With the increasing possibility of an impending economic recession, many employers are looking for ways to cut costs and increase efficiency. As companies begin to feel the inevitable crunch of a slowing economy, many will be forced to consider reducing labor costs by cutting workers. This painful process is nothing new, but is also never easy. Downsizing can give rise to a multitude of legal claims, including discrimination, retaliation, breach of contract, defamation, and infliction of emotional distress.
Discrimination charges are on the rise. In fact, last year the Equal Employment Opportunity Commission received over eighty-two thousand private sector charges of discrimination. This represents a 9% increase over the previous year (the largest increase since 1993). The EEOC attributes the sharp increase in claims to a combination of factors including “changing economic conditions.” A link certainly exists between increasing employment lawsuits and a fledgling economy as workers who are unable to find replacement jobs are more inclined to file suits against their former employers.
Companies can limit their liability and avoid the risk associated with a reduction in force.
After considering alternatives to a reduction in force, such as reducing employee benefits or cutting back the time hourly employees work, and determining that a reduction in force is necessary, develop a written reduction in force plan and stick to it.
Follow these tips for a good start:
JUSTIFICATION: Determine your rationale for the reduction in force and justify it with documentation. If economic factors warrant a reduction in force, document your company’s current financial state and track changes to your income and employee positions. Courts do not generally interfere with the business judgment of a company. The ability to demonstrate a business need for the reduction in force can save you from defending a costly lawsuit.
Discrimination charges are on the rise. In fact, last year the Equal Employment Opportunity Commission received over eighty-two thousand private sector charges of discrimination. This represents a 9% increase over the previous year (the largest increase since 1993). The EEOC attributes the sharp increase in claims to a combination of factors including “changing economic conditions.” A link certainly exists between increasing employment lawsuits and a fledgling economy as workers who are unable to find replacement jobs are more inclined to file suits against their former employers.
Companies can limit their liability and avoid the risk associated with a reduction in force.
After considering alternatives to a reduction in force, such as reducing employee benefits or cutting back the time hourly employees work, and determining that a reduction in force is necessary, develop a written reduction in force plan and stick to it.
Follow these tips for a good start:
JUSTIFICATION: Determine your rationale for the reduction in force and justify it with documentation. If economic factors warrant a reduction in force, document your company’s current financial state and track changes to your income and employee positions. Courts do not generally interfere with the business judgment of a company. The ability to demonstrate a business need for the reduction in force can save you from defending a costly lawsuit.
SELECTION CRITERIA: Outline in writing the criteria that will be considered and exactly how selections will be made. Strive to utilize primarily objective criteria in selecting employees for termination. Examples of objective criteria are:
Job classification – temporary workers, part-time workers, contract/agency workers, etc. should be the first to go.
Seniority – the “last in; first out” approach based on the amount of time an employee has been with the company.
Productivity – individual contribution to the company’s profitability as demonstrated through objective data.
Performance evaluations – periodic performance evaluations are a valuable business tool that can be used during reduction in force to eliminate workers with poor performance or disciplinary problems. The key is to perform such evaluations regularly and uniformly. Courts will question a newly implemented performance evaluation program or a sudden shift in performance ratings immediately prior to a termination. Do not attempt to use performance evaluations as a pretext to terminate an otherwise unwanted worker.
USE A MATRIX: If objective criteria are not enough and subjective criteria must be used, consider using a matrix system. The matrix could include objective factors such as seniority and productivity as well as intangible factors such as leadership and adaptability. Cuts can be made based on overall scores on the matrix. Strive for objectivity and consistency. Be careful to avoid allowing a supervisor to rank an employee with whom there is a history of problems or conflicts. Further, be wary of matrix rankings that are inconsistent with previous performance evaluations.
CHECK THE STATISTICS: After making the first selection, but before making the first cut, determine the statistical impact of the proposed cuts on your employee pool.
BE CONSISTENT: Deviations from your stated rationale and selection criteria may attract unwanted attention and provoke allegations of discrimination. A plan is only useful if implemented. Be sure to stick to the written plan for your reduction in force throughout the process.
The Aftermath:
Notifying employees of layoffs can be a difficult task; however, handling the situation in a professional and dignified manner can help reduce the likelihood of a subsequent lawsuit. Having a third-party present at the notification is a good idea. Most employees will accept the news in stride and focus on their future, rather than the fairness of their selection. However, some employees may become distressed and angered. Supervisors giving the news should be prepared to provide the employee with reasons why and how they were selected. Companies who are unable to supply this information upfront may lead the employee to believe he/she was selected for improper reasons. Consider using a checklist to ensure that all information is communicated to the employee.
Try to foster good will with the affected employees by writing letters of recommendation outlining the circumstances of their lay-off. Severance packages can be offered to help create a sense of fairness. Employees receiving severance packages can be required to sign binding releases prohibiting them from successfully suing on some employment claims. Companies should carefully review any release with their legal counsel as courts have enacted strict requirements for their enforceability in connection with a reduction in force. Just a few of the requirements courts have imposed include:
1. Allowing employees 45 days to consider whether to sign – and after signed – a 7 day revocation period.
2. Not asking employees to waive future claims.
3. Advising employees in writing to consult with legal counsel.
4. Not requiring employees to give up the right to file EEOC charges.
Finally, do not forget to find ways to reassure and motivate your remaining workforce. Moral will undoubtedly suffer after a reduction in force plan and your remaining workers need to know your business has a plan to succeed. Reductions in force are a painful, yet often necessary part of any successful business. However, if handled correctly, many of the legal obstacles can be avoided and potential lawsuits eliminated before they begin.
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