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Downsizing: Plan Ahead to Avoid Trouble

by Gary Fealk

Downsizing can be an effective strategy for building a more efficient organization going forward. But it can also lead to legal liability and may not accomplish the desired cost savings unless an employer implements a carefully considered plan.

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Establish the case for downsizing
Laid-off or terminated employees often challenge the genuineness of a reduction in force (RIF). To defend against discrimination claims, an employer must establish that a bona fide RIF has, in fact, occurred. Although the law protects the integrity of unbiased business judgments, some courts will permit scrutiny of the credibility of an employer’s reasons for a RIF. Establishing written reasons for downsizing lends credibility to the organization’s underlying employment decisions, for both displaced employees and those who remain employed.

Create a plan with documented reasons
Good documentation is essential to defending downsizing litigation. The absence of paperwork suggests ill-conceived and pretextual decisions and probably means your senior decisionmakers will have to give deposition testimony. Before you decide whom to lay off, document the reasons behind your decision to reorganize. Valid justifications may include increased governmental regulation, a decline in your financial condition, changes in product lines, automation of certain functions, or the loss of significant work. Recommendations from outside consultants on the need to reduce staff and the consequences of not doing so can also help legitimize the reorganization.

Similarly, before you begin selecting employees for layoff, appoint a task force or committee to review the reasons for your rightsizing and formulate a plan for your RIF that’s consistent with those reasons. A rightsizing plan typically establishes specific criteria and procedures for identifying jobs for elimination. The task force/committee usually assists in selecting employees for layoff. The restructuring plan also typically analyzes the demographic impact of the elimination of particular jobs. Your plan may include a voluntary incentive program followed by an involuntary termination program with the anticipated savings from voluntary incentives measured against their costs.

Consider whether to permit frontline managers to make recommendations to a senior manager responsible for decisions affecting their department. Restricting supervisors to providing recommendations rather than being the final decisionmakers in a RIF increases your ability to nullify any bias, prejudice, or favoritism through an independent investigation by upper management. In addition, it limits the number of employees who will have to provide deposition testimony should a lawsuit occur.

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Create a plan to reduce expenses
Before implementing your rightsizing program, establish an overall cost-savings plan to reduce expenses and improve efficiency. Reorganization plans often include cost-saving measures unrelated to personnel (e.g., eliminating the number of outside vendors) as well as personnel-related measures (e.g., salary freezes, reductions in benefits, hiring freezes, cancellation of club memberships and entertainment activities). Typically, a plan might include anticipated savings from attrition and the elimination of open positions on organizational charts, not just job consolidation or elimination and outsourcing.

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Ensure consistency
Your company is vulnerable to attack when employees can demonstrate that you acted inconsistently in your RIF decisions. Problems can arise if you try to reduce your workforce because of supposed economic difficulties at the same time that you’re spending millions of dollars to acquire new equipment, companies, or processes. While those expenditures may prove crucial to your company’s survival, employees may attack your motives if you provide a self-serving explanation in your reorganization plan. It’s also hard to defend downsizing decisions when the actual terminations don’t appear to be clearly connected to the problems that made the RIF necessary.

Bottom line
The risks of simply cutting staff without a well-reasoned plan may not accomplish your company’s cost-saving goals and can lead to costly, difficult-to-defend litigation.

Gary Fealk is an attorney and shareholder in Vercruysse Murray & Calzone, P.C.., in Detroit. You can reach him at (248) 433-8708.

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