Managing Downsizing by Means of Layoffs
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.