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eBook: Reductions in Force - A Ten Point Inspection

Given the current economic conditions, many businesses are struggling and may need to take action 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.

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eBook: Reductions in Force - A Ten Point Inspection

  1. 1. THOMAS ECONOMETRICS quantitative solutions for workplace issues Reductions in Force: A 10 Point Inspection Silver Lake Executive Campus 41 University Drive Suite 400 Newtown, PA 18940 P: (215) 642-0072 www.thomasecon.com1 | Page
  2. 2. Introduction According to the Mass Layoff Statistics Program (U.S. Department ofLabor, Bureau of Labor Statistics), there were 28,030 mass layoff eventsand 2,796,456 initial claims during 2009. These are recorded programhighs. The unemployment rate closed out the year at 10 percent, up morethan three and a half percentage points from the previous year. Given the current economic conditions, many businesses arestruggling and may need to take action to not only remain profitable but toremain sustainable. Some organizations may be considering a reduction inforce. When exploring the option of a reduction in force, it is important thatcorporate counsel is involved. Corporate counsel will be able to advise onthe legal implications of the reduction, to protect the interests of both theemployer and the employees. The following ten points are designed tofacilitate the discussion with your legal department when having a reductionin force conversation.Are There Alternatives to a Reduction In Force? When considering alternatives, Maribeth Minella of Young ConawayStargatt & 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.2 | Page
  3. 3. Alternatives can take the form of low-risk / long term solutions, suchas hiring freezes, pay freezes and other reductions in employee-relatedexpenses such as travel and tuition reimbursement. Mid-range solutionsinclude job sharing, reassignment of employees whose skills are betterutilized in other areas or departments, and voluntary programs such asearly retirement, sabbaticals, and flex time / part time arrangements. Deepimpact solutions include short term shutdowns, sales of portions of thebusiness, and long term furloughs.What Are The Reasons for the Reduction In Force? It’s critical that the organization understand the reasons why areduction in force is necessary. Common business reasons include costreductions, loss of business, abandonment of lines of business, andrestructuring of operations. Business reasons should be identified andmemorialized in writing, and documentation supporting those reasonsshould be identified, collected and maintained.What Size Reduction is Necessary? The answer to this question will be guided by the reason(s) for thereduction in force. Reductions can be thought of in terms of payroll dollarsor in number of positions. If cost reductions are the primary reason for thereduction in force, then payroll dollars may be the preferred metric toexpress the size of the necessary reduction. If abandonment of lines ofbusiness is the primary reason, the number of positions may be thepreferred metric.3 | Page
  4. 4. What Areas of the Organization Will Be Affected? It is important to examine where in the organization the reduction inforce will occur. Will the reduction be a certain percentage of the entireworkforce? All or a portion of the employees in a particular department orbusiness line? A specific number of employees? Again, the answer to thisquestion will be determined by the underlying business reasons for thereduction in force.What Are the Secondary Effects of the Reduction InForce? The reduction in force will impact more than just the employees beingseparated. After the reduction in force, the organization may suffer atemporary loss of organizational efficiency due to people moving into newpositions and new areas at the same time. The company may likely beconfronted with high one-time costs for such things as unemploymentcompensation, lump-sum payments for accrued leave, and severance pay.Additionally, employee morale may suffer after the reduction in force.What Criteria Will Be Used in the Selection Process? The criteria used in the selection process should be objective andsupported by documentation. The more objective the criteria, the less likelythe decision will be vulnerable to a claim of discrimination. Examples ofcommonly used criteria include length of service, attendance record,disciplinary record, past performance evaluations over a set period of time,4 | Page
  5. 5. the positions / functions that are being eliminated, and the presence ofskills that will be needed in the reduced workforce. Consideration of a multi-component evaluation process may beadvised; if so, the organization needs to determine whether the variouscomponents will be given equal weight, whether some components will beweighted more heavily than others, and whether some components will beused as tie-breakers. Organizations need to be aware that what they perceive to be“objective” criteria may not be perceived as objective by employees. Forexample, performance evaluations and disciplinary records could beviewed as “tainted”. An employee may make the argument that (s)he wasdisciplined more frequently or severely, and was rated lower onperformance evaluations because of gender, race, age, or other protectedcharacteristic.Which Employees Are Selected? Similarly situated employees should be grouped together intocomparison pools, and the criteria identified in the previous step should beapplied uniformly to each member of each pool. One of the key issues hereis defining “similarly situated employees”. The structure of the workforceitself will guide this definition. The general rule is that employees aresimilarly situated if they share the same job functions, have similar levels ofresponsibility, and their jobs require similar skills and abilities.5 | Page
  6. 6. Do The Selections Have A Disparate Impact? After objectively applying the criteria to the comparison pools andmaking the initial selections, a disparate impact analysis should then beconducted to determine if the selection decisions have a disparate impactby 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, theselections should be examined to determine whether they can be justifiedby business necessity or reasonable factors other than protected groupstatus.What Are the Organization’s Obligations UnderOWBPA and Other Regulations? If a reduction in force involves two or more employees, employersneed to comply with the Older Worker Benefits Protection Act (OWBPA) forage waivers for individuals over the age of 40. In circumstances where theage waiver is offered as part of an exit incentive of the employmenttermination program, the OWBPA requires that employees must beinformed of their right to speak with an attorney, must be given at least 45days to consider the severance agreement, afforded 7 days to revoke theiracceptance of the agreement, and be provided with statistical informationabout the reduction in force.6 | Page
  7. 7. The organization should carefully prepare the statistical informationabout the reduction in force, and legal counsel should approve theinformation 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 meetsone of several possible criteria defined by the statute. Consult with legalcounsel to determine whether your reduction in force triggers any WARNobligations.What Do the “Raw Numbers” Look Like? The Older Worker Benefits Protection Act requires that all releasesand waivers of federal age discrimination claims provided as part of aseverance program offered to terminated employees must include writtendisclosure of the job titles and ages of all individuals selected and allindividuals eligible for selection for the reduction in force. This information –the “raw numbers” – is the basis for a terminated employee (and hisattorney) making a decision on whether to sign the waiver or pursue an agediscrimination claim. Thus, it is important to not only perform the statisticalanalysis of disparate impact, but to also consider the raw numbers.7 | Page