The legal risks of downsizing

Q. After the failed launch of its new product, Weatherdoomer Inc. has decided to lay off 35 of its 79 employees. How do we avoid legal risk?

A. Implementing a reduction-in-force program is one of the most difficult tasks that an employer can face, and there are rules under federal and state laws that must be considered. The following steps will help reduce legal risk:

• Define specific business objectives for the reduction and identify what your business structure will look like post-reduction. Consider implementing a hiring freeze at this stage. Identify job functions as “essential” or “non-essential” to determine what functions can be eliminated or consolidated. Consider the impact a reduction will have on all affected constituencies including employees, customers, investment commitments, media and governmental units.

• Decide how many employees will be affected and comply with notice requirements under federal and state law. Weatherdoomer Inc. is not subject to the federal Worker Adjustment & Retraining Notification Act, which applies to certain large employers, including those with 100 or more full-time employees. But effective Jan. 1, 2010, Weatherdoomer may have notice obligations under state law, the pending New Hampshire Worker Notification Adjustment & Retraining Notification Act, which will apply to employers with 75 or more employees who are conducting a “mass layoff” or “plant closing.”

A mass layoff is a workforce reduction that results in employment loss at a single site of employment (during any 30-day period) of at least 250 employees or of at least 25 employees if they constitute 33 percent or more of the full-time employees of the company.

Under the new law, Weatherdoomer will be required to provide a 60-days prior notice to affected employees, the commissioner of labor; the attorney general and the chief elected official of each municipality where the layoff occurs. The act does have limited exceptions, so be sure to consult with legal counsel to determine if the Act applies.

• Engage in a non-discriminatory selection process. Use objective selection criteria and apply the same consistently across the board. Document the lawful and legitimate business purposes of each selection. Appropriate selection criteria may include tenure, performance (provided reviews are based on objective standards that can withhold scrutiny), job function and skill set. Beware of making exceptions, which can be evidence of unlawful discrimination.

• Once the company has prepared a preliminary list of employees who will be included in the reduction, perform a statistical analysis to ensure that the reduction is not inadvertently affecting a protected class of employees disproportionately. The most common area of litigation in workforce reductions is age discrimination. Ensure that your reduction does not disproportionately affect older employees.

• Offer severance pay in exchange for a release of claim.

Although not legally required, offering such severance will provide the company with significant protection from future litigation. Work with legal counsel to ensure that you obtain a valid and enforceable release, as specific rules apply.

• Confirm selected employees are employed on an “at-will” basis; if not, you may have additional notice or pay requirements. Finalize the company’s positions on important issues, such as treatment of final pay. Decide when and where you will notify employees (including any employees out on leave). Finally, consider the need for security and create an exit strategy plan including considerations about disgruntled departing employees.

• Delivering the message to affected employees is a difficult step in the reduction process. Include two trained members of the company’s management team at each meeting. Employers should stick to the message and avoid arguments or debates with employees. The goal of the termination meeting is twofold: informing employees that their position was selected and provide related information and treat the employee with dignity and respect, especially when asking the employee to return company property and/or to exit the building. Employees who feel disrespected are much more likely to take legal action.

• Be honest about what you know and what you can share with remaining employees. You should not discuss individual selection decisions, but may discuss workload and/or support concerns. Be sure to follow company policy regarding references and refrain from making disparaging remarks about any former employee.

Colleen Karpinsky, an associate in the Employment Practices Group of McLane, Graf, Raulerson & Middleton, Professional Association, can be reached at 603-628-1495 or colleen.karpinsky@mclane.com.