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Employers' Cost-Cutting Measures in Strained Economic Times


January 14, 2009

The subprime mortgage crisis and related nationwide economic difficulties have caused some companies to review ways to minimize the financial impact on their bottom line. Many employers will immediately consider implementing a mass layoff or reduction in force (RIF) in an effort to adjust to the economic climate. Employers that rush to implement these options without careful planning, the advice of counsel, and considering alternatives could incur the substantial expense of defending against claims of employment discrimination filed by the laid-off employees.

There are certain considerations that every employer must evaluate in planning for a layoff. When properly considered and documented, these decisions minimize potential liability to the laid-off employees, assist in maintaining the morale of those employees who are retained and asked to perform the work of those who have been let go and, additionally, help maintain the quality of service to the company's customers or clients.

Consider Other Options

Rather than immediately assume that an RIF is the appropriate response to difficult economic circumstances, employers should consider other options which could reduce the risk of litigation.

  • Allow natural job attrition to take place without hiring replacement workers.
  • Freeze wages across the board or postpone planned wage increases.
  • Terminate recent non-essential hires within their probationary period.
  • If possible, reduce work hours for hourly employees. Care should be taken, however, to consider the effect on employees' entitlement to fringe benefits.
  • Where appropriate, allow and encourage employees to job share.
  • Terminate employees who have documented performance problems.
  • Reduce fringe benefits, increase insurance deductibles and institute waiting periods for new hires to be eligible for fringe benefits.

A myriad of other options are available to employers to help reduce costs before moving to the more aggressive strategy of instituting an RIF. The list is limited only by management's creativity and willingness to review the company's true financial situation and staffing needs.

When an RIF is Inevitable - PAD!

When the conclusion is reached that a mass lay-off or RIF is inevitable employers should take the time to plan the reduction, analyze the true staffing needs of the business and document the process. A careful PAD approach to an RIF can assist an employer in making the correct business decisions regarding what jobs can be eliminated, therefore, transforming the RIF into an effective business tool. Proper analysis, documentation, and implementation of the decision-making process can provide necessary evidence of the employer's legitimate, non-discriminatory business decisions should any laid-off employees suggest that their inclusion in the RIF was based on discriminatory motive.

Planning

In planning the RIF, consult legal counsel for advice concerning the applicability of federal and state Worker Adjustment and Retraining Notification Acts (WARN). Failure to follow the notice provisions of these statutes can result in liability to the laid-off employees - costs which can easily be avoided by proper planning.

Counsel should also be sought to properly plan for requirements of state laws relating to wage payments, insurance benefit conversion rights of laid-off employees, severance benefits, and such matters as providing letters of reference for the departing employees. Counsel versed in the Employee Retirement Income Security Act ("ERISA") should be consulted to determine whether the planned RIF could result in a partial termination of pension plans causing a reportable event under ERISA.

Planning for the flow of work after the RIF is equally important in maintaining the morale of the employees who are retained and who will, necessarily, be required to perform additional job functions. Planning for wage increases, bonuses or other non-monetary incentives and rewards should be considered in order to provide optimal service to the business's customers or clients following the RIF.

Analysis

A careful analysis of the business's staffing needs is the cornerstone of an effective RIF. The analysis necessarily begins with the identification of job functions which are essential to the business, and which will continue to be essential following the RIF. Some job positions are redundant or unnecessary and can be eliminated for solid business reasons. Care should be taken to review the effect of any collective bargaining agreements in place relative to position elimination or consolidation.

Decisions regarding the elimination of positions should not be made solely on the basis of how the position elimination may affect the business's payroll. This type of analysis can lead to the costly and unintended consequence of triggering age discrimination claims by laid-off employees. Where employers use the technique of eliminating the highest paid employees in a particular job function, unintentional age discrimination can occur because, often, the highest paid employees in a job category are those with the greatest years of service. The focus of the analysis should begin and end with job functions and the need for essential services.

Document

As with all employment-related decisions, documentation of the decision-making process is paramount to being able to defend against a potential discrimination claim made by the affected employees. Employees must document the economic and financial position of the business which necessitated consideration of the RIF in the first instance. Next, the analysis of the job functions that are considered by management to be necessary to carry on the business of the company following the RIF must be documented. The process by which managers and supervisors were asked to review the job functions in their respective departments in order to make recommendations relative to job elimination must be documented. Any company reorganization that results from the RIF must carefully illustrate and document the elimination of jobs - not the elimination of people.

Effective and defensible reductions in force do not occur overnight. Careful planning for the reduction in force, analysis of the business's work force and essential needs and, documentation of the decision-making process are essential to achieving the desired financial benefit of the RIF and to reducing the potential risk of discrimination-related lawsuits following the RIF.

Reprinted with permission from the January 14, 2009 issue of The Legal Intelligencer. © 2009 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.