05Jan

Managing the Risks of Employees Who Use Machinery in the UK

A company that employed grounds workers in the U.K. instructed the employees to wear ear protection as they went about their work using lawn mowers and other loud machinery. However, several employees still ended up filing claims for reported hearing loss related to their noise exposure at work. The company had done the proper risk assessments and provided protective equipment. But the company was still found liable.

“They were liable there because they weren’t enforcing the use of them,” said Kate Donachie, an attorney with Brodies in Edinburgh, Scotland. “Employers have to do everything they can to make sure that employees are kept safe, and that means even challenging employees who wouldn’t keep themselves safe.”

Know Your Machinery

Managing the risks of employees who use machinery in the U.K. requires, first, an awareness of the kind of machinery in use.

“All machinery is not the same, so a piece of machinery that would achieve the same thing might have different risks attached depending on how old it is,” Donachie said. “The key thing is to understand what your employees are doing and what risks [they] are exposed to as a result of that.”

For example, information is usually available to employers about any machinery that can cause damage through noise or vibration.

“You should have manufacturer’s information available for that in terms of how much vibration it transfers per minute … and then it’s back to understanding what you’re asking your employees to do. How long do they spend using the equipment? How do they use the equipment?” Donachie said. “Employers might not be aware that their employees, for example, are using a piece of machinery for as long as two hours a day. … What does that look like across the course of a week or a month? So, it’s gathering the information.”

Conduct a Risk Assessment

Completing a detailed risk assessment should be a second step for employers that have employees using potentially dangerous equipment.

“For any automated equipment, risk assessment is absolutely vital,” said Ross Whalley, an attorney with Leigh Day in Manchester, U.K. “From the risk assessment, you have to consider who might be harmed, what level of harm may be caused, evaluate what those risks may be, record those findings and put in place control mechanisms to reduce the risk of that harm occurring. The greater the harm and risk, the more onerous the control mechanisms ought to be.”

It’s also important to train workers and communicate company policies clearly.

“Employers should set out a policy for how they approach health and safety in their business, which must be shared with employees,” Whalley said. “The employees that are going to be charged with using the machinery and those charged with repairing or maintaining it need adequate training, and the responsibility’s on the employer to train or provide suitable safety information and ensure those employees are appropriately trained to deal and come into contact with machinery.”

Track Potential Damage

After the risk assessment is in place, it’s also necessary to make sure employees are following through with policies.

“You have to make sure they understand why and what they’re being asked to do, but beyond that, you have to have supervision and discipline,” Donachie said.

Sometimes, monitoring devices can be put in place to track vibration or sound exposure. Also, health monitoring can be a key component of risk assessment and risk tracking. So, for machinery that can cause hearing damage, it can be important to check the hearing of an employee before they begin work and at regular intervals throughout their employment.

“You would have that monitored on a regular basis so that you could pick up on any deterioration,” Donachie said. “Health surveillance is a key strand to the main strategy to protect employees.”

Consequences for Noncompliance

Consequences for employers that fail to keep employees safe when using machinery can range in severity.

“If it’s sufficiently severe, [companies] might find themselves prosecuted, and that could be a very significant fine,” Donachie said. “If it’s not severe enough to warrant a criminal prosecution, HSE [the U.K.’s Health and Safety Executive] can place a notice on the business saying you cannot do this kind of work until you sort it out.”

In some cases, punishment could include imprisonment or a suspended sentence.

Companies can also be sued by injured parties. “It used to be that if you breached health and safety legislation, there was an automatic right to damages and civil claims. Now, that’s been decoupled,” Donachie said.

In 2013, the U.K. government implemented the Enterprise and Regulatory Reform Act 2013, which diluted the applicability of health and safety legislation to employers.

“It sought to reduce the perceived burden of red tape on employers and businesses by turning previous health and safety legislation into guidance only,” Whalley said. “I think it was a huge setback for health and safety laws in England and Wales. The cases for injured parties against employers are now much more challenging to prove in the civil courts.”

Ultimately, it is the employer’s responsibility to put in place policies and monitoring that keeps employees using machinery safe.

“There has to be a positive culture toward keeping people safe,” Donachie said. “I think culture has to come from the top, that being a really serious buy-in at the top of the organization.”

Katie Nadworny is a freelance writer in Istanbul.

Article Source: https://www.shrm.org/resourcesandtools/hr-topics/global-hr/pages/uk-managing-the-risks-of-using-machinery.aspx

05Jan

Can a U.S. employer engage someone living in another country as an independent contractor?

