Employer Guidelines for Conducting a Reduction-in-Force

Table of Contents:
Establishing Reasons for Reduction
Determining Which Employee Will Be Selected For Layoff
Management Training
Alternatives to Layoff
Providing Entitlements For Affected Employees
Guidelines for Maintaining Security
Reduction in Force Checklist of Human Resources Issues
Guidelines for Structuring the Compensation and Benefits
Guidelines for Communicating the Termination Decision

Whether it is called reorganizing, downsizing or rightsizing, reductions in an employer's workforce frequently give rise to litigation. The following highlights major areas of concern for employers and provides general guidelines for structuring a reduction in the workforce to avoid legal challenges.

Establishing Reasons for Reduction

It is important to establish objective, business related reasons for deciding to reduce the workforce.  Typical reasons include economic necessity, loss or downturn of business, reorganization, consolidation of functions or installation of technological advances that reduce manual labor requirements.  Whatever reason or reasons are given, they should be grounded in readily determinable facts and well documented in the event motives are called into question.

Determining Which Employees Will Be Selected For Layoff

Job categories and/or departments targeted for reduction will depend on the reason the reduction is necessary.  Once that is done, an objective means of selecting specific individuals for layoff must be developed in order to avoid discrimination claims under equal employment opportunity laws.  Unless required under a collective bargaining agreement, the law does not require employers to give employees selected for layoff an opportunity to transfer or “bump” other employees.  Because such a practice can be very complicated and disruptive, it is generally not a good idea to do it voluntarily.

Seniority As the Determining Factor
Length of service with the company or within job classification is the most common, easiest and most objective standard.  It has several advantages: it is objective, clearly understood by all parties, easiest to administer and less vulnerable to claims of bias.  On the other hand, it may not be feasible given differences in skills and the need to preserve flexibility within a smaller workforce.  Furthermore, long-service employees are not necessarily the most productive.

Performance as the Determining Factor
Performance is a difficult factor to measure and justify, and layoff decisions based on performance work best when they are documented.  If written performance evaluations have not been conducted in a thorough and conscientious manner in the past, they may not provide the objective basis necessary.  Evaluations prepared specifically for layoff purposes and immediately prior to the layoff may not provide adequate protection because they are not a part of the normal employment process and are subject to challenge, especially when they conflict with prior evaluations.  A number of legal pitfalls commonly arise when layoff and/or termination decisions are based upon subjective performance evaluations. The following potential legal risks can be reduced as suggested:

Absence of Formality
Informal, unwritten evaluation systems are extremely difficult to defend and may lack credibility.  Accordingly, if the selection of specific individuals for job elimination or layoff is to be guided by an assessment of individual job performance, that evaluation system should be formally adopted by policy and include specific evaluation forms, tools and instructions.

Vague, Subjective and Suspect Criteria
Performance criteria should be clearly identified and readily measurable.  For example, the consistent failure to meet identified performance goals has been upheld by the courts as a legitimate basis upon which to select an employee for layoff or termination.  Similarly, courts have held that effectiveness measured in terms of the gross product or production generated for the company also is an appropriate standard.  Conversely, judging an employee on the basis of vague criteria such as overall contribution to the mission of the company or cooperative attitude is very difficult to defend in the face of a claim of discriminatory termination.

Lack of Independence of the Evaluators
The integrity of the evaluation system is enhanced when more than one individual evaluates the employee's performance and when the evaluators make independent judgments rather than confer with each other before coming to a conclusion.  At least one court has held that the evaluation system was highly subjective and discriminatory where all of the evaluators used the same form and each evaluator could see preceding evaluations.  One method of enhancing the objectivity of the evaluation system is a “forced rankings” approach in which the evaluators rate each employee on a graded scale by identifying the “best” employee and the “worst” employee with regard to a particular factor and then the second best, second worst, and so on down the line.  This approach also provides a basis to compare an employee's qualifications among the individual evaluators.

