Reductions In Force: Minimizing The Risk

• Consider alternatives to involuntary reduction in force:

• Involuntary reductions: when it’s necessary, be sure to reduce your litigation risk:

• Releases

• Review WARN and state and/or local plant closing requirements.

1. As a result of the current business climate, numerous employers are attempting to either reduce the total number of their employees or reduce the number of employees with unneeded skills and replace them with new employees who are better able to help attain new corporate goals.

2. Employers often seek to achieve such departures from the workplace on a voluntary basis in exchange for severance benefits or enhanced pension benefits. Three reasons in favor of voluntary workforce reductions are: (a) loyalty to dedicated employees who are often performing at a satisfactory level or better, (b) the negative impact involuntary terminations may have upon the morale of those employees who remain after the reduction in force, and (c) avoiding lawsuits challenging the lawfulness of involuntary terminations.

3. Involuntary reductions in force have become a valuable tool that is being used with increasing frequency. Since costly litigation is often a by-product of involuntary mass terminations, prudent business practice dictates that procedures be carefully conceived and implemented with great attention to detail in order to minimize the potential exposure to liability.

a. Pension - Many employers find it attractive to provide enhanced pension benefits during a limited period of time, known as a "window period" in order to provide employees with the incentive to retire voluntarily. This is especially so with respect to defined benefit plans which are overfunded and provide employers with the opportunity to pay higher benefit levels without the necessity of making increased employer contributions to the pension plan. One common form of such an incentive is supplementing early retirement benefits with a "sweetner" so that employees who retire early do not receive a reduced pension amount. However, some employers may find other voluntary incentives to be more effective for the following reasons: (i) the desire to target highly compensated employees which could result in discrimination in violation of the plan qualification requirements of the Employee Retirement Income Security Act ("ERISA"). See 26 U.S.C. §401(a)(4); (ii) limiting eligibility for enhanced benefits to employees who are old enough to retire communicates clearly to employees as well as to judges and juries that the employer is interested in the termination of older employees; and (iii) if an employer has recently provided an early retirement program, there may not be enough employees eligible for retirement to make offering such a program worthwhile.

b. Severance - A very common option is providing employees with severance pay in exchange for their resignation. Severance benefits may be provided to employees without regard to eligibility for retirement. This sends a clear message that the employer is interested in reducing its workforce without regard to age, which is especially important if the likelihood exists of a subsequent involuntary reduction in force. Severance plans also provide employees with the flexibility to offer benefits which a broad spectrum of employees may find attractive, such as lump sum payments. However, since severance plans do not provide for the deferral of income to retirement, the benefits provided may be unattractive to some employees from the tax standpoint.

c. Special Individualized Packages - If an employer wishes to solicit only a small number of voluntary terminations, the employer may choose to individually negotiate specialized packages on a person-by-person basis. This approach provides employers with the flexibility to tailor the combination of benefits and compensation required to achieve the resignations that are desired.

d. Non Cash Incentives - In order to help meet their voluntary reduction goals, many employers find it fruitful to provide benefits such as career workshops, out-placement assistance, as well as continued health and hospitalization coverage.

a. Retaining valued employees.

i. Since retaining needed employees is an important issue for all employers, it is obviously undesirable to provide employees whom the employer desires to retain with a financial incentive resign. Accordingly, many employers are appropriately concerned with the prospect of losing their best employees if a voluntary program is offered. Additionally, employers may be reluctant to offer voluntary programs due to the risk that employees will elect to resign from locations, departments or departmental units in which reductions are not required.

ii. Employers often have the flexibility to design an early retirement plan to exclude certain locations or departments from eligibility. For example, it has been held that designing an early retirement plan to exclude certain facilities did not violate ERISA because it was a management and not a fiduciary decision. Trenton v. Scott Paper Co., 832 F.2d 806 (3d Cir. 1987) cert. denied 485 U.S. 1022 (1988).

iii. A pension or severance plan may also exclude employees from participation if it is not in the Company's best interest for them to resign. See Hlinka v. Bethlehem Steel Corp., 863 F.2d 279 (3d Cir. 1988).