Similar to the United States, most countries have laws and regulations surrounding self-employment, and misclassification of employees and independent contractors can be costly. U.S. employers cannot just assume they can pay an individual living in another country to perform work for them in that country without establishing an employment relationship. Even where self-employment is found to be the accurate classification, taxes and fees may still be due in other countries. Before engaging independent contractors outside of the United States, the employer’s legal counsel should conduct a careful review of each country’s requirements.

While a full review of every country’s requirements is beyond the scope of this article, there are some commonalities to be aware of.

Income tax reporting. While few other countries have reporting requirements like the U.S. 1099 Form, these requirements need to be reviewed in every location. Even where no such reporting requirement exists, many countries charge an income tax or “service fee” to be withheld by the employer and paid to the country in which the work is performed.

Establishment of a local presence by the employer. Some countries will not allow contractors to work for employers that do not have a local presence in that country. If this requirement is not followed, employers will have engaged employees, not contractors, and may have set up business without proper filings and permits.

Registration as a sole proprietor. Some countries require self-employed individuals to register as a sole proprietor. While this burden is normally placed on the contractor, practices should be put in place to be aware of these requirements and require proof of registration from the contractor.

Contractor versus employee requirements. As in the United States, most countries have requirements related to self-employed independent contractors. While these requirements vary from country to country, some general criteria include the following: 1) who has control over how the work is performed, 2) does the contractor have other clients and assume a risk of loss, 3) is the contractor paid for the project or for hours of work, 4) are benefits given, such as vacation and sick leave, 5) do contractors make their own schedule and supply their own work location and supplies. These criteria are not much different from U.S. independent contractor laws, but the variances by country need to be examined closely for compliance.

Employers should ensure that independent contractor relationships adhere to local requirements. Penalties for misclassification can be higher than in the U.S., going beyond back taxes, social security payments and benefits due, and may include back pay for vacations, severance pay, notice pay, levied fines and perhaps even a case for unlawful termination, should the termination not meet country requirements.

Article Source: https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/engagingindependentcontractorsabroad.aspx

05Jan

Designing Global Compensation Systems

Overview

An international assignment compensation system has to finely balance adequately rewarding and motivating expatriates while keeping costs under control for corporate headquarters. The cost of a three-year international assignment can easily exceed $3 million.

Because of the enormous investment, developing a comprehensive global compensation system for expatriates is one of the most critical challenges facing global human resource management.

Developing a Compensation Philosophy and Strategy

Companies with multinational operations need to develop compensation plans for employees that are in line with their global business strategy. Companies that articulate a clear global pay philosophy and develop corresponding compensation programs are best positioned to effectively execute their strategy. An effective global compensation strategy creates consistency in pay management and facilitates global employee mobility. See Viewpoint: Cross-Border Considerations for International Executives.

Establishing guidelines and practices with consistent communication of key messages is vital to the success of the compensation program.

Although multinational employers are striving to globalize their compensation practices, local and regional approaches to international pay are still most common.

Approaches to Global Compensation

International assignment compensation has many moving parts and is difficult to standardize. Many factors affect the compensation of a particular expatriate, including assignment type and length, location, family needs (if any), and benefits. The main compensation items for expatriates involve base pay, cost-of-living adjustments, housing allowances, home leave, education assistance for dependents and premium pay. See How Should We Compensate an Employee on a Foreign Assignment?

The U.S. Department of State indexes the living costs abroad, quarters allowances, hardship differentials and hazard pay allowances. The information, published quarterly, is used by many organizations to assist in establishing private compensation systems. See Salaries, Cost of Living and Relocation.

While the U.S. Fair Labor Standards Act does not apply to employees working outside of the U.S., employers must be familiar with the host country’s labor laws.

See:

Do U.S. employment laws apply to U.S. citizens working abroad?

The New UAE Labor Law—What You Need to Know

Multinationals Strive to Meet Stringent Pay Equity Requirements

Compensation Plan Elements

A global compensation plan includes elements typical of any rewards strategy along with a few extra incentives and allowances, depending on the host country.

BASE PAY

When an employee accepts an international assignment, it is up to the employer to determine the base rate of pay (referred to as the base salary). The base salary is normally related to pay ranges in the home country, which then may be adjusted based on local variances (i.e., fluctuations in the economy). Companies take one of the following approaches to establish base salaries for expatriates:

