Printer Friendly

Risks and opportunities in downsizing the work force.

Global competition, leveraged buyouts, large cutbacks in defense expenditures and the restructuring of the U.S. work force have led to significant staff reductions in many industries, particularly in white-collar and middle management positions. Between 1980 and 1990, payrolls at the nation's top companies dropped from 16 million employees to fewer than 12 million, and the trend appears to be accelerating in many industrial sectors.

Restructuring the work force through downsizing presents a tremendous challenge to employers. Ideally, downsizing will enable a company to respond to market needs and conditions efficiently and profitably. However, if downsizing is not properly planned, an employer can be faced with loss of key technical and management personnel, and the need to hire subcontractors, consultants and additional employees to meet demands not anticipated prior to the staff cuts. Additionally, failure to address issues such as productivity, morale and potential legal problems before downsizing can significantly impact the effectiveness of a work force reduction.

Downsizing Determinations

The need to downsize can result from many pressures, including excessive debt, lost market share and excessive capacity. When making the decision to restructure, employers must first attempt to determine the short- and long-term effects of the process. Employers should therefore consider a number of factors before deciding how to downsize. First, each company must look carefully at those business units that are losing market share or contracting, as well as those that are either expanding or poised for future growth. Secondly, reductions in the work force must be matched to staff levels anticipated by the company's business plan; the company must then decide which employees can be terminated without creating structural damage within the work force.

The nature of a given company's industry will determine how the firm should go about downsizing. For example, businesses that are cyclical in nature, including many manufacturing companies, have a greater incentive to keep skilled employees during periods of slow growth or slow sales. On the other hand, companies constantly undergoing change due to technological innovation often require fewer employees as new technologies replace workers. Companies that restructure because of the permanent loss of a particular market or to realize greater efficiencies in the ratio of management employees to the direct work force have yet another reason for downsizing.

Regardless of these factors, each company must decide if the layoffs are to be temporary or permanent. For example, a firm experiencing a cyclical downturn in business should consider keeping as many employees as possible by implementing job freezes, reducing work weeks or reallocating human resources within the firm. If, however, technological innovation or change has reduced the need for employees, the company must look at those positions that are no longer necessary, and determine if it is possible to redeploy these workers.

Companies must also consider the legal ramifications of reducing staff. Federal, state and in some instances local laws will affect a company's right to downsize its work force. For example, firms with collective-bargaining agreements may very well have some obligation to negotiate with the union regarding the impact of the layoff, at least with respect to bargaining unit employees. Plant closing laws also require advance planning.

Downsizing Strategies

The way a company approaches downsizing will depend in large part on the company's size and resources. Large, profitable companies will find it easier to offer employee incentives than will mid-size to small firms. Regardless of a firm's size, however, corporations should use certain methods to accomplish their downsizing goals.

For example, a number of companies have developed voluntary employee separation programs that enable workers eligible for severance benefits to leave the company and pursue career alternatives. In some cases, employers offer enhanced severance benefits and continuation of health insurance at group rates for a period of time after severance. Many companies also offer early retirement options, whereby employees who are close to retirement age - usually five years away or less - can leave the firm and still qualify for full retirement benefits. These programs are usually voluntary, although some companies have attempted to offer early retirement incentives as a carrot while continuing to emphasize the prospect of possible job loss through layoff or termination if the incentive is not accepted.

One significant problem with early retirement incentive programs is that companies do not know in advance which employees will decide to take advantage of the program. In some cases, these programs have been "oversubscribed," resulting in the loss of valuable and productive employees. While it is possible to tailor an early retirement program to a particular business unit, this is usually not the way early retirement programs are handled. Conversely, not all early retirement programs are successful: some firms find it difficult to convince employees to take early retirement, particularly in cases where employees do not believe they can find comparable employment elsewhere.

Besides these methods, some firms have resorted to unpaid leaves of absence to accomplish short-term work force reductions. However, it is increasingly difficult for most employees, even those in middle management, to take significant amounts of time off without pay. Conversely, many larger employers have implemented programs to retrain surplus employees in areas where the company expects future growth. These programs can help retain employees with good job skills and years of service with the company.

However, not all work force reduction plans require cutbacks in staff. In some cases, employers are able to maintain staffing levels by reducing the work weeks of certain groups or classes of employees. While these programs can be useful in maintaining work forces in the midst of cyclical downturns, they do not address the problems of firms that are forced to consider permanent staff reductions.