The pension plan in Hlinka provided that early retirement benefits were available to employees, so long as the Company determined that their early retirement would be in its best interest. An employee, Hlinka applied for early retirement was rejected because the employer did not deem that his retirement would be in its best interest. Hlinka contended that the employer, its pension board and plan administrator violated their fiduciary duty by not acting in the sole interest of participants and beneficiaries. The Court reasoned that the employer did not violate ERISA when it determined that Hlinka's retirement was not in its best interest, because the Company was not prohibited from acting in its own interest when not engaged in plan administration. The Court concluded that the determination at issue involved "... a business decision rather than a fiduciary decision." 863 F.2d at 286. The Court ruled that since the plan administrator and pension committee acted in accordance with the plan documents, they complied with their fiduciary duty. The Court noted expressly that based upon plan language requiring as a prerequisite to eligibility a Company determination that retirement was in its best interest, the fiduciaries had "no choice" but to deny the employee's claim for benefits. Also see, Dzinglski v. Weirton Steel Corp., 875 F.2d 1075 (4th Cir. cert. denied 110 S.Ct. 281 (1989) (retirement committee did not breach fiduciary duty under ERISA for denying claim for benefits where plan required company consent as a prerequisite for the payment of benefits).

i. Employers frequently increase their potential exposure to liability in suits for severance benefits because they provide severance benefits pursuant to an informal program as opposed to in accordance with a well drafted plan.

ii. If a plan includes an administrative claims procedure, a plaintiff will be precluded from maintaining a suit for benefits unless the plaintiff has exhausted the internal claims procedure. See e.g. Wolf v. National Shopmen Pension Fund, 728 F.2d 182 (3d Cir. 1984). The courts generally require exhaustion to promote the resolution of disputes in a non-adversarial cost efficient manner.

iii. Properly drafted plan document may ensure that a highly favorable standard of review will be applied in the event that the plans decision to deny a claim for benefits is challenged in court. In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), the Court held that a de novo standard of review will be applied by courts to decisions to deny benefits unless the language of the plan does not provide the plan fiduciaries with the authority to determine eligibility or interpret the plan. Under the de novo standard, the court determines whether a benefit entitlement exists without providing any deference whatsoever to the decision made at the plan level. However, benefit plans containing language providing the requisite discretion, will generally lead a court to apply an abuse of discretion standard. See De Nobel v. Vitro Corp., 885 F.2d 1180 (4th Cir. 1989); Ferrara v. Allentown Physician Anesthesia Association Inc., 711 F.Supp. 206 (E.D. Pa. 1989). Under the abuse of discretion standard, a decision to deny benefits at the plan level will generally be upheld so long as the decision was a reasonable one. Since most claims for severance benefits will arise out of terms which are subject to a number of interpretations, the outcome of litigation is often determined by which standard of review the court applies.

iv. Providing severance benefits on an ad hoc basis in the absence of clearly written eligibility criteria can lead a court to award severance benefits on the theory that they are due pursuant to an unwritten severance plan. Warner v. J.P. Steves & Co., Inc., 1991 U.S. App. LEXIS 13209 (4th Cir. 6/26/1991). Accordingly, companies which believe that they are retaining maximum flexibility to pay severance benefits in accordance with business needs by not reducing their severance policies to writing or by maintaining general policies for eligibility may find themselves obligated to pay substantial benefits where none were intended to be paid. This problem may be rectified by drafting explicit eligibility criteria in a plan document which comports with ERISA's requirements.

The following should be observed when implementing a voluntary departure program:

i. Simply because an employee elects to resign or retire under a voluntary program does not mean that a jury will determine that the separation from employment was voluntary. Employees which coerce employees into retiring will be held to have constructively discharged the employees and will be subject to liability if the termination is held to have been based upon an impermissible criteria such as age. Cazzola v. Codman & Shurtleff, Inc., 751 F.2d 53 (1st Cir. 1984).

ii. An employer which is held to have constructively discharged an older employee through a coerced "voluntary" retirement is highly unlikely to prevail at trial because it will be unable to establish that it had legitimate business reasons for the termination. However, when early retirement or severance programs are truly voluntary, the mere fact that the program is offered will not result in a ruling that employees are being forced out of the corporation because of their age. See e.g. Henn v. National Geographics Society, 819 F.2d 824 (7th Cir.) cert. denied 484 U.S. 964 (1987).

