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Considerations for Employers When Downsizing

Sponsored by Dickenson, Peatman & Fogarty

By Brandon R. Blevans

You need not subscribe to the most erudite of publications to know that many companies are struggling with real-world impacts of the economic downturn. Businesses around the country are tightening belts, shedding headcount and looking at other cost-saving measures they hope will help them weather this current economic storm. And as the unemployment numbers tell us, many businesses are resorting to workforce reductions to save on that big-ticket cost: labor.

Before engaging in a workforce reduction, however, there are a number of legal considerations a company must think about to ensure it can achieve cost savings without unnecessary legal backlash. The following outlines a number of these considerations.

Reductions without WARN-ing?

For companies with 100 employees or more, the federal WARN (Worker Adjustment and Retraining Notification) Act may require at least 60 days’ notice of proposed layoffs to affected employees and certain federal, state and local government agencies. The notice requirements are triggered in the event a company undergoes a cessation of operations, a plant closure or a “mass” layoff, which is defined as a loss of employment of at least 50 employees and one-third of the workforce in a 30-day period. A company can’t avoid the notice requirements by spreading the layoffs out over time, as the regulations provide that the 30-day period can be replaced with a 90-day lookback period if the same lack of work or lack of funds is the cause of the loss of employment. Although federal law has an exception when an entity is seeking financing but becomes unable to obtain it, the exception is narrow and isn’t available under California’s state WARN Act.

California’s WARN statute applies to companies with 75 or more employees. Like the federal WARN, it applies in the case of a mass layoff. However, such a layoff is defined as 50 employees in a 30-day period; it contains no one-third of the workforce requirement.

In the event your company is considering a mass layoff, you need to begin planning for the notice requirements well in advance. Alternatively, you should consult with counsel to determine if the structure or location of the employment losses can avoid notice altogether.

Group severance programs

Many companies who find themselves laying employees off through no fault of the employee provide severance payments to those losing their jobs. In doing so, most employers obtain a “release of all claims” to ensure the departing employee isn’t getting a large severance check just to turn around and sue the company over the termination or some other issue that arose during employment. If you use such agreements, you should be aware of the following potential pitfalls.

First, if you want a waiver of all claims, the agreement needs to waive the employee’s rights under Section 1542 of the Civil Code (which otherwise protects against a waiver of unknown claims).

Second, if you intend a waiver of age discrimination claims for those over 40 years old, to do so requires certain language and disclosures under the Age Discrimination in Employment Act. The employees need to be advised to consult with an attorney, given 45 days to review the agreement, provided with a seven-day revocation period, and be provided with demographic data identifying those employees who were considered for the layoff program (identified by job title and age), as well as those who were ultimately chosen for the program (identified by job title and age). A failure to appropriately provide this information can result in the release being unenforceable.

Third, your release agreement should make clear that the employee’s final wages are not being withheld until the agreement is signed. Under California law, it is illegal to condition payment of wages on the signing of a release. Accordingly, employees should be provided their final paycheck separate and apart from the agreement, and advised in the agreement that they can keep that check even if they decide not to accept the additional severance package.

Fourth, if you’re terminating a number of employees as part of the same reduction, you need to make sure you’re not “accidentally” discriminating. This occurs when you use a facially neutral factor to determine who gets let go (like salary or last hired), but it turns out to have a statistically significant impact on a protected status (age, race or gender, for example). Once the preliminary determination is made about who’s going to be terminated, a cross check should be done to ensure no such disparate impact affects a particular protected class.

Choose your words wisely

Words have meaning and, more important, the words used to inform someone of the workforce reduction can create expectations. In this context, companies need to use caution when calling the reduction a “layoff” as opposed to a “termination.” The former term (layoff) can create an expectation on the part of the employee of a right to recall back to work when business conditions improve. Accordingly, to mitigate against potential lawsuits based on a failure to rehire, unless a company intends to rehire those involved in the reduction, it should categorize the loss of employment as a termination for lack of work. To completely guard against recall expectations, terminated employees should be expressly told there is no right of recall.

It’s never easy to have to make the choice to reduce your organization’s workforce. But while no one likes the process, avoiding a proper and detailed analysis of the situation will likely result in additional cost and pain for the company. With a little planning and some guidance, you can lower the angst associated with the hard decisions required by these tough economic times.


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