Reductions in Workforce-- 10 Questions You Must Ask First

The economic forecasters are telling us that the economic recovery has been underway for a while now, but it sure doesn’t feel like it. We lost more than 9 million jobs in the recent recession, and more job cuts may be just around the corner. Many businesses are struggling and may need to adjust the size of their workforces to not only remain profitable but to remain sustainable.

Some organizations may be considering a reduction in force. When exploring the option of a reduction in force, it is important that corporate counsel is involved. Corporate counsel will be able to advise on the legal implications of the reduction, to protect the interests of both the employer and the employees. The following ten points are designed to facilitate the discussion with your legal department when having a reduction in force conversation.

1. Are There Alternatives to a Reduction In Force?

When considering alternatives, Maribeth Minella of Young Conaway Stargatt & Taylor, LLP suggests thinking creatively. "Thinking creatively has always been a business necessity and in this economic environment it is imperative for companies to come up with new ways to cut labor costs while maintaining a competitive edge."

Alternatives can take the form of low-risk / long term solutions, such as hiring freezes, pay freezes and other reductions in employee-related expenses such as travel and tuition reimbursement. Mid-range solutions include job sharing, reassignment of employees whose skills are better utilized in other areas or departments, and voluntary programs such as early retirement, sabbaticals, and flex time / part time arrangements. Deep impact solutions include short term shutdowns, sales of portions of the business, and long term furloughs.

2. What Are The Reasons for the Reduction In Force?

It’s critical that the organization understand the reasons why a reduction in force is necessary. Common business reasons include cost reductions, loss of business, abandonment of lines of business, and restructuring of operations. Business reasons should be identified and memorialized in writing, and documentation supporting those reasons should be identified, collected and maintained.

3. What Size Reduction is Necessary?

The answer to this question will be guided by the reason(s) for the reduction in force. Reductions can be thought of in terms of payroll dollars or in number of positions. If cost reductions are the primary reason for the reduction in force, then payroll dollars may be the preferred metric to express the size of the necessary reduction. If abandonment of lines of business is the primary reason, the number of positions may be the preferred metric.

4. What Areas of the Organization Will Be Affected?

It is important to examine where in the organization the reduction in force will occur. Will the reduction be a certain percentage of the entire workforce? All or a portion of the employees in a particular department or business line? A specific number of employees? Again, the answer to this question will be determined by the underlying business reasons for the reduction in force.

5. What Are the Secondary Effects of the Reduction In Force?

The reduction in force will impact more than just the employees being separated. After the reduction in force, the organization may suffer a temporary loss of organizational efficiency due to people moving into new positions and new areas at the same time. The company may likely be confronted with high one-time costs for such things as unemployment compensation, lump-sum payments for accrued leave, and severance pay. Additionally, employee morale may suffer after the reduction in force.

6. What Criteria Will Be Used in the Selection Process?

The criteria used in the selection process should be objective and supported by documentation. The more objective the criteria, the less likely the decision will be vulnerable to a claim of discrimination. Examples of commonly used criteria include length of service, attendance record, disciplinary record, past performance evaluations over a set period of time, the positions / functions that are being eliminated, and the presence of skills that will be needed in the reduced workforce.

Consideration of a multi-component evaluation process may be advised; if so, the organization needs to determine whether the various components will be given equal weight, whether some components will be weighted more heavily than others, and whether some components will be used as tie-breakers.

Organizations need to be aware that what they perceive to be "objective" criteria may not be perceived as objective by employees. For example, performance evaluations and disciplinary records could be viewed as "tainted". An employee may make the argument that (s)he was disciplined more frequently or severely, and was rated lower on performance evaluations because of gender, race, age, or other protected characteristic.

7. Which Employees Are Selected?

Similarly situated employees should be grouped together into comparison pools, and the criteria identified in the previous step should be applied uniformly to each member of each pool. One of the key issues here is defining "similarly situated employees". The structure of the workforce itself will guide this definition. The general rule is that employees are similarly situated if they share the same job functions, have similar levels of responsibility, and their jobs require similar skills and abilities.

8. Do The Selections Have A Disparate Impact?

After objectively applying the criteria to the comparison pools and making the initial selections, a disparate impact analysis should then be conducted to determine if the selection decisions have a disparate impact by gender, race, age, or other protected characteristic.

A formal statistical test of disparate impact is preferred to other ad-hoc methods, such as the Four Fifths Rule (also known as the 80% Rule), a means test, or other non-statistical tests. If disparate impact is found, the selections should be examined to determine whether they can be justified by business necessity or reasonable factors other than protected group status.

9. What Are the Organization’s Obligations Under OWBPA and Other Regulations?

If a reduction in force involves two or more employees, employers need to comply with the Older Worker Benefits Protection Act (OWBPA) for age waivers for individuals over the age of 40. In circumstances where the age waiver is offered as part of an exit incentive of the employment termination program, the OWBPA requires that employees must be informed of their right to speak with an attorney, must be given at least 45 days to consider the severance agreement, afforded 7 days to revoke their acceptance of the agreement, and be provided with statistical information about the reduction in force.

The organization should carefully prepare the statistical information about the reduction in force, and legal counsel should approve the information prior to its dissemination.

It is important to note that the Worker Adjustment and Retraining Act (WARN Act) applies to employers with 100 or more full time employees. WARN obligations are triggered by initiating a reduction in force that meets one of several possible criteria defined by the statute. Consult with legal counsel to determine whether your reduction in force triggers any WARN obligations.

10. What Do the "Raw Numbers" Look Like?

The Older Worker Benefits Protection Act requires that all releases and waivers of federal age discrimination claims provided as part of a severance program offered to terminated employees must include written disclosure of the job titles and ages of all individuals selected and all individuals eligible for selection for the reduction in force. This information – the "raw numbers" – is the basis for a terminated employee (and his attorney) making a decision on whether to sign the waiver or pursue an age discrimination claim. Thus, it is important to not only perform the statistical analysis of disparate impact, but to also consider the raw numbers.