Labor: Managing a down economy--considerations for a reduction of labor costs

Pre-emptive policy moves to make before cutting employees

The New Year brings no signs of where the economy is heading. The stock markets are moving up and down with no apparent pattern and businesses across the world are cautiously watching the global economy for signs of weakness. As a result of the uncertainty, companies continue to struggle with labor planning for  next year. Will companies reduce the number of employees, keep the number the same or increase headcount in 2012?

In the midst of uncertainty with respect to staffing levels, human resource professionals and legal counsel should continually plan and prepare for the potential necessity of cutting back on labor costs. Companies and their legal counsel can take steps well in advance to protect the company in the event of the need for a reduction in labor costs. These proactive steps are not only good human resources practice, but also can help protect the company from unwanted litigation and liability in the future.

For example, it is important to recognize the value of regular, objective and strong performance evaluations for all employees. Usually a reduction in force is, for legitimate business reasons, implemented by eliminating the positions of those employees who are the worst performers. Companies that effectively manage the performance evaluation process have already documented the issues related to employee performance and can rely on that evidence to support any employee’s performance-based termination.

An effective performance evaluation process generally requires at least these five things:

1. Regular performance evaluations of at least once per year

2. Objective, multi-level management review

3. Fact-laden narratives

4. The avoidance of excessive, unrealistic or undeserved praise

5. A process by which the employee acknowledges receipt of the written evaluation.

Inflated performance evaluation ratings and evaluations inconsistent with on-the-ground performance problems must be avoided. Where necessary, performance improvement plans (PIPs) should be implemented to focus attention on what proactive steps must be taken to address perceived performance problems. If a company’s policy has not been to implement rigorous performance evaluations or PIPs, it is worth investing time and resources in moving the culture to one where an effective performance evaluation process, including the necessity of PIPs, is accepted.

In addition, companies should ensure proper equal employment opportunity and unlawful harassment policies are in place. These policies should not focus solely on sexual harassment, but must cover the breadth of protected characteristics (age, disability, religion, national origin, etc.) under federal, state and even local law. Companies with employees in multiple states must be aware of all state and local laws that may apply to their employees. For example, in Wisconsin, employers cannot discriminate (except in limited circumstances) against an employee because of his/her arrest or conviction record.

Companies should provide training to their supervisors at every level on equal employment opportunity and unlawful harassment. Training in these important areas will ensure that supervisors are mindful of the need to avoid making employment-related decisions based on employees’ protected characteristics. If an employee in a protected characteristic complains about the fact that he or she was selected for a layoff the company will have valuable evidence that its supervisors were well-trained in the area of equal employment opportunities and anti-discrimination practices.

With these initial, proactive human resources practices in place, companies will be better prepared for a mandate to reduce labor costs. Additionally, companies will have a full menu of options to help reduce labor costs in a down economy.

The various cost-saving options available for companies, such as individual terminations, furloughs, layoffs, voluntary early retirement programs and reductions in force, will be discussed in future columns.

Contributing Author

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Tom O'Day

Tom O’Day joined the Milwaukee office of Godfrey & Kahn, S.C. in January 2006 as a member of the Labor and Employment Practice Group. Tom’s...

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