October 11, 2005

Many companies have experienced layoffs over the past few years, and the worst of the bad times may be over. Still, as every human resource professional knows, corporate reorganizations, including outsourcing, mergers, and acquisitions, continue apace. Whether emanating from sourcing, a merger, an acquisition, or simply due to a corporate restructure or cost-cutting measure – or any combination thereof – the elimination of positions and resulting separation of employees means the same thing from a human resource perspective: layoffs.

The specter of layoffs, especially mass layoffs, can be daunting. Tension is in the air, uncertainty prevails, morale is in jeopardy, and the threat of legal claims looms large. This Commentary suggests practical steps for any company to take when faced with a layoff situation.

If any of the employees potentially affected by the layoff are represented by a union, the company is likely to be obligated to notify the union and provide an opportunity to bargain about the decision and/or the effects of the decision. Those requirements are beyond the scope of this Commentary but are of vital importance.

Step One: Articulate the Reasons

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Clearly articulating the legitimate business reasons for a layoff is an essential first step. Careful wording of the reasons will serve at least four important purposes: (1) it allows the company to test the validity of the reason; (2) it assists in developing layoff criteria that are consistent with the reason; (3) it allows the company to preserve evidence documenting the decision; and (4) it goes a long way toward ensuring that everyone involved states the same reasons for the layoff.[fn1]

Step Two: Establish a Formalized Approach

Having a formalized approach, with a defined committee overseeing the entire process, is an important step in ensuring that each of the other steps is thoughtfully taken. Depending on the company’s size, in addition to human resources, the committee may include representatives from the different departments or facilities involved, or there may be separate committees for each department or facility. Where possible, the committee should include decision-makers of different races, sexes, and ages.[fn2]

Step Three: Separate Temporary Employees and Contractors

Releasing all temporary employees and contractors will not only help legitimize the reasons for the layoff, but also will help establish the fairness of the process. Moreover, if the temporaries and contractors were accurately classified as such, the company is not likely to be obliged to pay severance or other termination benefits to them, and they are not likely to count toward WARN obligations or a disparate impact analysis. (See Steps Ten and Eleven.)

Step Four: Implement a Hiring Freeze

Any time a layoff is contemplated, a hiring freeze should be implemented at least in affected units. Evidence that an employer hired someone into a position similar to the laid-off plaintiff’s is usually seriously detrimental to the employer’s case. If a hiring freeze is not imposed, the company should take care to ensure that newly-filled and/or created positions are substantially different in qualifications and responsibilities from the positions that were eliminated. Documenting other budgetary reductions will help as well.[fn3]

Step Five: Chart the “After” Organization

Before any attempt is made to decide who will be selected for layoff, the organization “before” and “after” should be charted. That is, for each department or unit or facility involved, there should be a clear depiction of the organizational structure, and positions, before and following the layoff. Sometimes, there will be no “after,” such as in the closure of a facility or outsourcing of a function. But in any situation where there is to be an “after,” what it will look like should be carefully defined and compared to the “before” prior to any decision about which employees will be let go.

If new, different positions are to be created in place of old ones, job descriptions should be created. In addition to the duties and qualifications for the new positions, reporting relationships and the compensation rate (wage or salary) should be specified. To the extent a new position looks like a position slated for elimination, justification for the change should be carefully ascertained and documented.

Step Six: Determine the Selection Criteria

This step begins the process of identifying who will be laid off. The first decision is whether there will be an opportunity for employees to self-select or “volunteer” for layoff and, if so, what limitations will be imposed so as, for example, to avoid too many volunteers from one area. Time limits for volunteering, and the incentives for volunteering, should be clearly defined.

Next, the criteria that will be used to select who will be laid off must be established. Of course, these criteria cannot include any prohibited consideration such as an absence record that encompasses legally protected absences, or an accommodation that has been made to a disabled employee. Similarly, the fact that an employee is currently on a legally protected leave, such as for pregnancy or a work-related injury, cannot be a basis for layoff selection. Other than legally prohibited considerations, however, any consideration is lawful so long as it does not have an unlawful disparate impact (see Step Ten). The more objective the criterion (such as, length of service or time in position), the less susceptible it will be to attack. The more subjective the criterion, the more careful the “second look” should be (see Step Nine).

