Reductions in force (RIFs) are often a necessary part of an employer’s business strategy when a company needs to trim its overall headcount. While RIFs are a minefield for compliance issues and potential litigation, proper planning and due diligence with respect to both federal and state regulations can go a long way towards mitigating the risks. In tandem with trusted employment counsel, the following steps can help make an employer’s RIF a smoother and less contentious process.
STEP 1: Determine which positions to eliminate.
When deciding which position to eliminate, the employer should limit subjectivity as much as possible, making decisions based on position rather than on individual employees. Additionally, the employer needs to articulate the business reason for each termination, e.g., loss of contract, redundancy, consolidation, etc. If the employer plans to replace the terminated employees, they should not characterize the layoffs as a RIF.
Employers may also seek to have departing employees waive their rights to federal discrimination claims by offering severance or other benefits upon termination. In these instances, the employer must determine the “decisional unit,” defined as “that portion of the employer’s organizational structure from which the employer chose the persons who would be offered consideration for the signing of a waiver” 29 CFR § 1625.22 (f)(3)(i)(B). A decisional unit could be an entire facility, a specific department, a specific job category, etc. It’s important to identify the decisionmakers for each employee terminated during a RIF, thus establishing commonality among impacted employees.
The employer must protect its decision-making process, keeping in mind that written communications (e.g., emails and texts) are discoverable in the event that a wrongful termination suit is brought against the company. Furthermore, attorney-client privilege may not apply to in-house counsel discussions, particularly if legal or compliance (i.e., the attorney’s department) is considered.
STEP 2: Conduct an adverse impact analysis.
Obtaining this data can help to ensure that the RIF does not disproportionately affect employees in protected classes (based on factors such as race, religion, sex, disability, age, etc.) and therefore cause an unintended discriminatory after-effect. An impact analysis should calculate the average age of employees both before and after the RIF is conducted. It should also compare the number of impacted employees in various protected classes both before and after the RIF. If there is a large discrepancy between the pre-RIF and post-RIF data, the RIF strategy may need to be vetted for unintended biases.
It is also prudent to consider whether any of the impacted employees are currently on protected leave. This might include maternity/paternity leave, leave pursuant to the Family and Medical Leave Act (“FMLA”) or the state equivalent, and leave pursuant to the Americans with Disabilities Act (“ADA”).
STEP 3: Determine if notice is an option or necessary.
The Worker Adjustment and Retraining Notification (“WARN”) Act requires employers with at least 100 full-time employees to provide 60 days advanced notice to employees regarding facility closings or mass layoffs. When giving such notice, it is once again important for the employer to define the decisional units used to decide which positions are to be eliminated. In the case of a predominantly remote workforce, decisional units can be especially difficult to discern. In addition to the federal WARN law, many states have “mini-WARN” laws that lay out their own (usually stricter) requirements pertaining to notices of termination. The employer should determine the critical needs during the notice period and consider retention agreements for its key employees.
STEP 4: Consider whether severance is an option.
Age Considerations
Employers who are offering severance to departing employees should draft two separate release agreements—one for employees under 40 and one for employees over 40 years of age, as federal law mandates stricter requirements for agreements with the latter. Additionally, employers should prepare an Older Workers Benefit Protection Act (“OWBPA”) exhibit. This involves determining a decisional group and preparing a roster of those not eligible for severance. If there are multiple groups, the employee may consider a master OWBPA exhibit divided by departments, particularly if the RIF is part of an overall cost-saving measure. As a practical tip, employers should leave employee names on the OWBPA exhibit until it’s finalized, so that it’s easier to make modifications. The names can be removed before the exhibit is provided to employees.
