One of the most difficult decisions to make is to reduce the size of your workforce. As a business owner, it’s difficult to know exactly what needs to be done and when. Legal liability is an aspect of workforce reduction that is often overlooked, with potentially disastrous results.
In this article, we talk about the laws that you must consider when planning a reduction in workforce and the importance of getting legal counsel involved at the earliest stage possible. We also cover how to create a workforce reduction strategy that is based on objective measures of employee performance.
You’ll also learn about how to create severance packages and release agreements that do right by your employees and reduce the likelihood of legal action against your organization.
What legal challenges will you face during a permanent layoff? Employees may file discrimination lawsuits against your business if they believe they have been selected for layoff based on factors such as race, gender, and age. The Civil Rights Act of 1964 and the Age Discrimination Act of 1975 are laws that protect employees from discrimination if they fall into one or more protected classes covered by these laws.
This anti-discrimination law defines the protected classes of employees and how they are to be treated by employers. For the sake of clarity, we will focus only upon the parts of this law that directly affect how you should plan and implement a reduction in your workforce.
Section 2000e-2 [Section 703], states under Employer Practices:
“It shall be an unlawful employment practice for an employer to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin.”
Discrimination lawsuits are the most common among laid off employees. In 2016, the US Equal Employment Opportunity Commission (EEOC) received 91,503 discrimination charges.
These top 3 complaints filed with the EEOC in 2016 show how serious employees are about being treated fairly in the workplace. Employers need to take discrimination just as seriously.
The total number of complaints filed in 2016 was 91,503, a substantial decrease from 2011, when complaints peaked at 99,947. However, this isn’t as good as it seems. The lowest year for complaints was 2014 when complaints were at their lowest in several years with only 88,778.
While it’s difficult to determine why the number of complaints has increased over the last two years, one thing is clear: employees are taking action when they believe they are being discriminated against.
This act prohibits laying off or firing employees over 40 years of age, although age-related discrimination continues. In 2016, age discrimination complaints ranked fourth, with 20,857 complaints filed with the EEOC.
The US Department of Labor has this to say on about age discrimination:
“The Age Discrimination in Employment Act of 1967 (ADEA) protects certain applicants and employees 40 years of age and older from discrimination on the basis of age in hiring, promotion, discharge, compensation, or terms, conditions or privileges of employment.”
Hewlett Packard (HP) and Hewlett Packard Enterprise (HPE) have some first-hand experience with what happens when a company discriminates against employees based on their age. On August 24th, 2016, USA Today published this article about four plaintiffs ranging in age from 52 to 63 years of age who filed a class-action lawsuit against HP on the same day.
The complaint claims that, back in 2013, the HR department at HP issued guidelines that required 75% of outside hires be me right out of school or “early career” applicants.
The status of the case against HP and HPE is unclear. What’s important here is to be aware that employees at companies of all sizes are taking action. Discrimination lawsuits are expensive and time-consuming. Even if an employer is judged innocent of the charges, the lost time, revenue, and damage to business reputation take their toll.
Discrimination lawsuits may be the most common, but they’re not alone. A less common, but equally important lawsuits are filed over severance packages (or the lack thereof) and release agreements.
Popularly known as “WARN”, this law requires companies to notify employees of major business actions that will adversely affect their workforce. In “The Worker Adjustment and Retraining Notification Act” on the Department of Labor website, it defines employer coverage, employee coverage, and what triggers notice.
Employers who have at least 100 employees who have worked for at least 6 months out of the last 12 months generally must comply with the provisions of WARN.
This includes:
These business entities operate in the public sector or in the private sector providing public services. Defining what is what can be a bit tricky, so here’s how the organization USLegal defines public entity:
“A public entity is defined as follows:
(A) any State of local government;
(B) any department, agency, special purpose district, or other instrumentality of a State or States or local government; and
(C) the National Railroad Passenger Corporation, and any other commuter authority.”
What is a quasi-public entity?
Finding a consistent, widely recognized definition for this term was difficult. Black’s Law Dictionary provided the best definition, if for the slightly different term Quasi Public Corporation:
The “quasi public corporation…[is] not strictly public, in the sense of being organized for governmental purposes, but whose operations contribute to the comfort, convenience, or welfare of the general public, such as telegraph and telephone companies, gas, water, and electric light companies, and irrigation companies.”
Basically, if your business is a privately held company that provides a public service, your business is a quasi-public entity.
Before you begin planning a workforce reduction, it is a good idea to consult with legal counsel to determine if you must comply with WARN. If it’s determined that your organization must comply with WARN, there are certain steps you must take to prevent enforcement action. We’ll come back to this in a bit.
There are four major actions that trigger a mandatory notice:
When one or more of these actions are taken, your business will have to give notice in compliance with the rules set forth in WARN regulations.
A covered employer must give notice if one or more operating units or facilities will be shut down and the shutdown results in the loss of employment for 50 or more employees during any 30-day period.
If an employer is planning a workforce reduction that is not the result of a plant closing, and it results in the loss of employment during any 30-day period for 500 or more employees, or for 50-499 employees if they make up a third or more of your active workforce.
If part or all of a business is sold,
Learn about the Form and Content of Notice to be given
An employer that fails to comply with the provisions set forth in WARN is liable for back pay and benefits for the period of the violation, up to 60 days. The violating employer may also be subject to civil fines and penalties.
As an employer, you may not be mandated by law to provide severance pay to your employees during a workforce reduction. However, it’s almost always a good idea to offer them anyway.
When do you have to provide severance pay?
There are only two scenarios in which an employer is required to provide severance pay:
If you entered into a contract or written agreement with an employee that states the employee will receive severance pay upon termination or layoff, you will have to pay severance. Likewise, if you hire an employee and it states in the employee handbook that employees will receive severance pay if terminated, your organization will have to pay it.
