With inflationary pressures and lingering fears of a recession, 2023 has seen layoffs in nearly every sector of the economy. But layoffs have their own price tag, which often includes severance payments to affected employees, loss of institutional knowledge, diminished employee morale, and reputational harm. Before committing to a reduction in force, employers should consider alternatives like pay cuts, eliminating benefits and perks, offering early retirement packages, or implementing furloughs. If layoffs are necessary, advance planning is vital to achieve the company’s cost-savings goal, reduce the risk of legal claims, and minimize the impact on the company’s residual workforce and its reputation. Employers are well advised to consider the following best practices.
Best Practices If Layoffs Are Needed
Establish a clear objective for the reduction in force. Before even considering who will be affected, you must identify the goal you seek to accomplish through the layoffs. Most of the time, the objective is a specific cost-savings metric, but it could be a restructuring of operations to enhance efficiency, the elimination of a plant or a product line, or right-sizing following an acquisition. Identifying a specific objective will guide decision-making throughout the layoff process.
Identify one (or more) decisional unit. The decisional unit is the group of employees who will be considered for a possible layoff. Examples of common decisional units include a department, a specific product division, an office building, a layer of management, or even the entire company.
Define the selection criteria. The criteria used to determine who within the decisional unit will be affected (laid off) must be job-related and consistent with business necessity—and not based on a protected class or other unlawful factors. Using objective selection criteria can help reduce your exposure to the risk of successful discrimination claims by providing a legitimate, nondiscriminatory basis for the decision to lay off certain employees and not others. Common objective selection criteria can include seniority, job grade, salary, or average performance score.
Perform disparate impact analyses to guard against discrimination claims. Laid-off workers—and the Equal Employment Opportunity Commission (EEOC)—have increasingly pursued large-scale lawsuits against companies whose layoffs disproportionately affect one or more protected classes. Before finalizing a layoff, risk-averse employers perform a “disparate impact analysis,” comparing the percentage of affected nonprotected employees with the percentage of affected protected employees within the decisional unit.
If a disparate impact is found, it may be necessary to retool your selection criteria or adjust the decisional unit to ensure the final layoff doesn’t disparately affect one or more protected classes, setting the company up for a discrimination claim.
Determine if WARN Act notice is required. A layoff may trigger obligations under the Worker Adjustment and Retraining Notification (WARN) Act. The WARN Act requires certain employers to give 60 days’ advance notice of a plant closing or mass layoff. The purpose is to give workers time to plan their next steps and to give the local government time to prepare for an influx of unemployment claims and requests for assistance.
In addition to the federal WARN Act, some states have their own “mini” WARN Acts that are even more protective of employees.
Use separation agreements to reduce liability. When used effectively, separation agreements can reduce and even eliminate the risk of legal claims by laid-off employees. A separation agreement usually involves an employee’s full release of claims (and other protections as permitted by law) in exchange for an additional payment from the employer above earned wages—otherwise known as a “severance.”
Cautious employers typically calculate the severance amount using an objective formula, such as one week of salary for every year of the employee’s employment. Keep in mind that certain laws like the Older Workers Benefit Protection Act (OWBPA) include unique notice and disclosure requirements that need to be built into separation agreements.
Communicate notice of the layoff responsibly and consistently. Creating precise, uniform talking points for affected employees to increase their cooperation and understanding can minimize harm to employee morale and the company’s reputation while deterring the spread of rumors and misinformation. FAQs are an effective way to provide information consistently through vetted responses to anticipated questions.
Bottom Line
These best practices are just a few examples of steps you should consider when undertaking a reduction in force. There may be other jurisdiction-specific matters that also affect the analysis. You would be well advised to consult with legal counsel ahead of any contemplated layoff to help minimize legal liability.
Benjamin J. Naylor and Delilah R. Cassidy are attorneys with Snell & Wilmer in Phoenix and can be reached at bnaylor@swlaw.com and dcassidy@swlaw.com, respectively.