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From Downsizer to Defendant … Managing the Legal Risks Associated with Reductions in Force

Corporate downsizing has become a fact of life in this economy.  As sales decline or new technologies emerge, many companies have turned to mass layoffs as a way to cut their costs or alter their work forces.  These decisions reverberate beyond the boardrooms where they are made, sometimes all the way to the courthouse.  Widespread job losses often bring legal challenges in their wake.  As if showing the door to a group of colleagues is not unpleasant enough, managers occasionally find themselves defending that action in front of a judge or jury. 

A recent decision by the United States Supreme Court highlights the importance of careful planning and cautious implementation when embarking on a reduction in force (RIF).  The case, called  Meacham v. Knolls Atomic Power Laboratory, involved a private laboratory paid by the federal government to help maintain the nation’s fleet of nuclear warships.   Faced with declining demand for nuclear reactors, the government ordered the lab to reduce its work force.  The lab first offered a voluntary early retirement program, which approximately one hundred employees accepted.  With additional jobs still remaining to be cut, the lab was forced to implement an involuntary RIF. 

Of the thirty-one employees eventually laid off, thirty of them were at least 40 years old.  Twenty-eight of those employees sued, claiming violations of the Age Discrimination in Employment Act.  The plaintiffs alleged, among other things, that the lab’s RIF procedure had a disproportionate effect (or “disparate impact”) on older workers.  In defense, the lab relied upon federal law allowing job actions that are shown to be “based on reasonable factors other than age” (or RFOA).  The lab maintained that its RIF selections were based on managerial rankings of each employee’s “performance,” “flexibility,” and “critical skills.”    

A federal appeals court reversed a jury verdict in favor of the employees, finding they had failed to refute the reasonableness of the lab’s RIF procedure.  The Supreme Court, however, overturned that decision.  In a closely watched case, the Supreme Court ruled that employers who invoke the RFOA defense bear the burden of persuasion on that issue, rather than the employees challenging the RIF.  The Meacham decision has been widely seen as making it more difficult and expensive for employers to defend these types of lawsuits.

While it is impossible to guarantee that a RIF will not be challenged, good planning and execution can help minimize the risks.  And if the affected employees bring a legal action, proper preparation will help in defending the RIF. 

Here is a RIF checklist for employers:

  • Develop the business justification for the RIF (such as a loss of profits, a change in markets, a new competitive threat, a loss of a key client base, a need to lower costs, etc.).  The decision-maker(s) should articulate the reasons why the RIF is necessary.
  • Consider the feasibility of a voluntary early retirement program, providing incentives to those who accept.  Pay careful attention to the eligibility factors, in order to avoid legal challenges.  Determine whether such a program is likely to result in the loss of key employees that you wish to retain.  Decide whether you have enough time to implement a voluntary system first, to be followed by an involuntary program if additional positions still need to be eliminated.
  • If an involuntary program will be used, develop a method to identify the employees whose positions will be eliminated.  Decide if positions will be eliminated across the organization or only in certain departments.  For each “decisional unit” from which employees will be selected, determine which positions must be retained in order to achieve the business goals.  Determine the selection criteria to be used.  These can be objective (seniority, attendance, measurable performance, certifications, etc.) or subjective (judgment, leadership, commitment to teamwork, etc.), or a combination.  The more subjective the criteria, the more vulnerable the selection process may be to accusations of stereotyping and discrimination. 
  • After applying the selection criteria, conduct an “adverse impact” analysis.  Evaluate whether the selection process would disproportionately affect employees in a protected category (due to their age, race, gender, etc.).  It is important to involve your attorneys in order to make the analysis “privileged” and shielded from disclosure.
  • Determine the timing of the job eliminations, and decide how much notice employees will be given.  For larger employers who are implementing mass layoffs or plant closings, federal law may impose a specific notice requirement.  In other situations, it may be helpful to consider whether you need the employees’ services for a period of time, or whether allowing them to remain may impose morale problems, productivity issues, or security risks.
  • Decide whether retention bonuses should be offered to those who remain for a specified period of time.
  • Determine whether special benefits will be provided in exchange for a release of liability.  Most commonly, employers offer severance pay as part of a separation agreement.  Other benefits may include continuation of health insurance, outplacement services, and job references.
  • Determine whether employees are entitled by law to certain pay and benefits (such as accrued vacation).
  • Prepare valid separation agreements.  If employees 40 years of age or older are affected, there are special notice and disclosure requirements that must be contained in the agreement.  Federal and state law may impose other requirements.
  • Implement any necessary precautions to protect the employer’s property and sensitive data, as well as the safety of employees.
  • Develop and implement a communication strategy, including how and when to inform the affected employees, the unaffected employees, any affected clients and business contacts.
  • Document each of these steps, and involve legal counsel throughout the process.