Implementing Staff Reductions

Once a firm determines that it must reduce its work force, the next step is to assure that the downsizing is implemented in a manner that serves the needs of these employees who will be laid off, as well as those who will remain. It is critically important that the company be completely candid in announcing the reduction in force, both for reasons of employee morale and to maintain the company's credibility in the event the reduction is subject to legal challenge.

All managers who participate in the layoff announcement should be reminded that their first duty of loyalty is to the company and its interests. They should also be told that the layoff decision is final, that the action is necessary and that the downsizing will provide remaining employees with greater opportunities for survival and future growth.

In meeting with employees who are being terminated, the following guidelines are generally recommended. First, the meeting should be brief, with the employee being told of his or her fate as quickly as possible. If any employee has a response, the manager should be encouraged to listen to his or her concerns, but should not debate the merits of the decision. At the same time, the manager should be prepared to tell employees about all options that will be made company can provide a fact sheet outlining all available benefits.

The company must also inform those employees remaining with the company about the firm's future plans and prospects. This information should be made available to all employees as soon as available to all avoid the rumor mill, and can be communicated in a variety of ways, including memoranda from senior company executive, and group meetings with employees to explain the rationale for the downsizing and the prospects for remaining employees.

Giving Warning

Once the decision to downsize has been made, the company must then review its obligations under federal, state and local law to ensure that all mandated requirements are met. Among the many laws that affect an employer's right to downsize are the Worker's Adjustment and Retraining Notification act (WARN), the Age Discrimination and Employment Act of 1967 (ADEA), the Older Worker's Benefit Protection Act (OWBPA), the Americans with Disabilities Act of 1990 (ADA), Title VII of the Civil Rights Act of 1964, as amended in 1991, and various state wrongful discharge laws. These laws should be taken into consideration before any reduction in force is accomplished, particularly with regard to individual employees who may enjoy special protection under the law.

WARN, which took effect in February 1989, essentially requires that employers provide 60 days notice of plant closing or mass layoffs. However, it applies only to employers with least 100 full-time employees on the day notice is due. In addition, WARN applies only to job actions of a certain minimum size, including plant closings that result in "employment loss" at a "single site of employment" for at least 50 full-time workers during any 30-day period, and mass layoffs that, during any 30-day period, involve "employment loss" for either 500 or more full-time employees, or at least 50 full-time employees who represent 33 percent or more of the full-time workers at a single work site. "Employment loss" is defined as a layoff that lasts more than six consecutive months. Layoffs, both taken and planned, within 90 days of each other may be aggregated together as one layoff for the purposes of applying WARN's numerical thresholds.

Assuming WARN applies to a particular layoff, 60 days notice must be given to each collective bargaining representative of the affected employees and/or directly to any unrepresented employee, as well as the applicable state dislocated worker agency and the highest-elected local official. If the employer fails to give 60 days' notice, liability may be reduced or eliminated under one of WARN's exceptions for faltering businesses or unforeseeable business circumstances. Otherwise, the employer may be liable for back pay, fringe benefits, prejudgment interest and attorney's fees. For the most part, the developing case law under WARN has been confined to various federal district courts.

The language of WARN may afford the employer an opportunity to manipulate the timing, size and number of layoffs to avoid triggering the notice obligation. For example, if the company lays off employees without giving WARN notice when required, the firm may be able to recall enough of these workers to go below WARN's numerical threshold and then discharge the same workers at a later date with proper WARN notice.

Congress provided three exceptions to shorten or eliminate the 60-day notice period required under WARN. The three exceptions apply to businesses that may call for immediate layoffs due to extraordinary problems, such as a natural disaster, or the sudden loss of a major customer.

In these "faltering business" exceptions, WARN relaxes the requirement of 60 days notice when, at the point notice is required, "the employer was actively seeking capital or business" that "if obtained, would have enabled the employer to avoid or postpone the shutdown." This exception requires that the employer reasonably and in good faith believes that giving the notice required would have precluded the employer from obtaining the needed capital or business. Even with the faltering business, the employer must give as much notice as is practicable with an explanation of the reasons for giving less than 60 days notice. Thus far, however, courts have narrowly construed the faltering business exception.

The unforeseeable business circumstances exception to WARN also relaxes the requirement of 60-days' notice when the closing or mass layoff is caused by business circumstances that were not reasonably foreseeable at the time that notice would have been required. While the term "not reasonably foreseeable" is ambiguous, some guidance is provided by the WARN regulations: if the circumstance is caused by some sudden, dramatic and unexpected action or condition outside the employer's control, then the circumstance will be considered "not reasonably foreseeable." Among the reasons found acceptable by the courts are unexpected cancellation of a purchase order and loss of business from a major customer. However, even where an employer successfully invokes the unforeseeable business circumstances exception, the act still requires the employer to give notice as soon as practicable after the employer learns of the circumstances that are leading to canceled orders or lost accounts. In one case, the court held that the employer should have given notice within two working days of learning that it was losing a major customer.

