Layoffs are unpleasant and disruptive at best. But handled badly, a layoff can harm morale, reduce productivity and even lead to employment discrimination lawsuits.
Before deciding to let employees go, determine whether a layoff is truly necessary. Other personnel changes may trim costs enough to let you avoid layoffs. These changes have the further advantage of minimizing the risk of employment discrimination claims, minimizing workforce disruptions and helping you keep valuable employees available for when the economy turns around. Steps you can take to reduce employment costs without resorting to layoffs include:
- Imposing a hiring freeze
- Terminating employees with performance problems
- Freezing wages
- Reducing benefit costs through benefit reductions, cost-sharing with employees or both
- Reducing work hours and pay proportionately
- Job-sharing
- Offering incentives to early retirement.
If these steps won’t cut staffing or costs to desired levels, proceed carefully before making any layoffs. The following pointers will help you ensure layoffs are handled fairly, minimizing loss of morale and helping you defuse any charges of employment discrimination:
- Document the reasons why the company needs to make a reduction in force (RIF).
- Determine the goal for the RIF. How much money does the company need to save? How many positions will it eliminate?
- Determine the essential functions of the company and the skills needed to perform them.
- Determine the criteria you will use for making layoffs. Legitimate criteria include: length of service (last in/first out), importance of the job function (eliminating inessential positions or departments) and employment class (i.e., eliminating an entire class of employee, such as part-time, temporary/seasonal or contract workers).
- Consider the impact of layoffs on protected classes of workers. Terminating only workers with low seniority might affect women and minorities disproportionately, which could lead to class action discrimination lawsuits. Likewise, focusing layoffs on older workers may run afoul of federal age discrimination law. The Age Discrimination in Employment Act (ADEA) prohibits forcing employees out at an arbitrary “retirement age”—they can continue to work until they can no longer do their jobs. You can offer incentives to encourage workers to take early retirement; just be sure to offer the same benefits to all employees. Offering higher benefits to workers over age 60, for example, could be seen as discriminatory.
- Determine if plant-closure laws, such as the federal Worker Adjustment and Retraining Notification Act (WARN) or state laws requiring notice to laid-off workers apply. Generally, WARN requires most employers with 100 or more employees to provide notification 60 calendar days in advance of plant closings and mass layoffs. Employees entitled to notice under WARN include managers and supervisors, as well as hourly and salaried workers. WARN requires that notice also be given to employees’ representatives, the local chief elected official, and the state dislocated worker unit.
- Determine how layoffs will affect benefit plans, including pension and health benefits. Determine what notices laid-off employees will require. Layoffs may also cause partial terminations of your benefit plans, which may require reporting under ERISA.
- Consult an employment attorney to review your RIF strategy and communications before making layoffs.
- Review your employment practices liability insurance (EPLI) coverage. EPLI policies cover employment-related lawsuits; however, some insurers exclude downsizing- related claims from coverage. Other insurers have begun to require more due diligence from insureds before they will cover claims resulting from downsizing.
- Check your EPLI limits. A 2008 survey of private company liability risks found that the total cost, including judgments, settlements, fines and legal fees, of an employment practices liability-related event averages $63,114.
Handling layoffs in accordance with the law and with sensitivity can prevent many of the mistakes and misunderstandings that lead to discrimination lawsuits. Please call us for an analysis of your employment practices liability exposures.