Agreement Provisions
While a release agreement should comply with federal laws, it is equally important to comply with the applicable state’s laws. A release agreement should include the laws of the state in which the employee works/resides, as well as any other state law requirements for releases. It’s also important to remember that there is no such thing as a standard, one-size-fits-all severance agreement. Therefore, for each employee, the employer will need to consider whether the following provisions are required or prohibited by federal and/or applicable state law:
- Non-Disparagement
- Confidentiality of Severance Agreement
- Waiver of Sexual Harassment
- Defend Trade Secrets Act
- Arbitration
While non-disparagement and confidentiality provisions have long been staples of severance agreements, on February 21, 2023, a National Labor Relations Board (“NLRB”) decision ruled that these provisions could potentially violate ex-employees’ rights under Section 7 of the National Labor Relations Act (“NLRA”), which grants employees the right to self-organize and engage in activities “for the purpose of collective bargaining or other mutual aid or protection.”
However, this decision does not mean that employers must completely do away with non-disparagement and confidentiality agreements. To begin with, any severance agreements signed prior to this decision will not be impacted. Additionally, this decision only applies to non-management—it does not apply to anyone classified as a “supervisor” under Section 2(11) of the NLRA. (This is one of many reasons why it is critical for employers to categorize workers correctly, with an eye to each employee’s actual job duties.)
While non-disparagement clauses are less useful than they may appear and are usually difficult to enforce, a robust confidentiality clause may be necessary to keep a severance settlement amount—or other information learned while working at the company—private. A disclaimer expressly stating that the severance agreement is not intended to restrict employee rights protected by federal law may be able to save the confidentiality clause from the latest NLRB edict.
It should be noted that, when dealing with union employees, the union should be given notice and an opportunity to bargain in order to avoid any unfair labor practice charges.
ERISA Plans
Another key consideration is whether the employer’s severance program falls within the scope of the Employee Retirement Income Security Act (“ERISA”). ERISA requirements pertain to “pension and welfare plans,” which can encompass severance benefit policies if those policies meet certain requirements.
STEP 5: Review employee agreements.
Before including a merger clause within a severance agreement (i.e., a provision stating that the agreement is a complete statement of terms between the parties), an employer should review any other agreements the employee has signed. A previous employment agreement/offer letter may already include a severance provision. It’s important to note that employees with a contractual right to severance won’t be included in group termination for OWBPA purposes. Rather, these employees would likely be “without cause” terminations, for which the employer would need to follow all procedures set forth in the original agreement. An employer should also be on the lookout for any prior non-competition/non-solicitation and confidentiality agreements that were entered into.
If the employee does have a previous employment agreement, the employer should also determine whether termination of that employee would trigger a change of control provision. For example, if a RIF is occurring less than 12 months following a change of control of the company’s ownership, it could trigger a change of control provision and entitle the employee to benefits that they would not have been entitled to otherwise.
STEP 6: Determine if payment is required upon termination.
Once again, employers need to be wary of individual state laws pertaining to payment after termination. For instance, states have different requirements for when a terminated employee must be provided with their final paycheck, e.g., on the last day worked versus the next payday. Employers should also check relevant commission and/or bonus plans to see if any payments are owed to the departing employee. Depending on company policy and state laws, the employee could also be entitled to compensation for unused Paid Time Off.
Additionally, some states require employers to provide formal notices of separation to departing employees. While each state differs, these notices typically inform terminated workers of their right to pursue unemployment insurance benefits from that state.
STEP 7: Track the data.
An employer should prepare a spreadsheet and designate HR personnel to track the salient information of employees effected by a RIF. Among other things, this data for each employee should include:
- Name
- Date of Birth
- Position
- Whether Employee is Management
- Department
- Supervisor
- State of Residency/Employment
- Decisional Unit/Group
- Date of Hire
- Date of Termination
- Amount of Severance
- Whether Employee Has Contractual Right to Severance
- Date the Employee Receives Severance Agreement
- Whether Severance Agreement Has Been Returned
If you have any further questions regarding the RIF process and steps that employers can take to protect their company’s interests, please contact Leslie Sanders and Daniel Crowell.
Helpful Acronyms
ADA — Americans with Disabilities Act
ERISA — Employee Retirement Income Security Act
FMLA — Family and Medical Leave Act
NLRA — National Labor Relations Act
NLRB — National Labor Relations Board
OWBPA — Older Workers Benefit Protection Act
RIF — Reduction in Force
WARN — Worker Adjustment and Retraining Notification (Act)
