In a challenging business climate, an employer may seek to explore ways to reduce workforce spend. When cuts to compensation and benefits and other alternatives to reductions in force (RIFs) are not feasible due to business conditions, an employer may need to decide on a type of separation from employment.
This article shows how an employer may choose between different types of workforce reductions in order to achieve business goals and remain in compliance with various laws.
Step 1: Determine Whether to Place Employees on Furlough or Temporarily Lay Off
A variety of alternatives to workforce reductions could be implemented (e.g., hiring freezes, cuts to compensation and benefits) prior to resorting to downsizing measures. In the event that an employer needs to downsize its workforce, it could explore relatively temporary measures, such as a furlough or temporary layoff. Permanent mass layoffs could also be an option.
A furlough is temporary in nature and often involves a reduction of hours and pay or time off from employment, while employees remain on the payroll and may continue to receive benefits. Furloughs may last for a defined period or for an indefinite period.
A layoff involves an actual separation from employment, which is sometimes temporary. Layoffs may be advisable for reasons of budget or due to the discontinuance, curtailment or redirection of a division, project or program.
Select individuals for the reduction in force (RIF). Whether deciding to implement a furlough or temporary layoff, an employer must first select the individuals for a reduction in force (RIF).
Employers should consult with inside or outside counsel in order to select individuals for the RIF. Focus should remain on factors that are reasonably designed and achieve a specific business purpose. The factors should be based on objective measures and legitimate business objectives.
Equal employment opportunity (EEO) laws prohibit intentional discrimination against workers with protected characteristics (known as "disparate treatment"), as well as disparate-impact discrimination (i.e., practices that, although facially neutral with regard to the protected characteristic, have the effect of harming protected workers more than other workers), unless the employer can show that the practice is based on reasonable factors other than age or any other protected characteristic.
In order to remain compliant with EEO laws, the employer should conduct an EEO adverse-impact analysis based on the positions that were selected. Specifically, an employer may conduct a number of statistical tests regarding the positions selected based on age, sex, race and disability.
The employer should also work with counsel to have a discoverable list of the individuals selected for RIF. This will enable the employer to show its compliance with applicable laws in the event of a claim.
Decide between a furlough and a layoff. Placing employees on furlough may allow an employer to defer costs related to final pay, severance pay and any remuneration for unused paid time off (PTO), vacation and/or sick days.
Because an employee on furlough continues to be on the payroll, the employer must take additional employment action, if necessary, to separate an employee from employment. However, certain jurisdictions may treat an extended furlough as a separation for termination notice and unemployment benefits purposes. In addition, the reduction of hours may be a qualifying event under health care continuation laws (federal COBRA and mini-COBRA state counterparts).
However, depending on an employer's ability to continue with benefits obligations by keeping an employee on furlough, or an employer's ability to reduce hours as opposed to a layoff, a layoff may make more fiscal sense.
An employer should consult applicable laws, agreements and internal policies and practices that may have a bearing on the decision between placing employees on furlough or laying off workers. With respect to internal policies and practices, an employer should consult:
- Personnel policies and any related employee handbooks statements;
- Any guidelines for selecting employees for a layoff;
- Written policies concerning RIFs;
- Any written policies concerning severance pay and remuneration for unused paid time off (PTO), vacation and/or sick days;
- Documentation pertaining to past layoffs or reductions in force; and
- Past practices regarding termination of employment, RIFs, severance pay and remuneration for unused PTO, vacation and/or sick days.
Reviewing applicable law and understanding present and past practices informs an employer's decision-making process to ensure that it is fair, objective and consistent.
With respect to furloughs in particular, an employer should review wage and hour requirements and the differences between exempt and nonexempt requirements. There are challenges in maintaining the salary basis of pay for exempt employees during the period of furlough.
Communicate decision and comply with legal requirements. The employer should communicate, in a tactful, truthful and compassionate manner, the fact that certain employees will be placed on furlough. In conjunction with this announcement, employees should be informed of the employer's voluntary attrition program in order to allow interested employees the opportunity to retire or accept a layoff in return for severance.