i. When voluntary programs are offered, employees frequently fear that if enough volunteers do not step forward, involuntary reductions are soon to follow. In such cases, it is only natural for employees to question their supervisors as to the likelihood that their employment will be terminated if an involuntary reduction in force should ensue. Supervisors who desire to alleviate the worries of their employees may tell them that they have nothing to worry about. However, such assurances may result in lawsuits if an unforeseen termination arises. The chances of this occurring are often greater than the supervisor may suspect, since termination decisions are often made at a much higher level in the organization and without input from first-line supervisors.

ii. It is critical to note that an employer which does not state whether an employee should accept a voluntary package should not be held to have constructively discharged the employee. See Henn v. National Geographics Society, supra.

In today's legal climate, whenever a substantial number of employees is terminated, litigation should be expected to ensue. Since all employees are in one protected class or another, EEO suits are most common. However, suits under various employment at-will theories may result as well. Although reductions in force should be specially tailored to the business needs and employment practices of each company by a team of top executives and human resources professionals with the benefit of legal counsel, some general principals usually apply.

1. Document contemporaneously the legitimate business reasons for adverse employment decisions. The vast majority of EEO suits are brought pursuant to the disparate treatment theory, where the critical issue for a judge or jury to resolve is whether an employee was terminated because of his or her membership in a protected class. For this reason, documents created at the time the decision to terminate employment is made setting forth the legitimate business reasons for the decision should form the foundation for any well-conceived involuntary reduction in force program.

2. When terminations are based upon an assessment of performance, it is permissible, and indeed preferable, to evaluate employees against new criteria when they will be expected to perform new responsibilities after the reduction in force is implemented. A simple numerical evaluation system providing employees with a "grade" with respect to critical skills for performing new responsibilities will allow the employer to demonstrate the basis for its belief as to which employees are most qualified. Only persons with knowledge of the employees should perform the rating, human resources personnel should be involved to ensure consistency, and where possible, examples describing the basis for a particular rating should be noted. However, it is critical to ensure that if the evaluations prepared in connection with the reduction in force conflict with prior evaluations prepared in the ordinary course of business, that a credible explanation exists for the discrepancy.

3. Reductions in force are not a cure for an organization's history of failing to deal with performance or other employment issues. Employers should expect that an involuntary reduction in force will cause the weaknesses in the organization's human resources programs to be disclosed and plan accordingly. For example, an organization which has failed to promote female employees above a certain management level should expect that complicated sex-discrimination issues will arise in its reduction in force.

4. Employers should ensure that impermissible criteria play no role whatsoever in the decision making process. This is not always as simple as it seems. For example, terminations based upon salary level, under certain circumstances, may be construed by a court as being based upon age. The same is true with respect to eligibility for retirement. Special care should be taken to avoid making decisions based upon subjective criteria such as being flexible or open to new ideas, which may also be viewed as tantamount to age.

5. Prior to implementing an involuntary reduction in force, the employer should compare the makeup of its work force both prior and subsequent to the anticipated reduction in order to assess whether adverse impact will occur upon any protected class. If adverse impact would result that cannot be justified by a business necessity, criteria for determining reductions should be reevaluated. Employers should not expect that the impact of the reduction in force upon protected class members will not come to light if an EEO claim is raised. The Pennsylvania Human Relations Commission routinely requests such comparative information if a discrimination charge is filed.

6. If at all possible, the employer should form a review committee representative of the protected classes found in the workforce, who are well respected by their peers. The committee should review the reduction in force program before it is implemented as well as the terminations which will result before decisions are finalized, to ensure that they are satisfied that both the process and its application are free of discrimination. An employer which can not satisfy such a committee that it has acted based upon legitimate business reasons should not expect to be able to convince a jury either.

7. Given the likelihood that any substantial reduction in force will lead to litigation, the reduction in force program should be reviewed by legal counsel before it is applied as well as after decisions have been made but before they are implemented.