The final consideration concerns any right that laid-off employees will have to other positions. While common in the union setting, allowing senior employees slated for layoff to “bump” junior employees is usually not allowed in the non-union setting. However, if there is a vacant position for which a to-be-laid-off employee is qualified, it is hard to justify not affording him or her at least preferential application rights, if not preemptive rights. Whether a laid-off employee will have notice rights, or preference rights, to new positions established after termination is a separate question. Again, it is not common in the non-union setting to allow “recall” rights following a layoff (and employees should be disabused of any notion to the contrary), but if the new position is created immediately following a layoff, it is hard to justify denying the laid-off employee the right at least to be considered for the job.

Step Seven: Determine the Severance Package

While no law requires it, most companies offer a severance “package” to laid-off employees. The package typically consists of some modest amount of pay in lieu of notice (if WARN doesn’t apply – see Step Eleven), plus a larger amount of money and other benefits (such as outplacement, and reimbursement for medical insurance premiums if COBRA rights are exercised) that are conditioned on the employee signing a release of claims.

Even in small layoffs but especially in large ones, we encourage setting up the severance package as an ERISA plan. Doing so is not as daunting as it sounds. The benefits of the ERISA approach are multiple, including the following: (1) the plan supersedes prior ad hoc or even written severance policies by application of ERISA preemption; (2) the plan document sets out standardized terms in one place; (3) the standardized terms are more susceptible of uniform and fair administration; (4) the plan administrator can decide eligibility and other plan questions according to a very broad “arbitrary or capricious” and “abuse of discretion” standard; and (5) the plan can even be set up so as to offset WARN liability against severance payments.

Regardless of whether an ERISA plan is created, the severance package is usually conditioned on an employee signing a release of claims. For employees 40 years of age and older, the release must comply with the Older Workers’ Benefit Protection Act, “OWBPA.” Among other requirements, OWBPA requires that the employee be given up to 45 days to consider the release before the offer is rescinded, and a non-waivable 7 days to rescind the release after it is signed. In addition, the employee must be advised in writing of the job titles and ages of all those in the “decisional unit” who were eligible to volunteer or were selected for layoff, and all those who were not eligible or selected.

Step Eight: Decide Who Will be Laid Off

With all the groundwork laid, it is time to decide who will be let go. Regardless of the soundness of the decision for the layoff, it is essential that the company build a sound case for each individual termination decision.

Initially, the volunteers (if any) are analyzed to see what impact they have had, and how many positions remain to be eliminated. Then, the selection criteria are carefully and methodically applied to the remaining employees in order to move from the “before” to the “after.”

All those involved in selecting employees for layoff should be trained in how to do it, and the results should be carefully monitored – remembering that unless they are in the context of obtaining legal advice, statements made and documents generated in the decision-making process are not privileged from disclosure. Additional levels of review beyond the immediate decision-makers is highly recommended.[fn4]

Step Nine: Assess Potentially Problematic Cases

Even though the selection of certain employees may look legitimate on the surface, a closer look by the trained human resource eye may identify problems that will warrant further review. For example, an employee who has recently asserted a harassment claim, or who took time off to care for a newborn, or who was a “whistleblower,” is likely to be able to make a prima facie case of retaliation, requiring the company to prove and defend its legitimate reason. Identifying these problematic cases can help ensure that the right decision is being made, and that evidence is available and is preserved.

Step Ten: Perform a Disparate Impact Analysis

Once the universe of employees tentatively selected for a layoff has been identified, an adverse impact analysis should be conducted under the direction of counsel. The analysis will identify any statistically significant disparity. If there is a disparity an assessment of whether the selection criteria can be justified as necessary and have been applied in a nondiscriminatory way will need to be performed. All documentation relating to the disparate impact analysis should be treated as attorney-client privileged.

