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.

1. THOMAS ECONOMETRICS
quantitative solutions
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Reductions in Force:
A 10 Point Inspection
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2. Introduction
According to the Mass Layoff Statistics Program (U.S. Department of
Labor, Bureau of Labor Statistics), there were 28,030 mass layoff events
and 2,796,456 initial claims during 2009. These are recorded program
highs. The unemployment rate closed out the year at 10 percent, up more
than three and a half percentage points from the previous year.
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.
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.
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3. 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.
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.
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.
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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.
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.
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,
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5. 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.
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.
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6. 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.
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.
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7. 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.
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.
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