The home-country-based approach. The objective of a home-based compensation program is to equalize the employee to a standard of living enjoyed in his or her home country. Under this system, the employee’s base salary is broken down into four general categories: taxes, housing, goods and services, and discretionary income.
The host-country-based approach. With this approach, the expatriate employee’s compensation is based on local national rates. Many companies continue to cover the employee in its defined contribution or defined benefit pension schemes and provide housing allowances.
The headquarters-based approach. This approach assumes that all assignees, regardless of location, are in one country (i.e., a U.S. company pays all assignees a U.S.-based salary, regardless of geography).
Balance sheet approach. In this scenario, the compensation is calculated using the home-country-based approach with all allowances, deductions and reimbursements. After the net salary has been determined, it is then converted to the host country’s currency. Since one of the primary goals of an international compensation management program is to maintain the expatriate’s current standard of living, developing an equitable and functional compensation plan that combines balance and flexibility is extremely challenging for multinational companies. To this end, many companies adopt a balance sheet approach. This approach guarantees that employees in international assignments maintain the same standard of living they enjoyed in their home country. A worksheet lists the costs of major expenses in the home and host countries, and any differences are used to increase or decrease the compensation to keep it in balance.

Some companies also allow expatriates to split payment of their salaries between the host country’s and the home country’s currencies. The expatriate receives money in the host country’s currency for expenses but keeps a percentage of it in the home country currency to safeguard against wild currency fluctuations in either country.

VARIABLE/INCENTIVE COMPENSATION

The globalization of business has increased the use of variable and incentive pay around the world. But some cultures do not readily accept the practice of linking pay to individual or group performance. Other roadblocks to pay for performance include financial (not enough funding of the pool), target setting (defining performance parameters) and pay equity. Yet when it is done right, pay for performance effectively allocates limited rewards and retains top performers. As such, variable pay has become an increasingly important compensation element in many countries.

Variable pay plans generally fall into one of two categories:

Short-term incentive plans are usually annual plans that link awards based on meeting individual or group performance criteria and objectives. Unlike long-term plans, these incentive pay plans provide for the payout to be awarded yearly.
Long-term incentive plans, on the other hand, can vary in length from three to five years. These plans typically include equity-based incentives, such as stock options, restricted share grants and other types of equity-based plans like phantom stocks or stock appreciation rights. Awards are closely linked to the achievement of company goals and objectives over the three- to five-year period.

Participation and eligibility for each type of plan, as well as the level of incentives and average payouts, vary greatly among different companies, industries and countries around the world.

PREMIUMS AND ALLOWANCES

Premiums and allowances are added to the base salary so expatriate employees can maintain their standard of living. Those add-ons are removed when the employee repatriates. Some types of premiums and allowances are as follows:

Hardship and hazard/danger pay. Employers sometimes need to send employees on assignments to host countries where conditions are difficult or hazardous (i.e., remote locations or countries with high rates of violence). As a result, a hardship allowance may be granted as an additional incentive to compensate employees for accepting assignments in less-than-desirable countries. Premiums typically range from 10 percent to 50 percent of base pay, depending on the severity of the hardship. For assignments in developing countries that have a history of violence or are experiencing political unrest, expatriates often receive some form of hazard pay, such as an additional 25 percent of their base salary. See Hazardous Duty Pay Policy: By Position and Location.
Cost-of-living adjustments. A cost-of-living adjustment is an increase or decrease of an expatriate employee’s pay in response to fluctuations in the economy, such as inflation or deflation. To prevent attrition of the global employee’s purchasing power, companies often raise the employee’s base salary to keep up with inflation. When price levels drop, companies may also decrease the base salary accordingly.
Educational assistance. Educational assistance for dependents of expatriate employees varies based on conditions in the host country. Assistance is usually not provided if local educational institutions are deemed adequate. When the educational system of the host country is substandard, employers may use a variety of benefits, such as employers operating a school in the foreign country; paying for dependents’ educational expenses, including room and board, to attend schools in the United States; or providing an allowance for attendance at private schools in either the United States or the host country. Other employers may simply choose to pay employees a specified amount (stipend) considered necessary for schooling at the nearest adequate school, and the employees make up any difference to send their dependents to an institution of their choice.
Housing assistance. Assistance for housing is usually provided either in the form of free company-owned housing or via a housing allowance that is typically equal to the difference in housing costs between the home and host countries or based on a specified percentage of an employee’s base salary. Housing allowance rates are usually calculated based on either a single person or a two-person household. For employees with larger families living with them, employers may provide an additional supplement, typically ranging from 10 percent to 30 percent of the two-person allowance.
Home leave. The objective of home leave policies is to give the assignee and his or her family the opportunity to maintain personal and business relationships and remain abreast of any economic, political, social or cultural changes in the home country. Although home leave policies vary among multinational corporations, most policies grant leave based on the employee’s level within the organizational structure. Executives, managers and more senior-level professionals are most often granted home leave once a year, or once every other year for a duration of up to four weeks, and lower-level employees may be allowed only a single visit during the course of their assignment. Companies that provide home leave allowances generally purchase or reimburse the employee for any travel-related expenses, such as airline tickets for the employee, spouse or partner and any dependent children younger than college age.

