Legal Implications of Reductions in Force
February 23, 2023
By: Frank Harty
Nyemaster’s Labor & Employment department hosts monthly Law & the Workplace webinars exclusively for Nyemaster clients. In a recent session, attorney Frank Harty outlined factors to consider when planning a workforce reduction.
The economy is cyclical. Although finding employees was the challenge a few months ago, some employers may soon need to reduce their workforces. The tech sector, financial services, and real estate development are already seeing layoffs. These sectors are the canaries in the coal mine that predict an economic downturn.
Employers can avoid some of the legal pain associated with a reduction in force (RIF) by implementing processes that limit the risks of discrimination claims.
A first step should be to consider whether a reduction in force is the best option. Less definitive cost-reduction efforts might achieve the desired goal:
- Voluntary retirement incentive plans (VRIP)
- Across-the-board salary reductions, especially when the employer is optimistic that the downturn can be overcome
- Reduced work hours
- A brief shutdown of a facility
- Reassigning certain employees
- Hiring freezes
Establish Selection Criteria
A majority of the reduction in force cases that make it into the courtroom are age discrimination claims. As a result, it’s vital to note the requirements of the Age Discrimination in Employment Act (ADEA).
Objective force-reduction criteria may offer protection from allegations of age discrimination. But employers may run into problems when using factors that appear objective but contain subjective elements. Typically, if performance evaluations go beyond productivity, attendance, and a few other measurable elements, they include subjective criteria. Evaluations that include the ability to work well with others or the ability to take direction, for example, are inherently subjective. Subjective selection criteria can be a legal problem.
Among the criteria employers use for a reduction in force:
Seniority: The bona fide seniority system provision of the ADEA allows employers a clear and legally safe method of job elimination. For employers with a seniority system, which includes most unionized workforces, a reverse seniority job elimination process is legally sound. It uses a last-in, first-out approach to job elimination. If employers adhere to a bona fide seniority system, even if a majority of the people who are laid off are older, the law builds in a safe harbor.
Compensation levels: Some employers attempt to reduce the payroll by focusing on high-compensation employees. While the courts do not equate employment longevity directly with age, an analysis before the final job-cut decision can identify any statistically significant anomalies.
Productivity: If implemented correctly, job elimination based purely on productivity is a fairly safe approach. The criteria consider how much money an employee makes for the company. This works best for salesforces and groups that are measured by defined productivity goals.
Pension eligibility: In theory, pension eligibility does not track directly with age. The courts do look long and hard at involuntary reductions in force that fall more heavily on individuals who are pension-eligible.
If it achieves an employer’s goals, it might be legally safer to consider eliminating a particular department or function. Clearly a factor other than age goes into the reduction-in-force plan in that instance. If an employer can use the organizational chart to identify and cut redundant positions, that is typically considered objective.
Maximize the Ability to Defend a RIF
The vast majority of claims, especially in the white-collar sector, are based in part on performance evaluations. A thorough and thoughtful process can help employers defend against discrimination claims.
Prepare an internal memo describing the plan and approach to the reduction in force. Write the memo with the idea that it might find its way into a courtroom. Draft it so you won’t be ashamed to see it blown up in front of jurors. The memo should:
- Make the business case for the RIF. Explain the business goals: business survival, profit level, shareholder return level, or other goal of the job cuts. Describe the approaches considered. If less definitive ideas were considered, list them.
- Identify the selection criteria. For example, note that you used attrition where possible. List and explain the specific criteria.
- Identify the selection procedures.
- Name the decision-makers. Make it clear who is making the ultimate determination about when the cuts are deep enough.
- Include guidance to evaluators. If evaluators have been trained over the years to focus on conscientious, task-oriented evaluations, the process will be less stressful. Still, provide written guidelines to those who determine which positions will be eliminated.
- Consider independent evaluators.
- Build in a due process standard. This helps avoid an evaluation pocket where one person’s approach is inconsistent with others. Consistency is key.
Focus on objective factors, such as skills and functions. Subjective factors raise red flags. For example, watch out for someone who wants to use a “reduction in force” to clean up their workforce. Maybe they have not made hard decisions about problem employees or bad employees. Human resources and legal professionals should make sure there’s a legitimate case for including these employees in the RIF based on the designated criteria.
Set Up Settlement Agreements and Releases
For employers, the only way to ensure a decision about a termination is “risk-free” is to get an employee’s signature on a signed enforceable release.
As the job action nears, clearly document both how the decision is going to be made and how it’s going to be carried out.
- Are you going to provide outplacement or other counseling services?
- How will employees be notified?
- Who is going to do it?
- When are employees going to be notified?
It’s always good to have legal counsel assist in drafting settlement agreements and releases. A technical analysis goes into the process.
The employee release:
- Must be in plain English.
- Must release only existing claims not future claims.
- Should handle some technical issues that your legal counsel can address.
- Must refer to the ADEA.
Keep in mind that a group incentive is defined as two or more job eliminations. If you have 20 or more employees covered by the ADEA, the Older Workers Benefit Protection Act (OWBPA) applies. That also changes the amount of time the employee has to consider the release. It may be a seven-day revocation period. But the consideration period might be 21 or 45 days.
When there’s a group incentive, a decisional unit disclosure is required. Titles and ages for those who were terminated and those who weren’t must be disclosed. The disclosure must be given to any employee who is terminated because of the RIF. The idea of OWBPA is that an employee can look at the disclosure and do their own statistical analysis. Using that analysis, an employee can decide if they see what appears to be age discrimination—and act on it if they choose.
Determining the decisional unit includes several factors.
- How broadly were job eliminations considered?
- Were job cuts company-wide?
- Was it focused on a department?
- Were a number of departments joined?
- Who is included?
In 2021, the Department of Labor issued a guidance about one aspect of counting the decisional unit. They instructed employers not to include foreign remote workers. They are not employees for purposes of the OWBPA, according to the Department of Labor.
Explore the Risks
As a near final step, do a statistical analysis or hire an expert to do one. Use it to bring out an anomaly that was unseen at first glance. The analysis should help point out if the RIF has a statistically significant disparate impact on a group, often older employees. You may decide to act. You may choose not to act if you feel good about the process used. The statistical analysis lets you know the risk is there.
Consult with your Nyemaster Labor & Employment attorney to ensure your reduction in force plan offers an acceptable level of risk.