Strategies for Reducing Legal Risk in Reductions in Force

The economy is reeling from a staggering recession. Sales are down, inventories are up, financial markets have dropped precipitously and remain extremely volatile, consumer confidence is at low ebb, and the government is stepping in to bail out icons of American business to include major banks, General Motors and Chrysler. The nation's unemployment rate rose to 9 percent in March 2009 " the highest rate since 1983. Experts predict the unemployment rate will soon reach 10 or 11 percent.

In the midst of it all, employers large and small are cutting costs through reducing hours, exit incentive programs, temporary shutdowns, plant closures, and involuntary reductions in force (RIFs). Because in a RIF the employer selects certain employees to be involuntarily terminated while retaining others, RIFs provide the greatest potential for risk of employment discrimination claims on the basis of age, race, gender, national origin and disability. RIFs can also implicate the federal Age Discrimination in Employment Act, as amended by the Older Worker Benefits Protection Act (OWBPA), the Employee Retirement Income Security Act of 1974 ("ERISA"), and the Worker Adjustment and Retraining Notification Act (WARN Act).

Careful planning of all aspects of the RIF with the oversight of counsel and human resources is crucial to limiting an employer's exposure to subsequent litigation. Indeed, in Blair v. Henry Filters Inc., the Sixth Circuit held that the lack of an objective plan to carry out a reduction in force, coupled with circumstantial evidence of age discrimination, would permit a reasonable fact-finder to conclude that the employer's proffered non-discriminatory reason for terminating the plaintiff was a pretext for age discrimination. It is therefore essential that employers develop and follow a predetermined RIF plan incorporating as many objective components as possible when conducting a RIF. The following includes a discussion of the major legal considerations involved in a RIF and some tips to establish an objective RIF plan.

Exit Incentive Programs

Before conducting an involuntary RIF, consider an exit incentive program. Whether the incentive involves enhancements to pension eligibility, such as adding to an employee's age and years of service for eligibility/benefit purposes, or cash incentives limited to older, more senior employees, or across the board incentives, these programs encourage employees to accept severance benefits now, rather than await possible termination with reduced severance benefits later. Before instituting such programs, which can be governed by ERISA, an employer should carefully identify the segment of the workforce it wishes to provide the incentive, whether it retains the right to reject exit offers made by key employees, and whether it will require a release in exchange for the exit incentive benefits that triggers compliance with the OWBPA.

Involuntary RIFS

The following considerations and processes will help reduce employment discrimination exposure in an involuntary RIF:

1. Establish the Business Justification. A key initial step is for the employer to determine and document the business purpose of the RIF. This will help identify economic measures that can be taken to reduce the number of employees to be laid off.

Determining the reason and necessity of a RIF, in turn, will also help determine the layoff criteria. For example, if there is a general reduction in sales, the employer might eliminate the second shift. This dramatically reduces discrimination claims because the second shift employees are being treated the same. This analysis would apply to eliminating employees associated with a product line that is experiencing faltering sales. The business justification analysis should also determine the number of employees to be laid off and establish the organizations from which they will be selected.

2. Identify Neutral Company Decisionmakers. Choose a special management committee to plan and implement the RIF. It should include a diverse group (e.g., senior management, HR manager or specialist and all of whom should consult with legal counsel).

3. Develop a RIF Policy or Guidelines. The management committee should develop written RIF policy or guidelines. Counsel should remember that RIF decisions can be challenged under a disparate treatment or a disparate impact theory. Employers must be able to justify the selection of one employee for the RIF over other similarly-situated employees. It is important that the client utilize as many objective selection criteria as possible. A totally subjective selection process not only subjects the employer to criticism and suspicion, it can also permit a statistician to examine the "bottom line" effect of the RIF upon a protected group. Examples of objective factors include giving credit for years of service and/or time in a position, considering relevant education or certifications, prior disciplinary actions, and objective or quantifiable aspects of job performance supported by pre-RIF performance appraisals. It is, however, a mistake to mislabel as an "objective factor" what is in reality a subjective one.

To the extent the employer considers more subjective selection criteria, such as "critical skills" or "transferability," the terms should be carefully defined to reduce subjectivity.

In reducing jobs where there are multiple incumbents, carefully define which employees are similarly situated and compare them for retention using the established selection criteria. The employer should develop a worksheet for comparing proposed RIF candidates with their peers, and the managers should be required to give detailed explanations when the individuals to be laid off are in protected categories. Using the proper peer group helps restrict the employees to whom a potential plaintiff can compare himself or herself to.

The employer should select the decisionmakers in advance with an eye toward those who are sufficiently neutral and who can convincingly explain the employee's work, skills and job performance. This is usually a department manager. Using an immediate supervisor as decisionmaker is generally ill advised inasmuch as they tend to be less articulate, more prone to bias against a particular employee, and are often the source of age, race or gender conscious statements that create circumstantial evidence of unlawful discrimination.

