ALP: How can employers prepare for the legal challenges of an economic downturn?

February 15, 2008

No one wants to say the word “recession.”  But whether we are facing an economic downturn or not, employers need to be prepared to face the legal challenges inherent in a less-than-perfect economy.  Even in prosperous times, every employer should prepare for the prospect of losing some of its workforce.  When layoffs, reductions in force (“RIFs”), or plant closings occur, employees and employers face a difficult situation.  That situation can be made worse if an employer is not aware of how to manage its legal responsibilities.

One of the federal laws most directly related to RIFs is the Worker Adjustment and Retraining Notification Act (“WARN”).  Under WARN, an employer who has 100 or more employees must provide those employees with at least sixty days’ notice before ordering a “plant closing” or “mass layoff.”  Those terms are defined in the statute.  A “plant closing” is the shutdown of an operating unit affecting 50 workers within a 30-day period.  A “mass layoff” occurs when 500 or more employees (or 33% of the workforce) lose their jobs for at least six months.  WARN also requires an employer to provide notice to the appropriate state and local government authorities.  These general rules are subject to numerous limitations and exceptions, so it can be difficult for employers to determine which aspects of WARN are applicable.  It is important to remember that a violation of WARN can result in substantial back pay awards. 

Some employers choose to offer severance payments to departing employees.  While these payments are generally not required, they can provide some measure of goodwill between employer and employee.  However, employers should think carefully before offering gratuitous severance payments.  Often, severance payments should be provided pursuant to an employee’s written agreement to release all waivable employment-related claims.  Under those circumstances, both parties benefit: the employee receives some financial assistance in the transition to a new job, and the employer receives protection from lawsuits that may make a bad financial situation worse.

If the severance agreement offered by the employer includes a waiver of age discrimination claims, there are special rules governing the scope and timing of the agreement.  Pursuant to the Older Workers Benefit Protection Act (“OWBPA”), age discrimination waivers are subject to special scrutiny.  They must be easily understood, they must provide additional benefits, they must advise employees to seek legal counsel, and they must provide employees 21 days to consider the agreement and 7 days to revoke it.  If the age discrimination waiver is offered to a group of employees (i.e., more than one), then the employer must offer 45 days to consider the agreement, and must also provide extensive information on which employees were eligible for the severance offer, and why.

Regardless of whether or not employers are securing age claim waivers, employers who are eliminating a significant number of jobs should consider an adverse impact analysis.  This concept is important to defend against discrimination claims under civil rights laws and federal affirmative action requirements.  The adverse impact analysis is a statistical calculation designed to determine whether an employer’s selection rate for layoffs, RIFs, or other job eliminations has a disproportionate effect on members of a protected class.  If an employer has disproportionately selected women, minorities, older workers, etc., for job elimination, the decision may subject the employer to liability even if there was no intent to discriminate.  Performing an adverse impact analysis before finalizing the decision can reduce the likelihood of this kind of discrimination claim.

There are many other legal challenges inherent in reducing the size of a workforce.  Has the company prepared to handle its insurance obligations under COBRA?  Is it appropriate to offer some workers the option of an early retirement?  What about the unemployment claims that will result from the loss of jobs?  Should the laid off employees be subject to rehiring?  Are there challenges that are specific to the particular workforce, such as protecting trade secret information or recognizing collective bargaining rights? 

Employers must consider these and other questions as they make the difficult decision to eliminate jobs.  The loss of a job is particularly hard on employees, but it can also be overwhelming to companies that are unaware of the potential legal pitfalls that accompany an economic downturn.  Companies that prepare for these challenges in advance can minimize the impact of a struggling economy on both the company and its workforce.