8. Employers should require any employee who is receiving substantial benefits to which he or she is not otherwise entitled to execute a binding release of any legal claims against the company.

9. The employer must carefully consider whether to permit displaced employees to "bump" into other positions and the procedure which will be applied if bumping is allowed. Many employers do not realize that even if the elimination of an older employee's job is free of discrimination, the failure to transfer the employee to another position may nevertheless be discriminatory. Turner v. Schering-Plough Corp., 901 F.2d 335 (3d Cir. 1990). However, there is no absolute obligation for employers to provide transfers to avoid terminations. Stanoiev v. Ebasco Services, Inc., 643 F.2d 914, 920 (2d Cir. 1981).

10. The employer should not lose sight of the importance of ensuring that employees who are terminated due to no fault of their own are permitted to leave with dignity and that the employees who remain will be able to respect the organization, its values and believe in its future.

The Older Workers Benefit Protection Act provides that in order for the release of age discrimination claims under the ADEA to be valid, the following requirements must be met:

1. An individual may not waive any right or claim under the ADEA unless the waiver is knowing and voluntary. Except as provided in paragraph (2), a waiver may not be considered knowing and voluntary unless at a minimum--

a. The waiver is part of an agreement between the individual and the employer that is written in a manner calculated to be understood by such individual, or by the average individual eligible to participate.

b. The waiver specifically refers to rights or claims arising under the ADEA.

c. The individual does not waive rights or claims that may arise after the date the waiver is executed.

d. The individual waives rights or claims only in exchange for consideration in addition to anything of value to which the individual already is entitled.

e. The individual is advised in writing to consult with an attorney prior to executing the agreement.

f.(i). The individual is given a period of at least 21 days within which to consider the agreement.

(ii). If a waiver is requested in connection with an exit incentive or other employment termination program offered to a group or class of employees, the individual is given a period of at least 45 days within which to consider the agreement.

g. The agreement provides that for a period of at least 7 days following the execution of such agreement, the individual may revoke the agreement, and the agreement shall not become effective or enforceable until the revocation period has expired.

h. If a waiver is requested in connection with an exit incentive or other employment termination program offered to a group or class of employees, the employer at the commencement of the period specified in subparagraph (f) informs the individual in writing in a manner calculated to be understood by the average individual eligible to participate, as to --

i. any class, unit, or group of individuals covered by such program, any eligibility factors for such program and any time limits applicable to such program; and

ii. the job titles and ages of all individuals eligible or selected for the program, and the ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program.

2. A waiver in settlement of a charge filed with the Equal Employment Opportunity Commission, or an action filed in court by the individual or the individual's representative, alleging age discrimination of a kind prohibited under Section 623 or 633a of the ADEA may not be considered knowing and voluntary unless at a minimum--

a. subparagraphs (a) through (e) of paragraph (1) have been met; and

b. the individual is given a reasonable period of time within which to consider the settlement agreement.

29 U.S.C. §626.

3. If a release will be required by the employer in exchange for severance benefits, the severance plan must provide that duly executing the release is a prerequisite for benefits eligibility. In the absence of such a requirement, (i) the employee will have a strong claim for benefits even if the release is not executed, and (ii) the release may fail for lack of consideration.

4. Although some employers are concerned that a properly drafted release will result in additional claims, in today's litigious society, most employees already know about their legal rights. Moreover, it is fair and prudent for employers to refrain from providing substantial benefits to employees who will use the funds to institute a legal action which the employer believes is without merit.

5. "Tender back" clauses, which require an employee who breaches a release and sues to return the money and other consideration given in exchange for the release, are no longer enforceable.

a. In Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998), the Supreme Court resolved a conflict among the circuit courts of appeal and decided that requiring tender back as a condition of allowing an employee to bring a lawsuit might frustrate the purposes of OWBPA. In Oubre, an employer’s release failed to comply with at least three OWBPA requirements: (1) it only offered 14 days for consideration, rather than the 21 required by OWPBA; (2) it did not provide for a 7 day revocation period; and (3) it did not make specific reference to ADEA claims. The employee executed the release and collected the consideration, then filed suit against her former employer. The Supreme Court reasoned that a discharged employee likely will have spent the consideration money by the time an employer demands a tender back based upon breach of the agreement. Thus, according to the Supreme Court, requiring an employee to return the money provided in exchange for an invalid release might encourage employers to breach release agreements themselves. The Court held that an employer cannot rely on an employee’s failure to tender back as a way of excusing its own failure to comply.