Where violations of WARN have been found, the next question is the extent to which an employer is liable for damages. The principal item of damages arising out of a WARN violation is back pay. Thus far, courts have split on the issue of what constitutes an appropriate period of time for awarding back pay. One series of decisions awards back pay based upon the number of working days during the period of violation. At the opposite end of the spectrum, some courts have found that Congress intended to make employers liable for each day of the violation, including weekends and days when the employee would not otherwise have worked. Congress also provided a good faith defense to employers that authorizes the court to reduce or eliminate WARN liability for back wages and benefits where the employer's error was in good faith and based on a reasonable belief that WARN was not applicable.

So far, courts have generally rejected the good faith defense in cases where the employer completely fails to provide WARN notice. However, courts have been more receptive to the good faith defense when it is raised to excuse a minor WARN compliance problem, such as failure to specify in a notice the job title of positions to be affected by the layoff and the names of Workers currently holding those positions.

While WARN has been in effect for over five years, it is still important for any company considering a significant downsizing to carefully study the statute, regulations and relevant case law in its jurisdiction before deciding whether WARN applies and how compliance with the statute may be satisfied. As a practical matter, an employer is best served by giving notice to employees in situations where it is not clear that notice is required.


Besides WARN, employers must also ensure that they are in compliance with the OWBPA. This act, signed into law in October 1990, amends the ADEA by including employee benefits within the "compensation, terms, conditions or privileges of employment" for which an employer may not discriminate against an employee on the basis of age. This law overrules the United States Supreme Court decision in Public Employee's Retirement System vs. Betts (1989). The OWBPA addresses several topics, most notably waivers of liability of ADEA claims, early retirement incentive programs, and the "equal cost or equal benefit" principle. Although there has not been much case law decided under this act, employers should be watchful for future court decisions that interpret these provisions.

Perhaps one of the provisions that the OWBPA is best known for is its treatment of waivers of liability of ADEA claims by an employee against an employer. The act sets up stringent standards for the validity of such waivers. Those that do not comport to the following seven requirements are deemed in violation of the OWBPA and will not be enforced by courts: all waivers must be knowing and involuntary; agreements must be in writing and written in "a manner calculated to be understood by the average individual eligible to participate"; waivers must refer specifically to rights and claims arising under the ADEA; waivers cannot cover rights or claims that may arise after the date the waivers are executed; waivers must be exchanged for consideration that is in addition to anything of value to which the employee is already entitled; the employee has to be advised in writing to consult with an attorney; the employee has to be given sufficient time to decide whether to sign the waivers.

A waiver given to an individual employee is valid only if the employee is given 21 days to consider the waiver. He or she may revoke the waiver within seven days after signing it, so the waiver does not actually become effective until after passage of seven days.

There are similar standards for waivers in the settlement of EEOC charges or lawsuits. However, the OWBPA does not appear specifically to require the 21 day and/or seven day revocation period, but rather holds the employer to a standard of reasonableness. The individual is only to be given a "reasonable period of time" within which to determine whether to accept a settlement. This is because it is widely thought that one who has filed a charge with the EEOC is in a much better position to have thought about what he or she is being asked to give up, therefore making the time requirements less essential. The OWBPA is specific in stating that it applies only to waivers that occur after the date of enactment.

Although the waiver provisions of the OWBPA are specific, they are not without interpretive problems, including the fact that the act's language indicates that the test for determining the waiver's effectiveness is whether the average person would understand its terms. This standard is such that a court could hold a waiver invalid even if the employee to whom it was given was so intelligent and experienced that he or she appreciated the significance of the waiver, although the average worker would not so understand it. Thus, it is important to tailor an employer's waivers to a rather low common denominator so as to ensure their enforceability.

A second interpretive problem, with respect to the settlement of charges actually filed with the EEOC, is that the act imposes a standard of reasonableness rather than announcing specific time periods for waiver consideration, thereby leaving some of the decisions up to the courts and out of the hands of employers to regulate. Employers should also note that the requirements regarding waivers relate only to a waiver of those claims that arose prior to the date that the waiver was signed, thus leaving open the possibility of future claims against the employer under the ADEA.

