Power of Attorney - August 2010

A Plan for Reduction in Force

by David McElhinney

    In these tough economic times RIF’s, a “Reduction In Force” are a part of the business landscape.  It requires employers to make hard decisions that affect some, but not all, employees and it is an area ripe for potential negative legal and financial consequences.  Start an analysis by considering alternatives to a RIF that might meet a company’s needs, but would be less expensive and less risky.

Estate Planning

    If a RIF is the best alternative, then determine its scope and establish a budget for the process.  Identify the estimated number of individuals that need to be laid off in order to meet the cost goals.  Is the reduction going to be throughout the company, or will it be limited to certain departments?  Will it eliminate job titles or reduce the number of people in certain jobs, or both?  Be specific with these goals.  A budget for the RIF process should be established to include costs for outplacement, counseling, extended benefits, severance packages, consultant and legal advice and retraining.  And of course, take into consideration the hidden cost underlying every workforce reduction including the training and development investment made in those people who will be eliminated in the RIF.

Selection Criteria

    Now it is time to identify the selection criteria that will be used to determine who will be let go.  The criteria must be business-related and the most legally defensible criteria are objective, such as length of service, demonstrated skills, education, quality of production, written performance evaluations and discipline history.  Subjective criteria such as enthusiasm, versatility, and personality, are also permissible criteria provided they are actually required for the particular job and are not applied in a discriminatory manner.  The RIF should not be aimed at particular employees.

    Many employers use a rating system to select employees to be RIF’d, giving a rating or ranking to each worker, sorting them by skills, value, contribution to the organization referencing performance appraisals, employee self rankings, team rankings, customer ratings, output data, outside consultant assessments, training scores and skill assessments to assist in the selection.  Such rankings should be as objective as possible and should compare to rankings of prior performance evaluations to ensure that there are no huge discrepancies between the two.  Consistency in selection and application of the criteria is critical.

    Now use the agreed upon selection criteria and prepare a confidential preliminary list of employees to be eliminated in the RIF.  Using that list, perform a “disparate impact” analysis by comparing the demographics of the workers on the preliminary list with those who will be retained.  You are looking to ensure that employees in protected classes, such as gender, age, race, national origin, religion, sexual orientation, pregnancy, disability and other legally protected categories are not intentionally or inadvertently being selected to lose their jobs at a higher rate than their percentage in the workforce.  For example, if 10 out of 100 employees in the company are over the age of 40, it would be anticipated that roughly 10% of those employees being RIF’d would be over 40.  If 50% of those on the preliminary list are over age 40, then further investigation is warranted to determine and eliminate those criteria resulting in such a disparate impact on those over age 40.

Protect Yourself

    Consider asking departing employees to sign a legally binding document releasing the company from any claims and bringing the employment relationship to an end without legal controversy.  A separation agreement containing a waiver/release of claims is commonly used. Promises of non-disparagement, confidentiality, and non-solicitation of customers or other employees might also be included.  There are specific federal statutory requirements for waivers of age discrimination claims in a RIF, including that the employee be expressly advised in writing to consult an attorney before signing the agreement; given 45 days to consider the agreement before signing; given 7 days after signing the agreement to revoke it; and, given disclosures consisting of general information about the RIF decision process, as well as specific information about the job titles and ages of persons selected and not selected for separation in the RIF.

    Provide necessary notices.  By way of example, the Workers Adjustment and Retraining Notification Act (WARN) is a federal statute that requires that employers give a 60-day layoff notice to workers, their representatives and local government officials, under certain circumstances.  This written notice is required for companies with 100 or more employees that close plants or operating units with 50 or more employees, or that lay off either 500 or more employees or 50 or more employees making up more than a third of their workforce.

    Before executing a RIF it is best to take some time and develop a comprehensive and carefully thought out plan in advance.  Seek out professional advice so as to minimize risk.  A few precautions taken prior to implementing a RIF can save in significant legal and financial problems down the road.

David McElhinney
David McElhinney, Partner with Lewis and Roca, LLP