If your company is facing revenue shortfalls and/or a decline in business opportunities, cost reduction has probably become a significant goal. You may be considering a layoff of employees to bridge the gap and reduce costs. But is a layoff truly the best course of action?
February 2009 EmploymentSource™ Helping employers prevent and correct employee relations issues. Surviving the Downturn: Considerations Before Trimming Your Workforce By Amy Jacobs, Esq. ajacobs@EPSpros.com www.EPSpros.com Each day, it seems there is more bad news about corporate cutbacks, rising unemployment and an economy which seems to sink deeper and deeper into recession. The unemployment rate for December 2008 was 7.2%.1 Over 500,000 jobs were lost in December, and 1.4 million were lost over the last four months of 2008.2 Consensus is growing that efforts to reverse the economic slide will not work quickly, but instead a turnaround could take a year and probably longer. Is a Layoff the Right Choice? If your company is facing revenue shortfalls and/or a decline in business opportunities, cost reduction has probably become a significant goal. You may be considering a layoff of employees to bridge the gap and reduce costs. But is a layoff truly the best course of action? Alternative and possibly more effective techniques exist to cut costs, if management is flexible concerning its business strategy, or at least its personnel strategy. When contemplating a possible layoff, take a careful look at the potential costs and savings. Savings Direct savings include salaries, benefits, overtime Costs Direct costs include severance packages, transition assistance for displaced employees, PTO accruals, pension & benefit costs, increase in unemployment taxes, potential litigation costs if layoff is challenged Indirect savings and costs should also be considered, including the indirect costs of lowered morale and decreased productivity associated with a layoff. Research also makes a persuasive argument that turnover among employees who survive the layoff is higher than if no layoff had taken place. Employers can take steps to minimize this “survivor” flight, but it is difficult to avoid completely. A critical tool for any company in these rocky economic times is open and honest communication with employees concerning business conditions and their possible impact on the workforce. Once the need for cost cutting has been communicated, solicit employee input about methods of reducing expenditures. Employees often offer innovative ideas, especially when their jobs are directly implicated. Making it known that job preservation is a top priority will help maintain employee morale and productivity during the period of workplace adjustments. As measures are implemented (reduced workweek, shortened hours, etc) make sure employee know that these actions are designed to keep as © 2009 Employment Practices Solutions, Inc. Surviving the Downturn: Consideration Before Trimming Your Workforce by Amy Jacobs, Esq. EmploymentSource™ – February 2009 many on the payroll as possible. In the event that a layoff does occur, employees will at least know that the company did all that it could to avoid such action. Alternatives to Layoffs What actions then could be taken in lieu of layoff? Costs can be reduced through normal attrition and hiring freezes. This is not a quick method of cost reduction, and may create some difficulties with assignment coverage. Similarly, a restriction on overtime could produce some cost savings. A restructuring of processes and/or departments to create greater efficiency is also an alternative. The best and most creative ideas for restructuring and increased efficiency often come from the employees. Workweek reductions and/or salary reductions are another possibility. Reducing the number of workweeks by just a few hours can generate significant savings. Indeed, the average work week in December fell to 33.3 hours which indicates that many businesses are employing this technique in an effort to avoid cutting jobs.3 Remember, that these measures all have legal considerations. It is important to review any employment contracts, collective bargaining agreements, and corporate policy, as well as considering applicable state and federal laws such as Title VII and the Fair Labor Standards Act. When a Layoff Is Necessary If a layoff is truly the best choice for your company, the most significant consideration is to plan the layoff carefully. A hastily thrown together plan will almost certainly fail in all aspects. Several steps should be taken. First, the company must determine the business justification for the layoff. This is critical, as it will guide the company in creating a selection process as well as be the cornerstone of all internal and external communications concerning the layoff. Moreover, if the layoff is challenged, a reasonably articulated and documented business justification will be the best defense. With an articulated business justification, the employer must next determine the appropriate layoff selection criteria. Objective criteria, such as seniority, performance, skills, experience and relevance of applicable business function are preferred. It is not possible to remove subjectivity from the process (for example, performance reviews contain a level of subjectivity), but try to make this process as objective as possible. Application of the selection criteria is best done by a team of decision makers who have carefully chosen and trained on the selection criteria, documentation procedures, relevant company policies and applicable state and federal laws. Remember, the