Additionally, all that can be waived under these provisions is an employee's personal right of action against the employer since - codifying previous case law from the circuit courts of appeals - the OWBPA does not allow an employee to waive his or her right to file a charge with the EEOC. Presumably, the employee who executes an OWBPA-effective waiver, but who nevertheless files a charge with the EEOC, will be unable to receive any financial benefit from any result in settlement. Failure to have the "magic" language of the OWBPA with regard to waivers has the effect of invalidating the waiver. Furthermore, there is authority for the proposition that failure to include the OWBPA-prescribed language also bars the employer from retrieving benefits that were provided to employees who claim that the release was ineffective.

Early Retirement Programs

The OWBPA specifically allows for early retirement incentive programs so long as they are consistent with the relevant purposes of the ADEA. One of the problems associated with this standard is deciding which of the ADEA purposes are relevant to this issue and therefore guide validity of these plans. Legislative history appears to suggest that the OWBPA most generally requires that early retirement plans comport with the ADEA purpose of prohibiting age discrimination of employment.

The OWBPA requires that where a waiver is requested in exchange for an exit incentive or early retirement incentive program, the group of employees affected must be given 45 days notice instead of the 21 days notice for an individual; be provided with a list of the class or group of employees covered by the program and the eligibility factors as well as any time limits applicable within which to accept the programs; and must also be furnished with job titles and ages of all individuals who are eligible for the program as well as the ages of all people in the same job classification or other organization who are not eligible or selected for the program.

For these retirement incentive plans to be valid, they must not be coerced and voluntary. Criteria indicating voluntariness are whether the employee had sufficient time to consider the plan; whether the employee was provided with complete and accurate information regarding the plan and its recipients; and whether there were any threats or coercion involved in the acceptance of the plan. These considerations appear to be in keeping with an approach taken by several courts prior to the OWBPA known as the "totality of circumstances approach," wherein all of the factors pointing to voluntariness were taken into consideration. However, the act does not define the word "voluntary," which suggests that this is an area where courts have considerable discretion to examine the facts of each case and decide if the plan is in fact voluntary. As with any balancing test, in any area in which courts are given a relatively wide scope of discretion, the outcome may not be favorable to the employer's position.

The act provides that these plans may be made on the basis of a flat dollar amount, service-based benefits or a percentage of the employee's salary. Plans which provide for increases in pensions are also allowable under the OWBPA. However, a.y early retirement incentive plan that reduces benefits to older workers without affecting the benefits available to younger workers would violate the act.

In fact, the OWBPA sanctioned several practices with respect to incentive programs that may otherwise be seen as conflicting with the law's purposes. For example, under the act, the pension plan can set a minimum age for eligibility, but the employer must show that the age feature is a permanent part of a pension plan and is subject to future modification by amendment. Also, Social Security bridge payments may be made in the form of increased pension payments until the person is eligible for Social Security benefits. An employer may also offset severance payments by the value of any retiree health benefits received by the worker who is eligible for immediate pension benefits. Finally, an employer may reduce long-term disability benefits by the amount of pension benefits the employee chooses to receive or by the amount of pension benefits that he or she is eligible for after obtaining age 62 or 65, whichever is larger.

Subsequent to the passage of the ADEA, the EEOC issued regulations implementing Congress' perceived intent to impose an "equal cost" principle for the treatment of employee benefits under the ADEA. In so doing, the regulations provided that age-based differences in e-ployee benefits would be permissible only if those differences were justified by documented cost considerations. Under this theory, reduced benefits for an older worker would be allowed only where the cost incurred by the employer for providing benefits to such a worker was equal to the cost of providing benefits to a younger worker. This principle, taien from the EEOC regulation, is codified by the OWBPA. In doing so, Congress allowed employers to base their cost justifications on reasonable and valid cost data regarding their own employees over a period of time rather than insisting that their considerations necessarily be based on larger actuarial models.

Under the equal cost or equal benefit principle as enacted by Congress, an employer may choose a "benefit-by-benefit" plan wherein the cost comparison is based on the cost of a particular benefit as provided to an older and a younger worker. U.der such a plan, if $200 a month provides $40,000 group life insurance to a 40 year old employee, but only $25,000 for a 60 year old employee, the lower benefit to the older employee is cost justified for that particular benefit. Alternatively, the employer may choose a "benefit package" plan wherein the cost comparison is made not benefit by benefit, but in relation to the entire plan as offered to different age levels of employees. This choice is particularly suited to a flexible spending program where the employee is credited with a set amount of money that can be used to purchase an array of benefits most attractive to him or her. However, among the few restrictions to the benefit package program is that this approach cannot be used for a retirement or pension plan, or to justify reductions in health insurance benefits greater than would be justified under the benefit-by-benefit approach.