Absence of Safeguards
The ability to defend the integrity and objectivity of a performance evaluation system is enhanced if the system includes certain basic safeguards. Such safeguards include having the first line supervisory evaluations reviewed by a higher level of management and providing employees an opportunity to comment on their evaluations.  Another critical safeguard is requiring all evaluations to be reviewed by the human resources department to assure that managers have used appropriate objective criteria and that they have adequately documented conclusions reached.  The human resources staff also should analyze the impact of layoffs on protected status such as race, sex and disability to avoid issues of employment discrimination.

Management Training

Numerous management personnel are usually involved in a reduction in force. Those who participate should be educated to ensure consistent and fair administration of the program.  This education should include an understanding of the company's procedures, as well as instructions for the correct methods to be used in implementing them, e.g., how to identify areas of excess staffing, what criteria should be used to rank employees, how to advise and counsel employees and what legal liabilities are faced by the company if one or more of the affected employees is treated unfairly or discriminatorily.

Management also should be told what procedures to follow in conducting exit interviews because such meetings often become the fodder upon which lawsuits are based.  It is important, therefore, that managers know what statements should or should not be made and how they should answer employee questions.

Alternatives to Layoff

In some instances, it may be possible to achieve either all or part of the company's goals through measures other than layoff.  Alternatives may not be feasible under certain circumstances. Because reductions in force often have a significant negative impact on the workforce as a whole, however, the possibility of the following alternatives always should be examined.

Attrition/Reduced Hours
Reductions based on attrition do not create the same trauma as group layoffs. Where action is necessary in a relatively short period of time, however, this practice may not satisfy company needs. Other alternatives include the reduction of work hours and/or the conversion of workers from full-time to part-time.  Again, these options may not be satisfactory or responsive to corporate needs, depending upon the circumstances involved.

Early Retirement
Offering an early retirement option is one method employed by a growing number of companies to avoid involuntary reductions in force.  Early retirement options usually include offering “sweeteners” to encourage voluntary retirement.  Sweeteners may include such things as continuation of company-paid medical insurance, continuation of salary, severance payments in excess of those already provided or increased pension benefits.

If an early retirement plan is implemented, it should contain a definite expiration date before which the employee must accept the offer and after which it will no longer be available.  It also is essential that any offer of early retirement be presented as a strictly voluntary option available to eligible employees in order to prevent claims under the Age Discrimination in Employment Act, which prohibits mandatory retirement except in limited circumstances.

Providing Entitlements for Affected Employees

Once a decision to reduce the workforce has been made, consideration must be given to insure affected employees receive all entitlements required by law and company policy.  The following issues should be addressed in that regard:

Advance Notice of Closing/Mass Layoff
The Worker Adjustment and Retraining Notification Act (the “WARN Act”) and similar state statutes require employers to provide advance notice in the event employees are terminated due to the closing of a facility or due to a significant reduction in the workforce.  Such statutes set minimum thresholds and can have a significant effect on layoff timetables.

The WARN Act requires employers of 100 or more employees to provide 60 days' advance notice of a facility closing (when there will be 50 or more employees affected) or a mass layoff (when 1/3 of the employees at a single worksite will be affected, so long as that percentage is more than 50 full-time employees, or when there will be 500 or more affected employees).  The WARN Act and applicable state law should be reviewed prior to any large scale reduction in force to assure compliance.

Wages and Vacation Pay
State wage payment laws generally include requirements regarding the payment of final compensation upon termination.  For example, the Illinois Wage Payment and Collection Act requires the payment of all wages, including accrued vacation earnings, be paid no later than the next scheduled pay date following termination.  Other states require immediate payment.  As a result, applicable state law should be consulted whenever a termination occurs.

Pension Benefits
Employees subject to layoff may be entitled to pension benefits depending upon provisions of the company plan.  Plan administrators should be contacted in order to ascertain the options available to employees, as well as the proper methods to be used in informing employees of their rights under the plan.