4. Establish a RIF Review Committee and Final Decisionmaker. A RIF review committee should be established and led by a strong manager who is neutral, a good witness, and familiar with the RIF guidelines. The RIF review committee should be diverse and should include human resources representatives and in-house counsel if available. The RIF committee should critically review the layoff comparison forms and demand a detailed justification for the selection of protected employees.

Questionable decisions should be challenged and, if necessary, reversed. The RIF review committee should also consider the disparate impact of the RIF as more fully discussed below. The results of the RIF review committee should be reviewed and approved by a final decisionmaker, usually the employer's president or a highly placed officer.

5. Plan the Delivery of the Message. Managers should be trained on how to conduct the RIF notification meetings, including what to say and what not to say. Two persons should participate in each meeting, one a manager (not the immediate supervisor) who played a role in the decision and the second a member of human resources or a neutral manager. The impacted employee should be advised that the decision is final and not subject to debate. The details of separation or other benefit issues should be addressed in separate meetings. Meetings should be kept short, but conducted with compassion and patience considering the inevitable emotional impact on employees.

6. Disparate Impact Analysis. Counsel should instruct that a statistical analysis be prepared for counsel's review, with attendant attorney-client privileges, to determine whether the selection process has a disparate impact on protected employees. Where a statistically significant disparate impact on workers in protected categories exists, counsel should recall that the employer will have the burden of establishing that the selection criteria and decision were justified by reasonable factors other than age (if there is an adverse impact on age), or by business necessity (if the adverse impact falls in other protected categories). Do not use untrained human resource representatives who tend to use simplistic analyses that often fail to account for each significant variable. Strongly consider engaging an expert statistician to identify the proper pools and run various tests, including multiple regression analyses.

The RIF review committee, through counsel's advice, should review the selections for disparate impact as well as disparate treatment. If the statistics show a disparate impact, the RIF committee should more closely review all selections and perhaps the process itself. RIF selections that cannot withstand close scrutiny should be revised. The purpose is not to eliminate a disparate impact but to correct erroneous choices and to insure a sound justification exists for the final decisions.

The Older Workers Benefits Protection Act

Employers should give careful consideration to providing a severance benefits package in exchange for a release of all claims. Employers who provide severance benefits coupled with a release to any employee age 40 or older must comply with the OWBPA. If the release does not comply with the OWBPA, any purported release of age discrimination claims is invalid even if the employee has received the severance benefits. The release must be written in such a way that the employee who signs it can be reasonably expected to understand it. One document may not work in all situations depending upon the education, mental capacity, sophistication or lack thereof of the employee in question.

The OWBPA imposes a series of very detailed and specific requirements on releases offered in connection with reductions in force (of multiple employees) which are beyond the scope of this article. OWBPA requirements include: providing employees with a "knowing and voluntary" release capable of being understood, giving 45 days in which to consider the release (which is waiveable by the employee) and seven days to revoke after the release is signed (which is not waiveable), instructing employees to seek legal advice, and providing a detailed census showing the classifications and age of employees eligible for the severance benefit and those who are not. Litigation abounds on these releases and employers will be held to strict compliance within the letter of the law and regulations.

The WARN Act Obligations

Counsel must also consider federal and Tennessee plant closing/mass layoff laws. Employers with multi-state operations must consider the application of state law in each state where the RIF is conducted. The WARN Act generally requires that a covered employer provide 60 days notice of a plant closing or mass layoff. Covered employees alternatively can be given 60 days pay in lieu of notice. Coverage under the WARN Act is complex and beyond the scope of this article. For an extensive discussion of the WARN Act, see David R. Keene, II's featured article in the May 2009 Tennessee Bar Journal.

ERISA Implications

Using voluntary separation benefits, especially pension enhancement or bridging years of service, can significantly reduce ADEA risk. Depending upon how they are structured, voluntary exit incentive programs can be governed by ERISA. When the employer starts giving "serious consideration" to implementing any enhanced severance program, the employer has a fiduciary duty to avoid any misstatements to employees about the potential program. An employer who makes any statement about future benefits (such as severance or retiree medical benefits), whether in response to questions or on the employer's own initiative, could be bound by those promises, whether accurate or not, if employees rely on the promise.

The Bottom Line

Conducting a RIF is never easy nor should it be rushed in order to quickly usher employees off the payroll. Counsel for employers should advise their clients to engage in careful planning to document the business justification, develop an objective plan, consider the RIF selection decisions from a disparate treatment and disparate impact standpoint, openly communicate with the employees selected and those retained, and offer a severance package in exchange for a lawful release of all claims. Counsel should encourage employers to consider voluntary exit incentive plans with separation benefits and a release to reduce ADEA exposure. A well executed RIF can help the employer add to the bottom line without exposing itself to undue litigation risk that could reduce or eliminate any benefits of the RIF.