As noted previously, OWBPA is an amendment to the ADEA. While the OWBPA is quite specific in its requirements, the ADEA contains a much broader prohibition against discrimination in employment against individuals within the protected age group, which includes those age 40 and above. While the act makes it clear that only those over the age of 40 have standing to bring claims of age discrimination under the federal law, it is worth noting that (a) many state laws, including Florida's, have no minimum age requirement for complaining of age discrimination; and (b) even under the federal law, younger persons are protected by the anti-retaliation provision of the law. That is, persons under the age of 40 who oppose acts of age discrimination or who participate in the EEOC investigation or in litigation of an age discrimination claim are protected from acts of retaliation by their employers.

Before conducting a large-scale layoff, employers should review the complement of persons selected for termination to ensure that the terminations do not disproportionately affect older employees and, if they do, that the terminations can be attributable to factors other than age. A question often arises when an employer contemplates terminating the employment of highly compensated individuals to reduce the greatest amount of overhead with the fewest actual terminations. Employers sometimes argue that, in the context of terminating the most highly paid but expendable individuals, they are discriminating not on the basis of age, but purely on the level of compensation. While a few courts have accepted this distinction, it is safe to conclude that, where there can be shown a direct correlation between the age of the work force and the level of compensation, most courts will not hesitate to find that discrimination on the basis of higher salaries is merely a proxy for an age-related termination. In general, absent special circumstances related to specific plans, an employer should carefully screen the list of persons selected for termination to ensure that a representative age distribution is achieved.

Other laws that affect downsizing include Title VII of the Civil Rights Act of 1964, as amended in 1991, and various state wrongful discharge laws. The same principles that have already been discussed apply here; where downsizing affects groups protected under Title VII (which prohibits discrimination on the basis of race, color, sex, religion and national origin), the employer must carefully review those who will be affected by the layoff to make certain that one or more of these protected categories is not impacted in far greater numbers than those who are not protected by the act. Even where downsizing is accomplished by objective criteria, if a protected group appears to be affected in far greater numbers than other groups, then some adjustments may be appropriate, if for no other reason than to avoid the potential for time consuming and expensive litigation.

Downsizing the work force can create opportunities and risks for any employer. However, if the employer follows the guidelines suggested, the likelihood of successfully reducing the work force without creating unnecessary turmoil and unwanted litigation should be greatly increased.

Considerations for All

Waivers and Releases

In any release or waiver dealing with employment rights, the drafter should review the following considerations:

1 Be sure that the names of the parties are correct.

2 Be sure that the release language releases the claims specifically addressed. It is a good idea to include specific statutes so there can be no question whether an individual has released a claim under the statute in consideration.

3 Be sure to address the attorney's fees issue so there is no ambiguity as to who will be responsible for he fee. A plaintiff might have an excellent case for attorney's fees in court by arguing that a settlement made him or her a "prevailing party" under a statute containing a fee-shifting provision that authorizes the award of attorney's fees to a "prevailing" plaintiff.

4 Spell out any monetary payments and ensure that the parties understand who is responsible for taxes, if any.

5 Consider a clause as to whether the plaintiff is eligible for re-hire in the future.

6 Consider the issue of what a prospective employer will be advised, if anything, considering the circumstances of the employee's departure.

7 Consider a confidentiality agreement and penalties for violation of that agreement. Generally, a liquidated damage provision and an injunction are worthwhile features for their in terrorem effect.

8 Consider including a choice of law provision in the event that the agreement is breached.

9 Address the issue of COBRA - whether it applies and who will make the payments.

10 Consider including a non-admission provision. If a suit or EEOC charge is pending, the settlement needs to ensure the withdrawal of the charge or the lawsuit. Be sure to include standard severability and integration clauses.

11 Do not include a waiver of statutorily mandated benefits such as an employment compensation in the event that such a clause may be considered to violate public policy and invalidate all or a portion of the agreement.
COPYRIGHT 1994 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1994 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:includes related article with list of considerations for waivers and releases
Author:Elliott, Jack R.
Publication:Risk Management
Date:Apr 1, 1994
Previous Article:An integrated approach to disability management.
Next Article:TXANS tackle workers' compensation.

Terms of use | Privacy policy | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters