Reducing Your Risks towards a Reduction in Force

HR Advisor feature article | November 2008

The current economic situation has significantly impacted many employers across the U.S.  As the government figures out ways to bring certainty back during these uncertain times, the market continues to have its ups and downs. In turn, more and more businesses have responded accordingly by making crucial adjustments including reducing their workforces. 

According to a September 2008 report from the Department of Labor’s Bureau of Labor Statistics, the number of unemployed persons has increased by 2.2 million over the past 12 months.

As employees (especially those already subject to personal financial hardships) become more anxious about tenuous job security, small to mid-sized businesses need to be acutely aware of specific employment-related laws and the implications.

Worker Adjustment and Retraining Notification Act (WARN). Generally, employers with 100 or more employees (not including employees who have worked for fewer than six months during the past 12 months and not including employees who work fewer than 20 hours a week) are subject to the federal WARN Act. The Act requires employers to notify workers at least 60 calendar days in advance of a plant closing or mass layoff. (Note: Many states enacting similar legislation require provisions that apply to employers with fewer than 100 employees.)

A “covered” plant closing happens when it shuts down for more than six months or when 50 or more employees lose their jobs during any 30-day period at a single site. A “covered” mass layoff happens when it lasts six months or longer and affects 500 or more workers (or 33% of the workforce if the layoff affects between 50 and 499 workers).

The Act may provide for fewer than 60 days' notice as in cases of layoffs resulting from a faltering company’s closure or unexpected business circumstances. Regardless, if an employer violates certain provisions, then it also becomes liable to each affected employee for up to 60 days’ worth of back pay and benefits.  An employer who fails to provide notice to the state government also may be subject to fines of up to $500 per day. So, before embarking on any downsizing plan, be very clear on how your potential adherence to federal and any similar state WARN Act provisions.

Older Workers Benefits Protection Act (OWBPA). As part of a reduction-in-force, consider offering employees who are protected by the Age Discrimination in Employment Act (ADEA) a separation agreement in exchange for a waiver and release of all rights and claims under the ADEA – which protects individuals who are 40 years of age or older from employment discrimination. The OWBPA establishes requirements that must be satisfied when an employee waives or releases rights under the ADEA. (Note: A waiver is exchanged for something of value, such as a lump-sum payment, in addition to what the employee is already entitled.)

Whether involving an individual or group waiver under the OWBPA, a separation agreement if established properly can help avoid litigation headaches and costs. If prepared poorly, however, consequences easily include non-enforceability of the agreement with the added money lost.

Americans with Disabilities Act (ADA). The ADA (as well as the federal Family Medical Leave Act) is not going to protect an employee’s job when it's eliminated as part of a legitimate reduction-in-force. On the other hand, employers still need to keep in mind that employees who were accommodated under the ADA (or who took FMLA) recently are more likely to bring suits against their employer with claims that the layoff was simply a pretext to discriminate against them because of their ADA (or FMLA) situation.

On that note, be highly diligent to completely document why certain job positions were selected for downsizing. Ensure that you have strong supporting documentation and a clear explanation for why certain employees were identified based on business needs.

Consolidated Omnibus Budget Reconciliation Act (COBRA). The affected employee may be able to purchase COBRA extended health insurance benefits after having been laid off. COBRA is a federal act that requires employers with 20 or more employees who provide group health insurance benefits to also offer extended, temporary health insurance benefits to employees in certain qualifying situations such as a layoff.

 The plan or employer should send a notice to the employee regarding the availability of COBRA coverage. After this notice is provided, the employee generally has 60 days to extend coverage which typically lasts 18 months (but may last longer in certain circumstances). Failure to comply with proper notification requirements can subject the employer to fines including IRS excise tax charges of up to a maximum of $500,000 and ERISA penalty fines.

During these challenging economic times, applying a reduction-in-force can be a prudent and necessary strategy, but also stay vigilant in reducing your employment-related risks by knowing and managing effectively your employer obligations.

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