When making the decision to engage in a reduction in force, an employer should review and comply with:
- Health care continuation (i.e., federal COBRA and its state counterparts) notice requirements (because workers will experience a reduction in hours plus a loss of coverage, triggering notice requirements);
- Employee's conversion rights for insured benefits;
- Retirement benefits information requirements;
- Any existing collective bargaining agreements and individual employment contracts;
- Final pay requirements, including:
- Applicable federal, state and local laws and company policies relating to severance pay and vacation/sick/PTO/other leave payouts; and
- Applicable laws and policies regarding outstanding balances or cash advances on fringe benefits, loan repayment, uniforms and overpayments.
- Any mass layoff notification requirements that would apply during these types of reductions in force. Although an employer may be expecting to recall employees soon, the federal Worker Adjustment and Retraining Notification (WARN) Act advance-notice requirements apply to employers covered under the law if a worker's hours are reduced by more than 50 percent in each month of any six-month period.
While the furloughs may be unavoidable, the employer should:
- Communicate its desire to retain its workforce;
- Explain that the step must be taken only due to circumstances outside of the employer's control; and
- Affirm that the decision is not based on performance or misconduct.
Step 2: Determine Whether to Implement Permanent Mass Layoffs
Sometimes a mass layoff is an employer's best course of action. For example, the shuttering of a location or laying off of a number of workers allows the business to consolidate resources and shift focus in order to better respond to market conditions.
Determine applicability of mass layoff notification laws. The employer must determine if mass layoff advance notification laws apply, and plan accordingly, based on the projected employment losses at the work location. The employer does not count any terminations for cause in its WARN Act reporting, because these types of separations are not an employment loss as that is defined under the law.
Mass layoff notification laws are operative at the federal, state and local levels. The employer needs to determine its coverage and any triggers, notification requirements and exceptions that may apply. In addition, a specific jurisdiction may require severance payments in addition to advance notice for worker retraining.
The federal Worker Adjustment Retraining and Notification (WARN) Act covers employers of 100 or more full-time employees; or 100 or more employees who collectively work 4000 hours per week. Covered employees under federal WARN include those employees to be laid off for more than six months, or who have their hours reduced by 50 percent or more for a six-month term.
The triggers for federal WARN are mostly mass layoffs and plant closures. However, some mini-WARN laws (such as California) cover relocations. The notification laws are triggered depending on the number of employment losses at a single site.
Depending on the jurisdiction, a number of exceptions to the advance-notice requirements may apply.
Institute a voluntary attrition program. Prior to announcing the layoffs, an employer may institute a voluntary attrition program. These programs generally ask employees to voluntarily accept a layoff or early retirement, generally for a set dollar amount provided as severance.
Depending on the number of employees who choose this option, the mass layoffs may be reduced and, depending on the employer's business structure, could inform whether a particular plant closure is necessary.
Communicate decision, provide required notice and comply with requirements. An employer should communicate the mass layoff decision in a truthful and compassionate manner. In addition, the employer should comply with all applicable compliance requirements, including advance-notice requirements under federal WARN and state and local counterparts.
Communicating the decision depends on an employer's particular circumstances. An employer may choose to convene employees individually or in small groups in order to communicate its decision. Consider having managers who are familiar to the employees present in order to answer any questions and to provide support.
An employer should execute all necessary steps and comply with obligations when separating an employee from employment. The employer should provide all parties with the required notification in compliance with the WARN Act and any applicable exception to advance-notice requirements, execute final payments to employees in compliance with applicable law and internal policy, and communicate information on retirement and fringe benefits and health care continuation.
Step 3: Determine Whether to Terminate for Cause
An employer may need to decide on whether to terminate an employee for cause (e.g., poor performance) or to lay off the employee. When making this determination, it is critical for an employer to base its decision on objective measures and facts.
Placing an employee on temporary layoff based solely on poor performance or misconduct is not best practice - it is conflating two different business decisions into one. This is not to say that an employer need not take competencies into account when deciding on layoffs and on whom to recall. However, best practice dictates that an employer decide on which positions and attending competencies to furlough or lay off, not specific individuals.
Furthermore, a temporary layoff conveys that the employer would be interested in recalling the employee should market conditions improve. Chances are a rule-breaker or poor performer would not be recalled or rehired under any circumstances.
Corrective action is the traditional, preferred route for addressing poor performance and/or misconduct. Although many managers shy away from being truthful about performance and conduct issues and resort to "grade inflation" to avoid a difficult conversation, the employer should focus on truthful, fact-based approaches to managing performance and conduct.