COMPENSATING THIRD-COUNTRY NATIONALS

Third-country nationals (TCNs) are employees who are not from the home country or the host country. TCNs have traditionally been technical or professional employees hired for short-term employment and are often considered international freelance employees. See What are the differences among a local national, an expatriate, a third-country national, and an inpatriate?

In the case of TCNs, multinational companies have one of three options regarding compensation:

Pay the TCNs as if they were local nationals.
Treat them as any other U.S. citizen would be treated.
Establish an arrangement based primarily on the third country’s existing pay ranges.

The option a company chooses depends primarily on how these employees were hired into the organization or how they obtained the international assignment. The most common practices include the following:

If the company is hiring locally in the host country, a TCN who applies for a job (including a professional or managerial position) may be assumed to be applying under the terms being offered. In this case, unless the TCN was specifically targeted and individually recruited for the position, he or she would most likely be offered the same compensation package provided to other local nationals.
If a TCN who is already employed by the company transferred or reassigned from another country, the compensation arrangement usually depends on the individual’s particular career pattern. TCNs who occupy positions that involve regular transfers or reassignments are most likely to be compensated on the same basis as any one of their U.S. counterparts who are also subject to frequent transfers. This approach, however, may require that these employees be paid based on U.S. salary ranges that are adjusted to support differences in locations each time a transfer occurs.

Benefits

Global benefits for expatriates can be complicated for HR professionals to navigate, given the myriad national health care and pension systems and the laws governing foreign residents. See Do we have to offer the same benefits to our employees who work in other countries as to the employees working in the United States?

HEALTH CARE PLANS

Health care coverage can pose significant challenges for expatriate employees because not all U.S. health care plans provide coverage for employees residing abroad. For this reason, the practice of providing health care benefits varies greatly among multinational companies. Multinational companies can provide coverage to employees in one of the following ways:

Include the assignee in an international health care plan.
Continue coverage under the U.S. health care plan.
Provide coverage for the employee through a host country health care plan.

RETIREMENT PLANS

Regardless of the compensation approach a multinational company chooses to adopt, most companies commonly provide assignees with the same level of Social Security and pension plan benefit coverage, without any interruption in service, as enjoyed by other employees in the home country location.

Some countries require expatriate employees to participate in their social security or other government welfare benefit schemes. In this case, many companies provide for reimbursement of any payments made to the host country’s government scheme.

SPOUSAL/PARTNER ASSISTANCE

Since approximately half of all U.S. marriages are dual-earner partnerships, dealing with international assignments can pose significant challenges for the trailing spouse or partner, the expatriate employee and the sponsoring organization.

Trailing spouses face many challenges to finding suitable employment in the host country, including language and legal barriers as well as differences in educational, professional or licensing requirements.

Assistance with job searches, visas or work permits, career and educational counseling, and resume writing are just a few examples of the types of assistance a multinational employer can provide spouses or partners of transferring employees. A less common approach is to offer a financial sum to spouses of expatriate employees for any loss of income resulting from the relocation.

Training

Other add-ons that are less commonly offered but can significantly ease expatriate package negotiations include cultural competence training, language training and repatriation assistance.

CROSS-CULTURAL TRAINING

The purpose of these programs is to enhance the knowledge and awareness about the employee’s new location and the cultural differences affecting communication, behaviors and viewpoints. Training programs typically last a few days; however, for assignments to more remote or difficult locations, programs may also include security training that lasts for a longer period of time. The length and type of training should be directly related to the perceived level of assignment difficulty or differences in the assignment country.

Employers may conduct training either as an individual program for a single transferring employee and his or her family or as a group program when a number of employees are transferring to the same location within the same general time frame. However, it is advisable when conducting group training to also provide individuals with one-on-one time with the trainer to discuss any specific issues related to the employee’s job responsibilities or to address any other more personal concerns or issues. See Helping Expatriate Employees Deal with Culture Shock.

LANGUAGE TRAINING

The inability to communicate can create a sense of vulnerability and loss of control. A basic knowledge of the language empowers expatriate employees to build critical relationships with host country nationals. Some jurisdictions require that employee communications be in the local language.

Most companies provide some form of language training for expatriate employees assigned to countries where they are nonnative speakers. Training program options include the following:

Intensive total immersion courses.
Cross-cultural training with integrated language instruction.
Private tutoring or coaching.
Group language classes.
Use of language software or audiovisual applications.