b. Proposed EEOC regulations would extend the no tender back rule to all releases, including those which appear facially valid. The EEOC proposed regulations specifically state that "[r]etention of consideration does not foreclose a challenge to any waiver agreement; nor does the retention constitute the ratification of any waiver. A clause requiring tender back is invalid under the ADEA."

c. Covenants not to sue or challenge a waiver in court are presumptively invalid under the proposed EEOC regulations. According to the EEOC, the ADEA clearly envisions that courts would have the authority to determine the validity of a waiver. Therefore, the ADEA necessarily contemplates that individuals should have the opportunity to bring a challenge to a waiver in court without fear of reprisal (in the form of a countersuit for breach of contract from the former employer).

c. The EEOC’s proposed regulations are currently in the public comment phase of the rulemaking process. Members of the public can file written comments with the EEOC by submitting them to Frances M. Hart, Executive Officer, Executive Secretariat, Equal Employment Opportunity Commission, 1801 L Street, N.W., Washington, D.C. 20507, no later than June 22, 1999. All written comments become part of the rulemaking record and can be examined by interested persons.

1. Notice Requirement - As a general rule, employers of a hundred or more employees must provide at least 60 days advance notice of a mass layoff or plant closing.

2. A "plant closing" exists in the case of any permanent or temporary shutdown of a single site of employment if 50 or more employees, excluding part-time employees, suffer an "employment loss" at that site during any 30 day period.

3. A "mass layoff" is a reduction in force, other than a plant closing which leads to an employment loss at a single site of employment during a 30 day period by (a) at least 50 employees constituting at least 33% of the employees at the site; or (b) 500 or more employees at the site. As with plant closings, part-time employees are excluded from the calculation.

a. A "part-time employee" refers to a person employed: (1) for an average of fewer than 20 hours per week; or (2) for less than 6 of the 12 months preceding the date on which notice is required. Accordingly, new employees who have not yet been employed for 6 months may be excluded when determining if a plant closing has occurred even if they are working full-time.

b. An "employment loss" occurs when there is: (1) a termination of employment other than a discharge for cause, voluntary departure or retirement; (2) a layoff in excess of 6 months; or (3) a greater than 50% reduction in work hours in each month of a 6 month period.

4. Notice required by virtue of a mass layoff or plant closing must be provided to (1) each employee (if the employees are not represented by a union); (2) each representative of the affected employees, (if they are represented by a union); (3) the State Dislocated Worker Unit; and (4) the chief elected official of the unit of local government within which the closing or layoff will occur. The WARN regulations which are attached in the appendix specify the information that must be included in the notice.

5. An employer which violates WARN is liable for: (a) backpay for each day the employer is in violation, up to a maximum of 60 days, to each employee who suffered an employment loss; (b) certain employee benefits, including the cost of medical expenses incurred during the 60 day period which would have been covered by the Company's benefit plan if the employment loss had not occurred; and (c) failure to provide proper notice to a unit of local government may result in a fine of up to $500 for each day of such violation.

6. The WARN statute and regulations include many traps for the unwary. For example, a plant closing or mass layoff will be deemed to have occurred, the threshold number of employees who suffer an employment loss is reached during a 90 day period, unless the employer can prove that the employment loss is a result of separate and distinct actions and causes and are not a subfergue for avoiding compliance with statutory requirements. Additionally, besides WARN, state and municipal plant closing for mass layoff statutes may apply.

The above summarizes some of the WARN requirements. Before determining whether WARN applies, however, applicable court decisions and regulations should be reviewed.

The purpose of this document is not to provide legal advice but to raise issues for discussion with your attorney. You should obtain legal advice if you are considering a reduction in force.

The ideas presented in these materials are general in nature and not intended to be construed as legal advice and cannot be relied on by any person or entity as legal advice pertaining to any specific situation.