June 20th, 2019
Jean Ohman Back at Schwabe
Avoiding Discrimination Claims as the Result of a Reduction in Force
Although the current economic indicators signal a healthy economy, many experts think that we will experience subdued economic growth in 2019 and 2020. In the midst of these uncertainties, some companies that grew a little too fast in 2018 are seeing the need to make reductions in their workforce in 2019. Reductions in force (“RIFs”), done correctly, can ease financial constraints on companies, which may be just the answer to refocus and rebuild. RIFs, done incorrectly, can lead to legal liability that will only further the economic burden on a company.
Employers who see the need to make a RIF will want to follow these key steps to ensure that the RIF does not unfairly impact individuals who are in protected classes. Equally important is to draft a RIF memorandum showing the decision-making process.
Develop your strategy. Draft a RIF plan identifying the future vision and organizational structure that will most effectively meet the company’s continuing needs. What locations, departments, and divisions will be involved? How many Full Time Equivalent positions (“FTE”) do you need to reduce? What is your budget for severance agreements, attorney’s fees, unemployment claims, outplacement services, and administrative costs? What is your timeline for the reduction in force?
Consider other options. Consider whether other options exist to ease the financial crunch before planning terminations or layoffs. Is it possible to have employees move to a job share arrangement, to a part time schedule, or to participate in a work share program? Would a temporary shutdown be possible? Would your employees consider a pay reduction? If you do decide on a pay reduction, consider fairness issues and make reductions from the C-suite on down. Do you want to ask volunteers to take early retirement or voluntary separation prior to the involuntary reductions? Have you frozen your current open positions?
Analyze application of WARN and any mini WARN Acts. The federal Worker Adjustement and Retraining Notification Act (“WARN”) Act applies to employers of 100 or more employees and requires that employers provide employees and certain governmental agencies with a 60-day advance notice of a plant closing or certain types of mass layoffs. Human resources will evaluate application of the WARN Act based on the number of employees affected by the layoff. Many states also have mini WARN Acts, and specific rules about contacting the state employment division and providing notice of a mass layoff. Oregon employers must submit a WARN notice to Oregon’s Rapid Response Dislocated Worker Unit and to the chief elected official of the local government. The notice must contain very specific information.
Determine the functions and positions to eliminate. An initial step involves determining which functions and positions you can do without within the departments or divisions that you have chosen for the RIF. For example, an organization may decide that it has more secretaries than are absolutely needed to perform administrative tasks and duties. The company might decide that a secretary who used to work in a one-to-one ratio for another person will now work for two to three people or more. Therefore, the organization would list “secretaries” as the position to be eliminated, and “administrative tasks” as the functions. For a second example, an industrial manufacturer with several lines of products may look at its product line and determine that product A just is not selling well any more. However, the manufacturer has other products, B and C, that have good sales. This company will look at the functions involved in producing product A (for example, small item welding, electrical assembly, etc.) and list those functions and the positions that perform those functions for inclusion in the layoff. At this stage, the company is only evaluating functions and positions; it should not list or consider names of employees or salaries.
Determine the objective nondiscriminatory criteria for layoff. A smaller control group within the company that consists of at least one member of human resources and three or four managers should now establish the objective criteria that the company will use to choose which employees will be subject to layoff. Generally, you will want to keep your best performers and most versatile employees. You may also decide to give consideration to loyalty and to long-term employees. If the business is a closely held family business, then whether the person is a family member is relevant. Examples of specific nondiscriminatory criteria for selection can include:
Add employees on leave into the employee group. Next, you should add all employees currently on leave for other reasons into the employee group. The human resources department will perform this step, as there may be considerations with respect to statutory rights to return to work. This can include adding employees who are on military, family medical, pregnancy, parental, family, or personal leave, or employees who are on disciplinary probation.
Apply the objective criteria. Now, the supervisors and managers should evaluate and rank all employees, including those on leave of absence who human resources has indicated are within the selection pool, according to the criteria the company chose as important for consideration. So that everybody is considering the criteria equally, it is a good idea to give each criterion a set amount of points to rank all employees. For example, for past performance reviews, if the employee received excellent reviews, they get 5 points, a meets expectations review gets 3 points, and no points are given for needs improvement overall reviews. This is just an example; each employer will have to supply its own performance review metrics. After all employees are ranked, the supervisor gives its list of ranked employees (and how they ranked them) to human resources, who will review the lists and select the lowest ranking employees for layoff. Managers must be very careful in this step not to take injuries, disabilities, age, sex, or other protected class criteria into consideration. In addition, the decision-makers should not mention, refer to, or consider the salary of an employee until after the final selections are made and after the layoff is announced.
Human resources review for bias. After selecting the employees, human resources must review personnel files and the notes of managers for comments that may be evidence of bias related to a protected class. If there is bias, reconsider inclusion of that employee in the group.
Perform a statistical analysis for EEOC impact. One of the most important steps in the process is to determine the Equal Employment Opportunity impact of employees selected for layoff. This step is necessary because many discrimination claims are based on the argument that the reduction in force had a disparate impact on a particular protected class, such as age, disability, sex, etc. A plaintiff can prove unlawful discrimination by establishing that the employer’s neutral policies or practices have a disproportionate effect on employees in a protected class. A statistical analysis is a way of determining whether there is a potential disparate impact in the employees chosen for the reduction in force. You want to see employees in protected groups laid off at an equal rate or below the average rate for all employees being laid off (and those being retained).
It is important to carefully consider who will conduct the analysis, the method to be used, and the underlying data that will be analyzed. A company can perform a simple statistical analysis in house, but may need to hire an expert to perform a more complicated analysis. The failure to do a proper analysis will negate its value if legally challenged.
If the statistical analysis supports that you are laying off a high percentage of employees in a protected class, then it may be necessary to reconfigure the RIF so that you choose other employees to lay off who may have been close or borderline for the program.
Consider communication of the RIF decision. It is always difficult to inform employees that their jobs are ending as the result of a RIF. Consider how you will communicate the reduction in force to your workforce, and whether you will offer separation agreements to the affected employees. Separation agreements must be carefully drafted. It is best to obtain legal help with this task. Most RIFs are “exit or other employment termination programs offered to a group or class of employees” under the Age Discrimination in Employment Act (“ADEA”), as amended by the Older Worker Benefit Protection Act (“OWBPA”), and require specific waiver language and time to consider the separation package.
There is a lot that can go wrong in drafting an ADEA release, as was demonstrated in the January 11, 2019 case of Ray v. AT&T Mobility Services, LLC. In that case, a federal judge in the Eastern District of Pennsylvania found that AT&T’s release was invalid because it did not contain the decisional unit, or the process by which those who were being laid off were chosen.
RIFs are always stressful, but often necessary to enable a business to keep its competitive edge. RIFs require careful advance planning and documentation to provide the best protection to the company. Following the recommendations above, and obtaining legal counsel, will put you at a distinct advantage and help to protect your RIF from claims of discrimination.