REPATRIATION/REASSIGNMENT

Expatriate pay considerations do not end when the assignment ends. Pay can be a significant factor in making it difficult for a person to repatriate. Often employees returning home realize they made considerably more money with a lower cost of living in the host country; returning to the home country means a cut in pay and standard of living. If the foreign compensation package is disproportionate, an expatriate can suffer financial issues upon repatriation or reassignment to the home or other foreign country. Expatriate families and employees benefit from repatriation training to help readjust to living in the home country and returning to the original work environment. The length of the training often depends on the length of the assignment and the ages of the employees’ children. See Managing International Assignments.

Similarly, if the leading motivator of the expatriate employee is the long-term career aspect, the company needs to provide a challenging assignment upon return to the home office or shortly thereafter. If this is not feasible, communication about future plans for such an assignment and the timing should come from a mentor or a member of the senior management team. Otherwise, the company may risk losing its entire investment to turnover of returning expatriate employees.

Tax Compliance

United States citizens and resident aliens are taxed on their worldwide income, whether the person lives inside or outside the United States. Multinational companies take one of four approaches to ensure tax compliance:

Employees are responsible for their own taxes.
The employer determines tax reimbursement on a case-by-case basis.
The employer pays the difference between taxes paid in the United States and the host country.
The employer withholds U.S. taxes and pays foreign taxes.

See How do we handle income taxes for expatriates?

Qualifying U.S. citizens and resident aliens who live and work abroad may be able to exclude from their income all or part of their foreign salary or wages, or amounts received as compensation for their personal services. In addition, they may also qualify to exclude or deduct certain foreign housing costs.

The foreign earned income exclusion allows an expatriate’s annual employment earnings income (up to a cap that is adjusted each year for inflation) to be exempt from U.S. gross. The foreign housing exclusion provides for the amount of housing expenses in excess of U.S. norms to be excluded from taxable income. A foreign tax credit of the amount of foreign tax imposed on overseas earnings can be used to offset the amount of U.S. tax otherwise due by the U.S. citizen or resident.

A common misconception that contributes to the international tax gap is that this potentially excludable foreign earned income is exempt income not reportable on a U.S. tax return. In fact, only a qualifying individual with qualifying income may elect to exclude foreign-earned income, and this exclusion applies only if a tax return is filed and the income is reported. See Where do expatriates pay income tax?

U.S. income tax is calculated on foreign-source income and translated to U.S. dollars at the time of receipt. Blocked currency, which is foreign income that is not readily convertible into U.S. dollars, does not constitute taxable income and may generally be deferred until the currency is convertible into U.S. dollars or is used for nondeductible personal expenses. Withholding of U.S. income tax is not required if the employer is required to withhold the host country’s income tax.

The U.S. Social Security tax is mandatory if services are performed by a U.S. citizen or resident, and if the employment is for a U.S. employer or for an affiliate of a U.S. company with a 3121(l) agreement. An entity is an affiliate if the U.S. company owns at least a 10 percent interest in the voting stock or profits of the entity. However, employees performing services for an international organization are exempt from FICA, FUTA and federal income tax withholding because services rendered for international organizations do not constitute employment, and remuneration for services rendered to international organizations does not constitute taxable income. Organizations that qualify as international organizations are those that have been designated as such by the president of the United States. The exemption applies to citizens and residents of the United States as well as to nonresident aliens.

Although foreign tax rules vary significantly by location, local taxing authorities also reserve the right to impose taxes on any income earned by the expatriate employee in the host country.

EQUALIZATION, REDUCTION AND TOTALIZATION AGREEMENTS

To prevent an expatriate employee from suffering excess taxation of income by both the U.S. and host countries, many multinational companies implement either a tax equalization or a tax reduction policy for employees on international assignments.

A tax equalization policy is an agreement between the employer and the employee to reduce the employee’s wages, for which the employer agrees to assume the obligation for the worldwide tax liabilities of the employee. Equalization is accomplished by the use of a hypothetical tax. The hypothetical tax is calculated as if the employee had never left the United States, and it represents the employee’s normal or expected tax liability for U.S. income.

Tax equalization is implemented by the use of advances to the employee; proceeds of the advance go to the tax authorities on the employee’s behalf. These advances are settled at year end. The result is deferred compensation to the employee, which the host country does not tax.

Under a tax reduction policy, expatriates gain from the differences in income taxes in the United States and the foreign country to which they are assigned, or the compensation of expatriates is adjusted so they experience no loss in income as a result of the net effect of income taxes, both foreign and U.S.

Additionally, the United States government has Totalization Agreements in effect with several countries. These agreements eliminate dual coverage of employees by both the home and host countries. U.S. International Social Security Agreements coordinate with comparable programs in other countries. These agreements assign coverage according to objective rules, provide for no individual coverage elections and require that the employee remains covered by the home country and is exempt in the host country. The expatriate assignment must be for a period of five years or less, and the employee must remain an active employee of the sending employer.

