A frequently used step to control costs in times of uncertainty is to reduce personnel. A well-planned restructuring or reduction in force, generally referred to as a “layoff,” can achieve meaningful cost reductions and refocus management on business priorities. However, layoffs are inevitably disruptive. They also come with legal risks. The following are ten action items that employers should consider to control risks associated with layoffs.
1. Assemble a Multi-Disciplinary Team.
Significant planning activities are necessary to conduct a layoff smoothly and reduce risks. Experienced employment counsel can be most effective in controlling legal risks engaged at the outset. In addition, the team should include human resource and benefits specialists as well as the employer’s CFO senior operations staff. At the initial meeting, the employment counsel can explain the layoff process, the legal risks involved and the basics of how to invoke and preserve the attorney-client privilege to shield sensitive communications.
2. Assess Whether the WARN Act or a Mini-WARN Act Applies.
Under the Worker Adjustment and Retraining Notification Act (the WARN Act), “mass layoffs” and “plant closings” by employers of at least 100 employees trigger an obligation to provide 60 days’ notice in advance of terminations of employment. There are different standards for what constitutes a mass layoff or a plant closing, although each includes as a necessary but not sufficient condition the termination of employment of at least 50 employees at a “single site of employment” within a 90-day period.
Multiple issues need to be considered in determining whether the WARN Act applies, including the exclusion (for counting purposes only) of “part-time employees” and the determination of whether remote employees should be counted as part of a “single site of employment.” If more than 25 employees will be impacted (also generally over a 90-day period), the employer must also consider if a state specific mini-WARN Act applies.
Those that finance the employer should be apprised of potential WARN Act and mini-WARN Act implications, because in some cases secured lenders and private equity firms have been determined to have liability under the WARN Act based on their involvement in the decisions leading to layoffs.
3. If the WARN Act Applies, Consider Whether the 60-Day Notice Period May Be Reduced, Mitigated, or Waived in Exchange for Severance.
Under the WARN Act, there are narrow exceptions from coverage for “faltering companies” or due to “unforeseeable business circumstances” or “natural disasters.” These exceptions, however, are limited. They are also subject to special notice requirements, which, if not satisfied, can preclude applicability of an exception. Employers may also elect to provide voluntary and unconditional payments to offset WARN Act back pay amounts or offer severance pay in in exchange for a release of claims, including claims under the WARN Act. Any of these actions involves risk and should be carefully reviewed with counsel.
4. Identify Existing Severance Programs or Develop a Program.
Determine if there is an existing severance program. If so, consider what modifications need to be made, including to address the WARN Act and mini-WARN Acts, if applicable. If not, consider whether to develop one for the layoff. Depending on the circumstances, an existing or new severance pay program may be subject to the Employee Retirement Income Security Act of 1974 (ERISA) as an “employee welfare benefit plan.” While ERISA compliance carries with it some administrative burdens and disclosure obligations, ERISA coverage also permits an employer to retain broad authority to interpret plan terms and to modify terms. An employer may consider equity enhancements (e.g., accelerated vesting or an extended exercise period) as part of a severance program.
If equity enhancements are part of a program, the employer should ensure that it considers the tax impact of the enhancements and obtains any necessary Board of Directors approval in advance of any termination of employment under the program.
Further, employers often consider reimbursing COBRA premium costs for terminated personnel, but there are complexities that should be reviewed by benefits counsel, especially for employers with “self-insured” group health plans, on-site medical facilities, and/or stand-alone health and wellness programs.
5. Establish a Process for Review of Selection Decisions to Reduce Legal Risks, Including Concerning Documentation.
Terminating an employee’s employment as part of a layoff does not insulate the termination decision from legal challenge. The decision-making process should be designed to provide opportunities for early legal review of selection decisions that are particularly vulnerable to legal challenge. Proper documentation is critical to having an effective decision-making process. Early in the process, the employer should identify the organizational units that may be affected. For each of those units, the employer should prepare a detailed listing of all employees in the unit, including name, job title, date of hire, salary and location.
