Conducting Reductions In Force (RIFs): 10 Practical Tips for Employers to Avoid Lawsuits
We recently have observed an increase in the number of employers conducting group layoffs or “RIFs” in order to cut costs because of the economic downturn. This trend may only worsen in the coming year. Employers must be aware that RIFs are much different than single employee terminations. Specific federal laws such as the Older Workers Benefit Protection Act (OWBPA) and the Worker Adjustment and Retraining Notification Act (WARN), as well as individual state laws, may apply to an employer’s RIF and, if violated, may result in costly legal claims. The following are 10 practical tips for employers to consider prior to conducting a RIF. Keeping these tips in mind will help ensure that planned cost savings are not cancelled out by legal defense costs, settlement payments, and damage awards.
- Assemble a RIF Team and Choose the Decisionmaker(s). Many stakeholders need to be involved in RIF decisions. For example, an employer’s operations managers will best understand future staffing needs, and employees’ relative job skills, experience, and performance. Corporate finance will determine what cost savings must be realized by the RIF to keep the business competitive. The Legal Department and Human Resources will play lead roles in managing the RIF and communicating with employees. Early in the RIF process, therefore, an employer’s leadership team should form a RIF planning team comprised of managers from these departments. In addition, depending on the size of the RIF, it will be important for management to choose one or more key decisionmakers, who will decide which employees will be selected for separation.
- Assure Confidentiality. When planning a RIF, nothing is more damaging than a premature disclosure of information to employees. RIF rumors may result in reduced productivity and performance, low morale, and even unwanted employee departures. In addition, circumstances may unexpectedly change and a planned RIF ultimately may not occur or may involve fewer employees than originally planned. For these reasons, the RIF team should establish and ensure strict confidentiality among participants. Moreover, the RIF team may consult with inside and outside legal counsel about RIF decisions and confidentiality is required to preserve the attorney-client privilege for protected legal advice.
- Consider and Decide Upon Selection Criteria. A key factor in conducting a RIF is to ensure that the criteria used to select employees for separation are business-related and non-discriminatory. The RIF team should consider and decide upon what criteria to use after considering the expected needs of the business following the RIF. Importantly, if the RIF is covered by the OWBPA, these criteria must be disclosed to affected older workers as the eligibility factors for their participation in the special severance plan. Common business-related employee selection criteria for job elimination are employee qualifications, impact on the business from the employee’s separation, skill set, experience, and relative job performance and proficiency. By comparison, selecting employees with the highest salary for layoff may be problematic and result in age discrimination claims because high salary often correlates with years of service, which correlates with age.
- Review Decisions for Disparate Impact/Union Issues. The most common legal claim brought by affected employees after a RIF is that the employer disproportionately chose older workers for job elimination. Sometimes a group of older workers will allege that the employer’s business justification for the RIF is merely pretext for “cleaning house” or getting rid of older employees in favor of younger ones. Such claims can be expensive to defend against. Accordingly, prior to implementing the RIF, the RIF team and legal counsel should evaluate data concerning those employees selected for job elimination. In addition, employees can bring claims after a RIF for other types of discrimination and retaliation, so employers should consider whether a RIF is likely to prompt such claims. If the workforce, or part of it, are members of a union, then RIF terms may have to be bargained for under a collective bargaining agreement.
- Evaluate OWBPA/WARN Act/State Law Coverage. If an employer is covered by the Age Discrimination in Employment Act (ADEA) and is offering an early exit incentive plan or special severance benefits to a group of employees, then special requirements under the OWBPA must be followed for affected employees who are over age 40. The federal law known as WARN applies to plant/facility closures and mass layoffs and requires sixty (60) days’ written notice to affected employees and government officials/agencies. State laws may require other special notice requirements. Employers planning a RIF must know if their actions are covered by these laws.
- Plan for Termination & Final Pay Requirements. As part of RIF planning, employers must take care to comply with normal state law final pay rules for terminated employees. Typically, final earned wages and salary and accrued but unused vacation time must be paid to discharged employees on the date of termination. Similarly, employers should carefully plan to pay commissioned employees any earned commissions in accordance with the terms of any existing commission plan. In some states, failure to timely pay final wages will result in liability for triple damages.
- Choose Special Severance Benefits. Because the legal risks from RIFs are significant and simply to assist departing employees, many employers will offer special severance benefits to employees in connection with a RIF as part of a separation agreement. These benefits may include salary continuation or a lump sum severance payment, health insurance continuation payments or COBRA reimbursement, and transition assistance. An important duty of the RIF team with be to consider what special severance benefits to offer affected employees and their costs.
- Use Special Separation Agreements. If special severance benefits are offered, an employer usually will require employees to sign separation agreements that include a release of legal claims. Separation agreements for RIFs must be drafted carefully to be enforceable. If they are not, the former employee may get to keep the severance benefits, but retain the right to sue the employer. Under ADEA and the OWBPA, separation agreement for RIFs that contain releases of age discrimination claims must contain specific provisions, such as a 45-day consideration period and a 7-day revocation period. Employees over age 40 also must be provided with information disclosures about the special severance plan, such as the time limits applicable to the plan, the eligibility factors (as described above), and a listing by job titles and ages of those employees selected for participation in the plan. Omitting these or other provisions may mean that the release does not waive age discrimination claims under federal law. In addition, many states now restrict the scope of confidentiality/nondisclosure provisions in separation agreements and/or require specific language in the release of claims.
- Plan for Employee Communications. Careful planning about how to announce the RIF to affected employees is critical, especially in today’s environment with many employees working remotely. Human Resources and frontline managers must be prepared to deliver the news to employees, explain severance pay and benefits being offered, and answer questions about benefits termination and continuation rights. The RIF team should also develop a procedure for collecting Company property from affected employees, which may include prepaid boxes sent to those working remotely.
- Address Concerns of Remaining Employees. Equally important to an effective RIF communications strategy is to address the concerns of remaining employees that the RIF may be one of several. After all, these are the employees the RIF team determined were necessary to the future success of the business. If true, the RIF team should let remaining employees know that the RIF was necessary to right-size the business but that no further reductions currently are planned. Otherwise, employees may preemptively seek opportunities elsewhere.
RIFs are complex and often must be implemented urgently. Our labor and employment, employee benefits/ERISA, and executive compensation attorneys have successfully helped employers conduct thousands of RIFs. If you have any questions regarding RIFs, please contact Scott Connolly in our Boston Office or another member of Verrill’s Employment & Labor Group.