All agreements exempt expatriates from the host country’s version of the U.S. Old Age, Survivors, Disability and Health Insurance (OASDHI) program. Some agreements also exempt them from other foreign benefits, such as health insurance, unemployment insurance, workers’ compensation, family allowances, cash sickness benefits and maternity benefits.

TAX TREATIES

The United States has income tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Treaty provisions generally are reciprocal in that they apply to both treaty countries. Therefore, a U.S. citizen or resident who receives income from a treaty country and who is subject to taxes imposed by foreign countries may be entitled to certain credits, deductions, exemptions and reductions in the rate of taxes of those foreign countries. Treaty benefits generally are available to residents of the United States. They generally are not available to U.S. citizens who reside outside the United States. However, certain treaty benefits and safeguards, such as nondiscrimination provisions, are available to U.S. citizens residing in the treaty countries. See Tax Guide for U.S. Citizens and Resident Aliens Abroad.

STATE TAXES

Many states impose taxes on the foreign income of expatriate employees who maintain a home in that state. In addition, states also may impose unemployment insurance taxes on employers that have employees with homes in that state. The reasoning is that, like other resident citizens, the employee derives certain benefits from the state, and the state where the employee resides is the most plausible place for an unemployed worker to seek unemployment compensation.

Article Source: https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/designingglobalcompensation.aspx

05Jan

Managing Downsizing by Means of Layoffs

Overview

Many different reasons can lead an organization to engage in downsizing by means of a layoff, including cost-cutting, economic declines, mergers and others.

Although similarities exist between the ways an organization should handle a layoff as compared with termination for poor performance or for cause, this article spotlights policies and practices that are particularly relevant to the layoff situation. See Involuntary Termination of Employment in the United States.

Whenever an organization contemplates a layoff, it must consider the risks of running afoul of a number of federal and state statutes. In addition, certain common law claims also can take on added vigor in the context of a layoff.

Whereas the discharge of a single employee may expose an employer to a multiplicity of legal claims as to that employee, a layoff potentially exposes an employer to a multiplicity of claims by many employees in the form of a class action or collective action lawsuit. See Tread Carefully Across the Severance Minefield and How to Conduct Layoffs the Right Way.

Successfully implementing a layoff is one of the greatest challenges an employer may face. However, a significant body of effective practices has been developed to guide management in carrying out the process in a strategic, legally compliant and humane fashion.

Why Layoffs Occur

Layoffs are a time-tested means of cutting organizational costs; reducing staff can have an immediate and substantial impact. Because “people” costs—compensation and benefits—typically represent half of a company’s total operating expenses, it is natural that organizations aiming to reduce expenses tend to focus on shedding employees. Even the announcement of an upcoming layoff is widely regarded as a quick way to boost the share price of a public company’s stock, although studies belie that assumption.

A variety of other conditions may also necessitate a layoff:

A nationwide recession.
A natural disaster or crisis.
A decline in a particular industry.
Technological changes.
The failure of a company.
Mergers and acquisitions.
Competitive forces such as offshoring and outsourcing.
Acts of war or terrorism.

See:

Cutting Staff in Times of Crisis

Managing Human Resources for a Company in Bankruptcy

How HR Can Prepare for the Next Recession

Alternatives to Layoffs

While layoffs have become a standard business practice, there has been little research on the effectiveness of job-trimming practices in improving an organization’s fortunes. Employers routinely resort to mass layoffs to help meet financial forecasts and stay within budgets, but they often ignore innovative cost-reduction solutions that may fit their cost-cutting environment.

Anyone who has ever been laid off or required to implement a layoff understands the importance of considering alternatives to a layoff that may not only be more palatable but also be more effective than a layoff. As with so much of effective human resource management, recognizing and implementing alternatives to layoffs require a strategic approach.

Alternatives to layoffs include:

Reducing hours worked to spread the economic consequences of cost cutting among all employees rather than targeting a few persons for layoff.
Adopting a voluntary separation program (VSP). VSPs are particularly good at reducing the risks of legal liability associated with terminating employees. See Reduction in Force Policy: Voluntary Separation Program.
Identifying and eliminating wasteful practices.

A Strategic Approach to Layoffs

A strategic approach to layoffs has many characteristics in common with that used in fault-based terminations. As such, it:

Begins with a strategic approach to hiring.
Continues through the decision to conduct a layoff as opposed to another means of reducing workforce.
Requires notification to the various stakeholders in the process.
Requires ongoing dealings with former employees in terms of benefits administration, reference requests, verification of employment and, possibly, responding to lawsuits.
Requires effective management of the forces surviving the layoff.