Employers should be cognizant that documents created as part of the selection process may be subject to discovery in later litigation unless the documents are protected from disclosure as privileged attorney-client communications. To avoid an inference that EEO-1 category and age information were considered in making selection decisions, it is preferable to limit that information, as well as other documentation relating to potential legal risks, to an attorney-client privileged version for review of legal counsel.
6. Determine if Reporting Obligations Apply.
Publicly held companies are obligated to file a Form 8-K concerning material events. Corporate counsel for a public company should be consulted about any substantial layoff to determine if Form 8-K reporting is required.
7. Review Employment Agreement Obligations and Restrictive Covenants.
The employer should also ensure that it identifies employees who have severance pay or notice entitlements under individual employment agreements or other commitments. Also, consider what post-employment restrictive covenants are in place (noncompetition and nonsolicitation agreements) and the pros and cons of modifying those obligations as part of a severance program or, alternatively, announcing an intent to fully enforce such provisions. To the extent that Section 409A of the Internal Revenue Code may apply to any existing severance arrangement, tax counsel should review any anticipated modification before it is proposed to a terminating employee.
8. Develop Compliant Separation Agreements.
Severance benefits are ordinarily conditioned on departing employees’ agreement to separation agreements that include the release of legal claims. Consider whether some standard severance agreement terms, such as confidentiality of the agreement and no rehire terms, among others, are appropriate for separation agreements used in a layoff. Also, under regulations issued pursuant to the Older Workers Benefit Protection Act (OWBPA), special rules apply to releases of legal claims by persons who are age 40 or over and are laid off by covered employers (generally speaking, those with at least 20 employees), provided that at least two employees are laid off, at least one of whom is age 40 or over, and the laid off employees are offered separation agreements that include severance benefits based on a standardized formula or package of benefits. Those special rules require that the employer provide a disclosure to employees that, among other things, lists all employees in the applicable “decisional unit” by job title and age, identifying which were selected for layoff and offered separation agreements and those who were not. Further requirements apply to disclosures in connection with layoffs that occur over a period of time. There has been considerable litigation over employers’ determinations about what is the proper “decisional unit,” among other issues raised by these disclosure requirements.
9. Consider State Wage Payment Law Requirements.
State wage payment laws generally require the full and timely payment of salary, wages and certain other forms of compensation. In some states, laid off employees must be paid in full on the date of termination while in others, final pay is not due until the regular payroll date. In some states, vacation pay must be paid to departing employees, while in other states, vacation pay is not covered by the wage payment law. Depending on the state, a late payment can lead to liquidated damages or penalties plus liability for the former employee’s attorneys’ fees. Employers need to ensure that they satisfy the wage payment law requirements in each state where employees are laid off. Commission plans warrant particular attention. Commissions are generally treated as wages for wage payment law purposes. Commission plans are sometimes less than clear about commission entitlements in the event of termination of employment. Even when the plans are clear, courts may disregard commission plan language that results in not paying commissions that an employee has earned, or they may find that commissions could have been paid more quickly than the commission plan provides. Ideally, commission plans should be reviewed and, if warranted, revised to enhance clarity and minimize risks of liability for commissions and additional wage payment law damages and attorneys’ fees.
10. Determine Whether the Layoff Triggers Vesting Acceleration of Retirement Plan Accounts.
Generally, if employee terminations impact more than 20% of the employees who participate in a retirement plan (e.g., a 401(k) plan) in any 12-month period, the employer should consider whether a partial retirement plan termination has occurred with its retirement plan vendors. A partial retirement plan termination generally requires all “affected employees” to become fully vested in their account balance as of the date of a full or partial plan termination. Employee salary deferrals are always 100% vested, but employer contributions (including matching and profit sharing contributions) may be subject to cliff or graded vesting. For more information on partial plan terminations and other benefit plan implications of layoffs, please see our ERISA + Executive Compensation team’s alert entitled “Benefit Plan Considerations for Employers in a Market Downturn.”
These are just some of the legal issues that can be raised by layoffs. Experienced counsel can assist in planning for layoffs to reduce these and other legal risks.
Robert M. HalePartnerChair, Employment
Jennifer Merrigan FayPartner