Insurance Continuation and Conversion Privileges
Federal and state laws require employers to offer group health insurance continuation and health insurance conversion privileges to terminated employees. Company responsibilities under those laws should be examined prior to layoff, and insurance carriers should be notified to assure compliance with applicable law.  These laws also require notification of continuation and/or conversion privileges to be given to employees at the time of termination, and these requirements also should be met.

Unemployment Compensation Benefits
In order to ensure that employees seeking state unemployment compensation benefits will receive benefits as quickly as possible, information regarding layoffs should be provided by the company to the local unemployment compensation office.  Alternatively or additionally, individual letters may be prepared and given to employees to take with them when they apply for benefits.  Information provided should include the date of layoff, the reasons, and the name and address of the individual affected.

Severance Benefits
Though not required by law, company policy or practice considerations may dictate the payment of severance to laid off employees. Previously established company policy with respect to severance pay may be followed.  In the event there is no currently established policy or practice, the amount of severance and eligibility criteria for severance pay can be established in the employee's discretion.  Often it is based upon objective criteria such as length of service, job classification, and/or wage level.

If you have any questions regarding the above or would like assistance in preparing for or conducting a workforce reduction, you may contact any partner in the Wildman Harrold's Employment and Labor Practice.

Guidelines for Maintaining Security

• Will all keys be obtained from the individual at the end of the terminated individual's interview?
• By when do you want the individual's office cleared out? Who will clear out the individual's office?
• Does the individual have expensive organization-owned equipment at home? How will it be returned?
• Collect credit cards, arrange for auto transfer, etc.

Reduction in Force Checklist of Human Resources Issues

• Identify targets of workforce reduction:
• Specific departments, job categories and shifts
• Establish a system for selecting individual employees for layoff within the affected departments and jobs
  • Straight seniority - if it is used, define what seniority date will be used, date of hire with hospital, length of time in the department, etc.
  • Modified seniority - seniority controls only where ability and qualifications are equal
  • Qualifications only - can we evaluate fairly?
  • Consider using a committee to make final decisions in layoff of individual employee
  • Evaluate comparative EEO impact of various layoff systems
• Notice of layoff
  • Check current policy
  • Consider pay in lieu of notice
• Transfer or bumping rights
• Termination benefits
  • Health insurance continuation
  • Vacation pay
  • Recall rights
  • Unemployment compensation claim
• The layoff interview should be conducted by department head
• Interview Layoff Outline: All employees should receive the following information
  • History of the reasons for the reduction, e.g. economic decline, loss of key customers or clients
  • When the effective date of reduction will take place
  • Indicate the number of other employees affected (do not name specific employees)
  • Describe recall rights, if any
  • Detailed discussion of benefits to which the employee is entitled
  • Explain outplacement services, if any, and how to participate
  • Brief explanation of unemployment compensation and offer assistance of Personnel Department in completion of forms

Guidelines for Structuring the Compensation and Benefits

• Was there a pre-employment agreement regarding severance?
• Will severance pay be paid in a lump sum or over a regularly scheduled pay period?
• Will there be any bonuses or other additional compensation paid? If so, will it be paid immediately or over a period of time?
• When will accrued vacation pay be paid? Will accrual continue for as long as the employee is on the payroll (even though he/she is not at work)?
• What is the criteria for determining severance compensation?
• Precedent .... Length of Service .... Reason for Termination .... Job Market for Services .... Marketability
• How long will you extend health, life, and disability insurance coverage?
• Does the employee have credit cards (phone, food/lodging)? If so, how long may he/she keep them?
• When will you explain the individual's pension rights? How soon must the employee make a decision?
• Will you provide outplacement services to the terminated individual? Has the outplacement firm been contacted?

Guidelines for Communicating the Termination Decision

• Prepare a “script” for the termination interview. Identify the individual who will handle the interview and determine if a witness should be present.
• Prepare a draft of a formal letter outlining the termination arrangements. (Determine whether a “release” will be required.)
• Inform the switchboard of the individual's departure and determine how incoming calls will be handled.
• Determine who needs to be notified of the individual's departure, e.g. customers, clients, co-workers.
• Identify who will be the terminated employee's ongoing contact within the organization, if any.

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