Selection Criteria

Layoffs are demoralizing to employees and, when large numbers are involved, may result in negative publicity for the employer. It is very important that the employer carefully consider the selection criteria for a layoff particularly as a defense against any allegation of discrimination. An employer in a unionized environment needs to take additional precautions to ensure that it does not violate an existing collective bargaining agreement. The following are typical types of selection criteria:

Seniority-based selection.
Employee status-based (full-time, part-time, contingent status) selection.
Performance-based selection.
Skills-based selection.
Multiple criteria ranking (selection based on seniority, performance and skills may then use ranking criteria such as an employee’s promotability, attitude, skills, abilities, knowledge, versatility, education, experience level, quantity and quality of work, attendance history, and tenure).

An employer conducting a layoff must be transparent about the selection criteria it is using and must emphasize to employees that the layoff is about positions and not about employees.

See:

Why a Layoff Is Not an Alternative to Terminations for Cause

If I Can’t Fire Someone, Can I Lay Him Off Instead?

What criteria should be used in selecting employees for a workforce reduction?

Fairer Layoffs: How Do You Decide Who Stays and Who Goes?

Legal Implications of Layoffs

A variety of federal and state statutes as well as municipal ordinances and regulations may be implicated by an organization’s decision to conduct a layoff. Note that employers not covered by the federal laws discussed below may be covered by similar state laws.

FEDERAL LAWS

Worker Adjustment and Retraining Notification Act (WARN). The goal of this statute (and its state law counterparts) is to minimize harm to workers and communities caused by layoffs. Subject to certain exceptions and under certain circumstances, WARN requires employers to provide a minimum of 60 days’ notice of a “mass layoff” or “plant closing” to certain persons.

Under WARN, the term “plant closing” means 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.

A “mass layoff” occurs when at least 500 employees, excluding part-time employees, lose employment during any 30-day period, or if at least 33 percent of the employees at a single site of employment lose employment during any 30-day period, unless that percentage amounts to fewer than 50 workers.

The WARN regulations say that in deciding whether notice is required, the employer should:

Look ahead 30 days and behind 30 days to determine whether employment actions both taken and planned will, in the aggregate for any 30-day period, reach the minimum number for a plant closing or a mass layoff and thus trigger the notice requirement.
Look ahead 90 days and behind 90 days to determine whether employment actions both taken and planned that separately are not of sufficient size to trigger WARN coverage will, in the aggregate for any 90-day period, reach the minimum number for a plant closing or a mass layoff and thus trigger the notice requirement.

Obviously, the determination of whether WARN even applies to a particular layoff can be a complex task. In all but the most clear-cut situations, it is wise to consult with experienced legal counsel.

WARN notices must be given to three distinct groups:

Each representative of the affected employees, or, in the absence of a representative, to each affected employee.
The state or entity designated by the state to receive such notice.
The chief elected official of the local government where the mass layoff or plant closing will occur.

Damages and civil penalties can be assessed against employers that violate WARN.

See:

WARN Notice Letter

WARN Act Compliance Assistance

WARN Act Did Not Apply to Sudden Closure of Nuclear Plant Construction

Equal employment opportunity laws. These laws include Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act (ADEA), including their anti-retaliation provisions. Many states have similar laws.

Employers conducting a layoff must be careful not to discriminate intentionally against any person in a protected class or to discriminate inadvertently against a group of persons in a protected class.

See:

Can we include employees who have performance problems in a RIF?

Layoff Implementation May Be Challenged Under Title VII

Older Workers Benefit Protection Act (OWBPA). The OWBPA, which amends the ADEA, regulates the content and time periods applicable to releases of claims as to persons age 40 or older. The OWBPA mandates that any agreement providing for the release of claims under the ADEA must contain certain provisions to be legally enforceable. As a result of the OWBPA, there are three basic types of separation agreements for the following situations:

None of the employees being terminated are 40 years or older.
A single employee age 40 years or older is being terminated.
More than one employee is being terminated and at least one terminating employee is 40 years or older.

See Waivers of ADEA Claims.

Laws providing for reinstatement rights. Both the Family and Medical Leave Act (FMLA) and its state counterparts, as well as the Uniformed Services Employment and Reemployment Rights Act (USERRA) and similar state laws, provide for employee reinstatement under certain conditions.

An employee on FMLA leave is entitled to be reinstated to the same position or an equivalent position—in terms of pay, benefits, and other terms and conditions of employment—except in the case of any of the following:

Bona fide job elimination.
Termination for reasons not related to the employee’s medical condition or use of leave.
The employee’s inability to return to work upon the expiration of all available leave.

