluding part-time employees) are affected, the 33% requirement does not apply, and notice is required if the other criteria are met.

D. Benefit concerns following a RIF

Companies must also consider issues related to employee benefits.¹ For example, if an employer must provide a notice period under WARN, the employer must continue its current benefit plans. This is true even if the company has exercised the pay-and-benefits-in-lieu-of-notice option and excused employees from work (causing them to fall below the “active employee” requirements in its benefits plans).

If the employer has 20 or more employees, COBRA continuation coverage² must be offered to all employees and their covered dependents who will lose coverage due to the RIF. The employer has 30 days to notify the plan administrator of the termination of employment, and the plan administrator then has 14 days to provide a COBRA election notice to the qualified beneficiaries.³ Failure to provide timely notice may result in daily penalties under ERISA, per individual, for each day the notice is late and additional penalties under the Internal Revenue Code.

Employers should review their various insurance policies/plans to determine when coverage terminates. Disability insurance carriers are strict about coverage requirements that provide that an employee must be “actively-at-work” to be covered under the terms of the policy. Upon termination of coverage under insured welfare plans, a conversion notice must be provided. The plan will determine when notice is necessary.⁴

Conclusion

RIFs are complex and time consuming, and they involve much rough water that leads to costly litigation. Preparing your client and helping it stick to the plan will help minimize the potential damages from a RIF and make sure your client is still afloat when the weather clears.

Phillip Kilgore is the managing shareholder of the Greenville office of Ogle-tree Deakins where he focuses on employment and business litigation and helping clients find employment law solutions. James Silvers is an attorney at Ogletree Deakins in Greenville where he focuses on background checks (Fair Credit Reporting Act and mini-Fair Credit Reporting Acts) and reductions in force (ADEA, OWBPA, and WARN).

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Notes:

[1] If the employer has an ERISA-covered plan, an employee selected for a RIF or layoff could bring a discrimination claim asserting that he or she was discharged in order to interfere with his or her rights under the plan.

[2] 29 U.S.C. § 1162.

[3] If the employer is also the plan administrator, the employer has 44 days to provide a COBRA election notice.

[4] Typically, the election to convert from a group insurance policy to an individual policy must be made within 30 days of the date coverage terminates. Assuming coverage terminates on the last day of active work, we recommend that the conversion notice be provided at the time of termination.

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