Planning and Conducting a Reduction in Force
Apr 04, 2012 QuickCounsel Download PDF
By Jackson Lewis
Due to precarious economic conditions, employers throughout the country have experienced an unprecedented wave of voluntary and involuntary workforce reductions in 2010 and 2011. Although organizations may achieve short-term savings through an involuntary reduction in force (“RIF”), layoffs also entail hidden costs and legal risks. For example, large scale terminations can eliminate disproportionate numbers of older, female and minority employees, which can result in class actions and individual wrongful discharge claims. In addition, RIFs may trigger certain employer obligations under the Employee Retirement Income Security Act (“ERISA”), the Worker Adjustment and Retraining Notification Act (“WARN”), the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), and comparable state laws.
One way in which employers can reduce the legal risks inherent in terminating large groups of employees is by implementing voluntary attrition programs. Voluntary programs afford employees more control over their employment options, without requiring employers to undertake adverse employment actions. Voluntary programs also obviate the need to provide exiting employees with WARN notices. As a result, employers should consider the potential benefits of offering voluntary resignation or retirement incentives to their employees before implementing involuntary reductions in force.
Designing and Offering Voluntary Attrition Programs
Employers who seek to reduce personnel on a voluntary basis can do so by offering their employees the opportunity to participate in either an Early Retirement Incentive Program (“ERIP”) or a Voluntary Resignation Incentive Program (“VRIP”). The efficacy of either option often is influenced by the demographics of the employer’s workforce and the incentives the employer is capable of offering employees in return for their voluntary departure.
Employers with predominantly older workforces containing large percentages of employees nearing retirement age can offer employees assistance in making the transition to retirement by implementing an ERIP. Early retirement incentives often include defined benefit pension plan enhancements (e.g., accelerating eligibility for receipt of pension benefits by adding years to employee age and/or length of service), retiree health insurance coverage, and Medicare supplement insurance coverage (bridging employees from their participation in employer-sponsored health insurance plans to their participation in Medicare). While it is unlawful to use age as a basis for selecting employees for involuntary reductions in force, the U.S. Supreme Court has upheld the legality of offering favorable benefits to older employees on the basis of age. This precedent allows employers to use age as a criterion for offering favorable benefits to older employees in connection with ERIPs.
Employers who wish to offer employees incentives for leaving the workforce on an age-neutral basis can do so by implementing a VRIP. Employers can control the breadth of a VRIP by limiting program eligibility to employees on the basis of their length of service (e.g., offering the option of program participation to employees with a minimum of 10 years of continuous service). Voluntary resignation incentives often include severance pay, COBRA subsidies, pro-rata bonus payments, and outplacement benefits.
Employers can protect themselves from losing indispensible employees through voluntary attrition programs by retaining the discretion to reject applications for VRIPs and ERIPs as long as enhanced tax-qualified retirement plan benefits are not being offered to program participants. It is imperative for employers who sponsor ERIPs and VRIPs to condition the provision of all program benefits on the exiting employees’ execution and non-revocation of a general release. It is also imperative to implement voluntary attrition programs on a non-coercive basis. Employers can strive to promote voluntary participation in ERIPs and VRIPs by (1) providing eligible employees with sufficient time to consider the terms and conditions of program participation, and (2) refraining from predicting any adverse consequences for declining voluntary attrition program offers.
Planning for a Reduction in Force
When sufficient savings cannot be realized through the implementation of voluntary attrition programs, careful planning can help reduce the legal risks that accompany involuntary workforce reductions. The ongoing financial crisis, however, may make it difficult for employers to plan layoffs far in advance. Some key considerations for organizations facing the possibility of a RIF are:
Selecting Employees for Layoff
Selection should be based on quantifiable and objective job-related factors such as:
Employers should strive for an objective comparison of employees where job qualifications and skills are evaluated in making layoff determinations.
Disparate Impact Analysis
Under a disparate impact theory of discrimination, an employee may challenge an employer’s policy or practice that appears neutral on its face but disproportionately affects a protected group in application. After making initial selection decisions, therefore, employers should conduct a disparate impact analysis to determine whether there will be any disproportionate effect on a particular category of workers within a protected classification. If a disparate impact exists on the basis of gender or race, evaluate whether selection can be justified by business necessity, or in the case of older workers, by reasonable factors other than age. If not, consider alternative selections.
Employers can attempt to limit their potential liability by obtaining general releases from employees affected by a RIF, in return for enhanced severance benefits or other valuable consideration. Strict compliance with legal requirements is critical to the effectiveness of any release. Under the Older Workers Benefit Protection Act (“OWBPA”), for example, many procedural requirements must be satisfied before an employee's release or waiver of age discrimination claims under federal law will be considered enforceable.
A Note on WARN
WARN applies to employers that have, nationwide, 100 or more employees (excluding part timers), or 100 or more employees (including part timers) whose total weekly work hours (excluding overtime) are at least 4,000 per week. The Act requires covered employers to give 60 days’ advance written notice of a ""plant closing"" or ""mass layoff” to certain specified individuals and organizations. WARN provides limited exceptions to its notice requirements, including an exception for business circumstances that were not reasonably foreseeable at the time the notice would have been required and a limited “faltering company” exception.
Similar statutes are found in California, Hawaii, Illinois, Kansas, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Tennessee, Virginia, Washington, Wisconsin, Puerto Rico, and the U.S. Virgin Islands. In addition, some cities and municipalities have enacted plant closing ordinances.
There are many other issues that employers should consider in undertaking workforce reduction programs. After completing a voluntary attrition program or an involuntary reduction in force, management should take affirmative measures to optimize the Company’s stronger and leaner position and to motivate remaining employees to meet new challenges. This QuickCounsel provides an overview of the issues in-house counsel must consider before implementing any reduction in force program.
Reprinted with permission from the Association of Corporate Counsel
2010 All Rights Reserved
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