See Can an employer lay off an employee who is on Family and Medical Leave Act (FMLA) leave?

USERRA applies to all employers, regardless of size, and to all regular employees, regardless of position or full- or part-time status. It regulates leaves of absence taken by members of the uniformed services, including reservists, and by National Guard members for training, periods of active military service (whether voluntary or involuntary) and funeral honors duty, as well as time spent being examined to determine fitness to perform such service.

Like the FMLA, USERRA has special rules for reinstatement that are important to note in the context of a layoff. There are three exceptions to USERRA’s re-employment obligations:

The employer’s circumstances have so changed as to make such re-employment impossible or unreasonable.
Re-employment would impose an undue hardship on the employer.
The employment from which the person leaves to serve in the uniformed services is for a brief, nonrecurrent period, and there is no reasonable expectation that such employment will continue indefinitely or for a significant period.

See Can we lay off an employee who is on military leave under USERRA?

Laws regulating benefits administration. These include the Employee Retirement Income Security Act (ERISA), COBRA, and the Health Insurance Portability and Accountability Act (HIPAA).

Wage and hour laws. Mass layoffs invite scrutiny from employees and plaintiffs’ attorneys as to grievances employees may have had but never bothered to pursue. In the context of a layoff, a single employee or group of employees may have little disincentive to bring claims for violation of the Fair Labor Standards Act (FLSA) or its state counterparts alleging improper classification as exempt employees (making them ineligible for overtime) and other minimum wage or overtime pay violations.

STATE LAWS

Unemployment insurance. Employees laid off through no fault of their own generally will be entitled to unemployment insurance benefits, provided other eligibility requirements have been met. An award of unemployment insurance benefits to a laid-off employee will result in higher unemployment taxes for the employer. However, such benefits help laid-off employees temporarily deal with the loss of employment income, which in turn can benefit the employer in a lower incidence of lawsuits by laid-off workers.

Severance pay. There is generally no federal obligation for severance payments; however, some states do include severance pay requirements for certain workers. For example, see Some New York City Hotels Must Pay Severance to Service Workers.

Service letter laws. Some states have laws requiring employers to provide upon written request basic information about a former employee such as the nature, character, duration of employment, the rate of compensation and the reason for termination.

Employee access to personnel records. A majority of states require employers either to copy, or make available for inspection and copying, a former employee’s own personnel file. States differ as to the applicable time periods, the scope of records the employee must be permitted access to and the means by which the state enforces the rule.

Common law claims. Employees may allege common law claims that their layoffs constituted wrongful discharge in violation of:

A written or oral contract.
A contract implied in the terms of an employee handbook.
Written or oral promises that the employee would be treated in a certain way, which the employee relied on to his or her detriment. This theory is known as “promissory estoppel.”

INTERNATIONAL LAW CONSIDERATIONS

Multinational corporations may be subject to layoff laws of the countries in which they operate. Even U.S. companies may have international law obligations in the area of layoffs. See Italy: New Measures May Impact Most Employers Planning Layoffs and Business Lessons from Abroad.

Effective Practices in Implementing Layoffs

There is a wealth of information to support management in effectively, legally and humanely implementing layoffs.

Effective layoff practices include:

Planning thoroughly. All the steps in the process require careful planning: considering alternatives, selecting persons to be laid off, communicating the layoff decision, handling layoff documentation and dealing with post-layoff considerations.
Applying diversity concepts. Organizations should create a diverse team to make layoff selections.
Addressing the needs of the laid off. Outplacement services and assistance with navigating unemployment benefits are commonly offered by employers to exiting employees. See Helping Displaced Workers Get a Fresh Start.
Providing severance pay. Employers may offer severance pay via a welfare benefit plan covered by ERISA or on an ad hoc basis in light of particular circumstances. See Severance Tied to Tenure and Position as Formal Policies Decline.
Behaving professionally. An HR professional or manager may be tasked with implementing his or her own layoff. This calls for the utmost in professional behavior.
Dealing with the emotional impact. While downsizing may be a corporate vision of change for the employer, it is a vision of job loss for employees. This scenario creates a daunting task for the manager who may be helping separated employees find work, money and a new future. At the same time, the employer must help retained employees confront new challenges. Key responsibilities include understanding and preparing for the adverse impact of layoffs on those being laid off and their families, on managers making layoff selection decisions, on employees not laid off, and on managers working with the post-layoff workforce.
Managing the post-layoff workforce. Workers who remain after a layoff often feel guilty that they still have a job while their co-workers are facing unemployment. They may also feel stressed or anxious as they are asked to take on more work in their colleagues’ absence. See Supporting Employees Who Remain After Layoffs.

Article Source: https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/managingdownsizing.aspx