RIF Risks

As the U.S. economy continues to sag, employers are paring their workforces at an ever-accelerating rate. In June, 1,643 companies implemented mass layoffs, according to the Bureau of Labor Statistics, meaning that each one laid off at least 50 people. And while most of the 166,000 employees who lost jobs in those June layoffs can't or won't instigate legal action against their former employers, companies planning layoffs of their own should tread carefully.

The very nature of the current layoffs increases the legal risk. Layoffs happen even in up economies as
employers deploy new technologies or outsource work. In good times, the laid off workers typically leave optimistic about finding work elsewhere. But employees who lose jobs in a down economy are more likely to feel they have nothing to lose by taking their former employer to court, according to Gerald Hathaway, co-chair of the business restructuring practice at Littler Mendelson.

"During times of economic hardship, when companies are forced to execute mass layoffs, people are more prone to sue as a result of their inability to find work and meet financial pressures," says Hathaway.

While the bottom line in any ensuing litigation is being able to show no discriminatory intent in who was laid off and who wasn't, there's a tried and true process for making an airtight case, and it all boils down to documentation.

"Not having proper documentation is one of the most critical and common mistakes," says Caroline Austin, a partner at Wolf Block. "You can minimize your risk with proper planning and proper documentation."

Honesty Pays
The first step is to document the reason for the layoff--sales are down, you've discontinued a product line, you're consolidating operations with a merger partner, you can cut costs by outsourcing the work overseas. The business rationale is critical to defending litigation because it shows your motivation wasn't discrimination.

"It sets the stage for the mantra you will be singing if there ever is litigation," Austin says.

The reason for the layoff also may dictate how it is done. For example, a company that loses a contract may need to eliminate positions directly tied to that account. A company facing revenue declines due to the slow economy may choose to lay off its poor performers.

Regardless, it's important to be honest with yourself and with your employees about what you are doing and why.

"In avoiding liability, the biggest thing that gets companies in trouble is not being clear themselves on what they are doing or not being honest with their workers," says James Bucking, a partner at Foley Hoag. "The death knell for employer defense is dishonesty or inconsistency in what managers are saying about an event."

The next step is appointing a committee to implement the reduction in force (RIF). It should include representation from each affected part of the organization and people from the protected classes, if possible. Bucking recalls a case filed by a woman in her late 50s who was laid off. The defense case was bolstered because another woman in her late 50s was on the RIF committee.

But beware of including a low level employee to create the appearance of diversity. "That's a misstep because everyone will understand the person does not have an equal vote," Austin says.

Choose Criteria
The committee must determine the criteria that will be applied in selecting the group to be terminated. If the company has an existing policy or a contract requiring layoffs by seniority, the committee's hands are tied. More frequently, employers use performance-based criteria, or they may assign a weight to each, such as 90 percent to performance and 10 percent to seniority. One step employers often forget is documenting who was compared to whom, according to David Lamoreaux, co-leader of the Labor and Employment Practice at consulting firm CRA International. Lamoreaux often serves as an expert witness in RIF cases.

"What you want as a witness is to know who was compared to whom," Lamoreaux says. "That information may be lost two to three years later when the case comes to trial, so you are left with trying to explain how the process worked without having the information."

The criteria to be used in the comparison should be written down before the individuals to be laid off are selected. That provides a documentable reason for choosing one individual over another.

"Then if you terminate someone in a protected category, you can say, 'Our policy is to base terminations on certain factors, and it just happened that this person fit the factors. We weren't thinking about him when we made the decision, we were thinking about factors,'" Bucking says.

The more objective the factors, the more defensible your case. For example, you may be able to identify certain crucial skill sets you need in retained employees. Or you may document factors such as attendance and tardiness, or people who haven't met a certain sales quota. Some performance standards aren't quantifiable, so you must rely on a pattern of poor performance reviews over time.

"If you say to an employee, 'You are the worst performer,' and the person has sterling performance reviews, you have a lot of explaining to do," Bucking says.

Analyze Impact
If an entire department is being eliminated, make sure there are no exceptions. "Frequently the exceptions become an allegation in litigation," Lamoreaux says. If exceptions are necessary, document why they are important--the person has a critical skill set, is crucial to the success of a cross-department project or is needed to close down the department.

A critical step is analyzing the impact of the layoffs on protected classes to see if any protected group is disproportionately affected. This can be a particular problem where entire departments are laid off. You may treat everyone in the department the same, but if the department as a whole is older, more female or has more racial minorities than the other departments, discrimination claims may ensue. Such situations dictate extensive documentation, Lamoreaux says.

In other cases, you may need to re-evaluate your decisions to see if the criteria were applied fairly. You may also need to change the criteria.

"Go back and say, 'What criteria are really necessary?'" Hathaway suggests.

Lamoreaux adds that it's not enough to look at one staff reduction in isolation if more layoffs are planned.

"You can get a false sense of security if you only look at it in a piecemeal fashion," he says. "You may want to be more aggressive about minimizing adverse impact in the early phases [of an ongoing restructuring]. If you wait until phase four or five, it's much more difficult to bring that under control."

Senior Editor

Mary Swanton

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