Your organization may have a history of paying severance to the employees it terminates. If so, you will have to pay severance.
Also, if you make an oral promise to employees that they will receive severance pay upon termination, you will have to pay it.
In a nutshell, if severance pay is promised in writing, you have to pay it, even if it’s not part of an employment contract. Oral promises carry the same weight as written ones, so someone in your business makes an oral promise of severance pay to an employee, you will have to pay it.
Many organizations offer severance pay and packages for employees that have been with them for a long time, even when there is no legal requirement to do so. Severance packages show departing employees that they are valued and appreciated. In a broader context, it also draws positive attention to your organization and its generosity with valued employees. This boosts the morale of your employees and sends a clear message that you take care of your employees to new talent you’re trying to attract.
When a business is downsizing, it’s easy to get caught in the trap of eliminating any and all non-essential costs. Reducing the workforce is a painful, dispiriting process. Offering severance pay to employees that are about to be terminated or laid off isn’t just about PR — it’s also about helping your managers and supervisors feel better about reducing the number of workers in their departments.
But what if you were to take severance pay a little further and provide your employees with outplacement services to help them find new jobs quickly?
Employees in transition will appreciate getting a severance paycheck, but it will help them out for a short time. When your organization provides outplacement for employees in transition, you’re doing more than helping them keep their bills paid for a few months — you’re helping them to take the next step in their careers. A reputable outplacement service will provide your former employees with professionally written resumes and cover letters to help them find new jobs. Many outplacement services also provide job search training, career coaching, and interview coaching to help former employees develop the skills they need to land a new jobs they’ll love. When they land those new jobs, they’ll thank your organization for its generosity and support during a difficult time.
There’s something in it for your business, too — greatly reduced exposure to litigation brought by former employees. If you take good care of your employees after they have been terminated or laid off, they will be grateful for it. Happy, grateful people aren’t likely to file lawsuits against their employers.
An employer that requires employees to sign a release agreement greatly increases its litigation risk. Without careful planning and guidance from legal counsel with release agreement expertise, litigation is all but guaranteed.
Here’s why.
Release agreements, first and foremost, ask employees to surrender their rights to file claims and seek legal action against the employer. Former employees who signed release agreements are able to quickly and easily research what release agreements are and determine if they may be able to take action anyway. The most common type of lawsuit brought by former employees is discrimination, and release agreements are no different. If a former employee believes the termination or layoff was due to discrimination, that former employee will seek legal action and the courts will back it.
Even when employers ask employees to sign release agreements when a severance package is provided, there is no guarantee that the employer will be protected from legal action by that employee.
The best solution to this legal dilemma is to first determine if your business really needs to require a release agreement. If it’s decided that it is necessary, then it’s necessary to get legal counsel involved to help develop a release agreement strategy that includes equal distribution among employees and compliance with discrimination laws.
Michigan’s unemployment tax code is made up of two taxes: the state’s Unemployment Insurance Agency (UIA) tax to fund the account from which unemployment benefits are paid, and the Federal Unemployment Tax Act (FUTA).
This tax is made up of three components:
The CBC and ABC components are calculated based on your payroll and unemployment charges to your account. This is known as the experience factor for your business. Generally speaking, the more unemployment claims filed against your company, the higher your unemployment tax.
If you own a business that is less than two years old, you will likely pay a 2.7% unemployment tax rate. New construction businesses, due to the cyclic, seasonal nature of the industry, are subject to an unemployment tax that is the average of the construction industry as a whole. The UIA announces that rate near the beginning of each year. Over the last few years, the unemployment tax rate for construction companies has varied from 6.8% to 8.1%.
Learn how your company’s unemployment tax is calculated
The NBC component is not calculated as part of the employer’s experience factor. Rather, it is often set at 1.0% for all contributing employers. Companies that are less than two years old may pay a little less than the flat 1.0%. There have been several revisions to this law, so it’s a good idea to read up on it here.
The length of time it takes a former employee to find a new job varies widely by job type, level of responsibility, and industry. At Vertical Media Solutions, we have found that, in Michigan, it takes an average of 18 weeks for a job seeker to find a job. Professional outplacement of employees in transition can be reduced by as much as six weeks or more. A carefully planned severance package strategy that includes outplacement can sharply reduce the number of unemployment claims, which keeps your unemployment tax low.
The best severance packages provide employees in transition with income and benefits similar to what was provided for them while working. Outplacement helps even further by greatly reducing the amount of time it takes a former employee to find a new job. They’ll appreciate you looking out for them and helping them to move on.
When you look out for your former employees, they are going to speak well of you. Think about it — what would you rather they post on social media: How you abandoned them when you saw a sharp downturn in business, or how they rave about how much you cared about them? Most business owners will choose positive reviews over negative ones any day.
Ok, but how harmful can bad employee reviews be?
Pretty harmful, it turns out. Bad employee reviews can make hiring new employees virtually impossible. The best talent will be scared away by the bad reviews. To attract them, you may have to offer the talent you need substantially higher pay and benefits to lure them in. Even then, there’s no guarantee they will bite on your offer.
The best way to prevent damage to your business reputation is to plan a severance package ahead of time that includes what your employees will actually need. Providing them with a paycheck, key benefits, and outplacement services will go a long way toward ensuring that your business will continue to be seen in a favorable light when you have to let some of your employees go while resizing your company to survive during a downturn in business.
At the end of the day, it’s really about asking yourself what you would want if you were about to lose your job due to downsizing, reorganization, or other reason. If you can provide your employees with what you would need, you’ll have employees who will continue to hold you and your business in high regard long after they’re gone.
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