Step Eleven: Comply with WARN and state WARN Laws

If the number of employees to be laid off is large enough, the requisite notice (usually 60 days) must be provided under the federal Workers Adjustment Retraining and Notification Act (“WARN”) and state counterparts.[fn5]

The rules regulating who must be notified and what the notice must say are situation-specific and detailed, and should be carefully followed.

Step Twelve: Make the Announcement

By whom, when, and how employees being laid off are told of their status should be carefully planned and orchestrated. Each employee should receive a “severance kit” containing some or all of the following:

1. A memorandum confirming the effective date of termination;
2. An ERISA Severance Plan and Summary Plan Description (or, a description of the severance package) with the appropriate release form;
3. COBRA election forms;
4. Information about rolling over 401(k) plan assets and exercising stock options;
5. Outplacement services information if such services are being provided; and
6. A reminder of any no-solicitation or non-compete obligations.

It is equally important that plans be made for advising employees being retained of their status. While false assurance should never be made, supervisors should be prepared to respond appropriately to the uncertainty and guilt of retained employees.

Following these 12 steps will not guarantee that all will be well, but doing so will go a long way toward making the company’s position stronger and more secure in all the ways employment lawyers can measure.[fn6]

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Footnotes:

1: The importance of this last point is reflected in Godwin v. Hunt Wesson, Inc. (9th Cir. 1998) 150 F.3d 1217. In finding that the plaintiff had presented a triable claim of discrimination, the Ninth Circuit focused on evidence that the employer’s proffered reasons for the decisions at issue were not consistent. As the Court explained, “[a]lthough the employer’s declarations and depositions indicate that ‘creativity’ was the most important criterion for selecting the male Wesson marketing manager, the criterion of ‘creativity’ does not appear in the contemporaneous memorandum prepared at the time of the selection. Although ‘shifting explanations are acceptable when viewed in the context of other surrounding events . . . such weighing of evidence is for a jury, not a judge.’ (Citation omitted).”

2 : In Moulds v. Wal-Mart Stores (11th Cir. 1991) 935 F.2d 252, evidence that the employer’s management committee, which included a black woman, unanimously approved an employment decision was determined to be sufficient to rebut an inference of discrimination.

3: For example, in Madden v. Independence Bank (C.D. Cal. 1991) 771 F.Supp. 1514, 1518, the court denied defendant’s motion for summary judgment on an age discrimination claim, pointing to evidence that “. . . while ‘eliminating’ plaintiffs’ positions, the Bank continued to hire new employees” and that “. . . the Bank did not institute a hiring freeze, which would be consistent with any plan to reduce staff.”

4: For example, in Wado v. Xerox Corporation (W.D.N.Y. 1998) 991 F.Supp. 174, 182, the court found persuasive the following measures taken by the company in implementing the RIF: “. . . Xerox put in place a number of safeguards to ensure that the RIF was carried out fairly and without disparately affecting any protected categories of employees. Xerox states that senior managers would review employees’ contribution assessments for consistency and fairness, and that Xerox’s legal department also conducted analyses of the termination recommendations to make sure that they would not have a discriminatory effect.”

5: Generally, the threshold is 50 employees if that number translates to 33% of the workforce, or 500 employees, at a “single site” of employment within a 90-day period under federal WARN, but it may be lower under state WARN laws. In California, for example, a layoff of 50 employees requires a 60-day notice if the employer has 75 or more employees, regardless of percentage or location.

6: See also our March 2001 Employment Law Commentary at http://www.mofo.com/news/updates/bulletins/bulletin68.html, “RIFs Redux: A Short Primer on Employment Laws Relating to Workplace Reductions.”

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Judith Droz Keyes is a partner in our San Francisco office and can be reached at (415) 268-6638 or [email protected]. Judy acknowledges the significant contribution of Chris Lyon and David Murphy in our Palo Alto office in the preparation of this Commentary.