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Tips for Minimizing Risk When Cutting Labor Costs

by Mark Wiletsky

Although we’re beginning to see signs of an economic recovery, many organizations are still grappling with how to stay competitive in this challenging environment. Layoffs, furloughs, and other methods used to cut personnel costs are often part of the equation. But the savings gained by those cost-cutting measures can be lost if employees later sue the company and embroil it in expensive litigation. The good news is that organizations can often avoid turning cost- cutting measures into expensive headaches by sidestepping these four common mistakes.

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Mistake No. 1: Lack of planning
Advance planning can be difficult when faced with the need to cut costs. But moving too quickly can create unintended consequences, so take it one step at a time.

First, consider the options. Layoffs may be necessary, but perhaps less drastic measures — such as a hiring or wage freeze, wage reductions, benefit contribution reductions, or mandatory or voluntary time off — are appropriate.

Second, determine how the decision will be implemented. For example, analyze whether the decision will apply companywide or to specific departments, or to all employees or only certain ones within a department. For layoffs, develop a set of objective factors to guide who will be selected, review pertinent contracts and collective bargaining agreements, assess the need for notification under the Worker Adjustment and Retraining Notification (WARN) Act, and evaluate whether any protected groups will be adversely affected by the decision.

Third, plan how the decision will be communicated to the workforce. Be sure to have a message ready for employees ahead of time, and communicate it consistently. If employees are told different things, that can come back to haunt the employer.

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Mistake No. 2: Blowing an exemption
Mandatory time off, furloughs, and decreases in pay are often alternatives to layoffs. A common mistake, however, is to implement these types of cost-cutting measures across the board. Exempt employees (i.e., those not subject to overtime) generally must be paid on a salary basis. Adjusting their salary based on workload or forcing time off without pay can jeopardize their exempt status and require the employer to pay them overtime for hours worked in excess of 40 in a workweek.

To avoid these problems, implement furloughs or mandatory time off in one-week increments or solicit exempt employees to take a voluntary day or two off without pay. Similarly, while it’s permissible to reduce exempt employees’ salaries to reflect a shortened workweek or simply to reduce cost (so long as they don’t fall below $455 per week), making such adjustments based purely on workload or on a frequent basis isn’t recommended.

Mistake No. 3: Rehiring employees as independent contractors
Companies sometimes rehire a recently laid-off employee as an independent contractor, thinking it’s a cheaper and more flexible alternative to hiring the person back as an employee. But doing so is almost always a mistake. Typically, the individual won’t satisfy the requirements for being a true independent contractor, meaning the company is taking on liability for failing to pay unemployment and payroll taxes, benefits, and overtime.

Instead of labeling the person a contractor, rehire him as a temporary employee. The relationship can be based on a particular project or contract. So long as it’s clear that the position is only temporary and the employee is “at will,” the company still has the flexibility to end the relationship when necessary without taking on the unnecessary risks associated with misclassifying an individual as a contractor.

Learn more about wage laws and correctly classifying workers in the Wage and Hour Compliance Manual

Mistake No. 4: Not getting a valid release
When offering an exit incentive program or implementing involuntary layoffs, many companies offer severance packages (even small ones) in exchange for a waiver and release. A common mistake is to use a waiver and release used many years ago in a different situation. Unfortunately, dusty old waivers and releases often don’t contain the special provisions needed to obtain a valid release of age discrimination claims, which are the most common — and dangerous — claims to arise in the context of layoffs.

To release age discrimination claims (which may be asserted by those 40 years old and over) when laying off a group of employees, you must:

  • advise the employee to seek the advice of an attorney before signing the release;
  • give him 45 days to consider the release’s terms;
  • allow seven days to revoke the agreement after it’s signed; and
  • provide the ages and job titles of others in the “decisional unit” who were considered for layoff.

Therefore, if you want an effective waiver of claims, be sure to develop an appropriate release for the situation.

Bottom line
Employers have many tools at their disposal to cut personnel costs. But be sure to use the right one for the job. Using the wrong tool to reduce personnel costs can result in costly lawsuits that will wipe out any savings you might gain by reducing staffing costs.