Family Medical Leave Act, state leave laws, and USERRA may impact an employee’s status with respect to the layoff. Once the selections have been made, it is advisable to have another level of review by someone not on the selection team, but who is familiar with the selection criteria, policies and laws. Additionally, it is prudent to conduct an “adverse impact analysis” to confirm that no protected category has been disproportionately affected by the layoff. Notification Laws Be mindful of federal and state notification requirements concerning layoffs. The federal Worker Adjustment and Retraining Notification Act (“WARN”) requires employers with at least 100 employees to give 60 day notice prior to a “plant closing” or layoff of at least 50 employees. There are very specific additional coverage definitions and some coverage exceptions. Failure to comply with WARN can result Employment Practices Solutions, Inc. (www.EPSpros.com) Page |2 © EPS 2009 Surviving the Downturn: Consideration Before Trimming Your Workforce by Amy Jacobs, Esq. EmploymentSource™ – February 2009 in significant penalties. In addition to the federal WARN, many states (and some cities) also have notification requirements that can be more burdensome. For example, New York’s more burdensome WARN act goes into effect on February 1, 2009. The New York WARN Act applies to employers with 50 or more employees and requires a longer notice period. Evaluate these federal and state laws to ensure compliance. Severance Packages & Waivers If severance packages are to be included in the layoff, remember that an offer of severance benefits can constitute a “plan” under the Employer Retirement Income Security Act (“ERISA”). A failure to comply with ERISA can lead to an imposition of significant penalties by the Department of Labor. Additionally, if the company intends to obtain claim waivers from affected employees, it should prepare releases that comply with the Older Worker Benefit Protection Act (“OWBPA”) in order to obtain valid and binding releases of all claims. Survivor Support Even after completion of the layoff, there is still work to be done. Those employees who “survived” the layoff are now expected to help shepherd the company back to positive revenue streams and increased business opportunities. The survivors are most likely experiencing varying emotional reactions to the layoff. These include relief from getting through it, guilt from being one of the “lucky ones”, anger that the layoff occurred, and/or fear that another round of layoffs is in the near future. Management can minimize the problems associated with these natural emotional responses by continuing to communicate honestly and empathetically with the remaining workforce. Also, showing respect for departing employees can minimize some of the anxiety and guilt experienced by the remaining employees. Make sure managers understand the importance of handling employee concerns in a way that reassures instead of fostering these emotions. In these uncertain economic times, most companies are facing the need to cut costs. Hopefully, alternatives to layoffs can be effectively employed to achieve the necessary goals. If a layoff is necessary, it can be planned and administered in a respectful and legal manner. 1 www.bls.gov/new.release/empsit.nr0.htm 2 Id. 3 “Job losses hit 2.6 millions as layoff pain deepens”, Jeannine Aversa, Associated Press, January 9, 2009 4 For a review of FLSA concerns pertaining to payroll deduction measures and many other employment issues pertaining to corporate cost reductions, see “Employer's Guide Special Supplement: Workforce Strategies in a Down Economy" © 2003 Aspen Publishers, Inc., Employment Practices Solutions, Inc., Contributing Authors: Stephanie Davis, Esq.; Lily Garcia, Esq.; Jennifer George, Esq.; Denise Kazlauskas, Esq.; Trish Lewis, Esq.; Ginger McRae, Esq.; see also, Wage and Hour Perils of Layoffs, Reduced Workweeks and Other Payroll Reduction Measures” Vedder Price newsletter, November 2008, www.vedderprice.com. Employment Practices Solutions, Inc. (www.EPSpros.com) Page |3 © EPS 2009 Surviving the Downturn: Consideration Before Trimming Your Workforce by Amy Jacobs, Esq. EmploymentSource™ – February 2009 About the Author: Amy Nickell Jacobs, Esq., Senior Consultant, has a thorough knowledge of employment law from eight years of practice, first with Bracewell & Patterson in Houston, Texas and then with Haynes & Boone in Fort Worth, Texas. She has advised and defended companies on a variety of employment law issues, including harassment. Her experience includes investigating allegations of harassment, advising employers on resolution strategies and defending employers in litigation relating to harassment. Amy has worked with small and large employers in both the public and private sector. Her experience with public sector employers gives her sensitivity to the scrutiny under which governmental entities must handle workplace issues. Amy is also a frequent speaker on a wide range of employment topics and has worked as a consulting expert on investigation issues. She is an energetic and effective trainer and has significant experience training all levels of employees from entry level up to executive management. Amy graduated from Virginia Tech and received her law degree from the University of Virginia School of Law. She is a co‐author of Prevent Workplace Harassment: Proven Policies That Keep Your Company Out of Court. Amy joined EPS in 1997. Employment Practices Solutions, Inc. (www.EPSpros.com) Page |4 © EPS 2009
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