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In this slow economy, many employers are looking at measures for decreasing labor costs. Such options may include changing employees' conditions of employment or implementing a reduction in force.
Whatever course a business takes, a variety of legal issues must be properly handled. Measures such as pay cuts, forced vacations and layoffs are all subject to requirements under various state and federal laws, such as the Fair Labor Standards Act, the Older Workers Benefit Protection Act and the Worker Adjustment and Retraining Notification Act. Before undertaking any labor-cost reduction initiative, employers must identify and mitigate the full range of legal risks.
Options for Reducing Labor Costs
Changing Conditions of Employment
Because employers are generally free to establish terms and conditions of employment, they also have flexibility to reduce salaries, reduce hours, eliminate bonuses, shift to performance-based compensation and take other cost-saving measures. But before implementing such changes, employers should review employee handbooks, offer letters, employment agreements and, if there are union employees, collective bargaining agreements to ensure these documents do not include language restricting the ability to modify compensation or benefits.
Employers must also consider the basis for reducing employee compensation or benefits to ensure decisions are objective and do not have an adverse impact on a particular protected class of employees. As with all employment-related decisions, clear communication to employees regarding the timing and purpose of any changes in the terms and conditions of their employment is critical to maintaining morale after decisions are implemented.
Forced Vacation
Whether an employer can force employees to use vacation time typically hinges on the organization's vacation policy. Although requesting or encouraging employees to use vacation leave at a particular time generally is permissible under federal law and most states' laws, some states restrict an employer's ability to require employees to use vacation leave at times specified by the employer.
A forced vacation leave policy should incorporate principles of equity and fairness to the extent possible. For example, employees should be given adequate time to use vacation leave on particular dates. Requiring employees to use vacation leave during a shutdown without adequate notice may unfairly deny them the opportunity to choose when to take their vacation.
There are some unique issues for exempt employees. Requiring such employees to take time off without pay for partial-week periods is inconsistent with payment on a salary basis—and could destroy the employees' exempt status under the Fair Labor Standards Act (FLSA). In other cases, state law may present a barrier. Although it may be permissible under the FLSA, for example, to force an exempt employee to use paid vacation leave for single-day or even partial-day increments during a workweek (provided the employee receives his or her normal salary), this practice may not be permissible under certain state wage and hour laws.
Senior Executives Forgoing Salary
Salaried employees must be paid a minimum weekly salary (currently, at least $455) to satisfy the "salary basis test" for exempt employees under the FLSA. Therefore, it is typically not an option to allow senior executives—or other exempt employees—to forgo their entire salaries.
If, however, an executive has at least a 20 percent equity ownership interest in the company, such ownership interest may substitute for the minimum salary required under the salary basis test. Under the FLSA, such an employee is considered to be an "employee employed in a bona fide executive capacity" as long as he or she is actively engaged in management of that enterprise.
Managing a Reduction in Force
Developing and implementing a reduction in force is a multistep process that, if done in haste, can expose employers to legal risk. While circumstances will vary, employers should consider the following eight steps:
1. Take stock of the organization and determine what is driving the need for reductions. Evaluate which positions are essential to the company's future success—and which can be eliminated or consolidated. An employer may need to consider only certain facilities, job functions or departments, rather than the entire company, when reducing its workforce.
2. Decide whether the reduction in force will be voluntary or involuntary. Although a voluntary program has the benefit of giving employees some choice, it may result in the loss of valuable employees and may not generate enough volunteers. As a result, a voluntary program may need to be followed by an involuntary program.
3. Identify personnel who will be responsible for managing the reduction in force.
4. Document business reasons driving the reduction in force and decision-making process. Consult with human resources personnel, in-house counsel and/or outside counsel early in the process for guidance and to help ensure compliance with applicable laws.
5. Develop and disseminate objective termination criteria that are consistent with operational needs of the organization. Such criteria may include seniority, job function, job criticality, overlap among positions, skill sets, transferability of skills, performance and geographic location. Ensure that decision makers apply selection criteria uniformly and do not consider protected characteristics, e.g., age, race or gender, in the selection process.
6. Prepare and share confidential preliminary lists of those selected for termination with the team responsible for managing the reduction in force, including legal counsel. Lists should not be considered final until all selections have been reviewed and statistical data has been analyzed to assess legal risk.
7. Create appropriate documentation regarding termination decisions. Once selections are final, ensure that the decisions are properly documented. Have decision makers complete documents that identify the affected employee, reasons for the decision and the person(s) responsible for the decision. Once an employer develops a documentation system, it is critical to follow through with it. Bad documentation can be worse than no documentation.
8. Prepare final documents for affected employees, including termination notices, releases and information regarding the continuation of benefits. If severance is offered in exchange for releases, be mindful of legal requirements, including specific state and federal requirements for valid releases and potential deferred compensation pitfalls. Consider developing talking points for those who will be delivering termination decisions to employees.
In addition to severance decisions, employers must consider whether to pay out unused vacation leave to terminated employees. Decisions should be consistent with the organization's policies and comply with applicable state laws.
California law, for example, requires employers to pay out all accrued and unused vacation leave upon separation from employment. Under Minnesota law, however, employers are allowed to set the terms under which vacation leave is paid out or not paid out. To the extent vacation leave is treated as wages by the employer, most states require unused vacation leave to be paid out upon or shortly after the termination date.
Reductions in force often leave those who remain feeling uncertain about their future, which can lead to employees looking for new opportunities. Therefore, once decisions have been delivered, it is important to communicate with remaining employees, particularly key contributors to the organization, about their value and importance to the company.
Ensuring That Releases Are Valid and Enforceable
Employers who offer severance in exchange for a release of claims must take steps to ensure that releases are valid and comply with applicable state and federal requirements. In Minnesota, for example, releases must include language addressing the 15-day rescission period required for a waiver of claims under the Minnesota Human Rights Act. Additional language is required under federal law if the release is requested from an employee age 40 or older. Complying with all specific state and federal release requirements is critical; the worst-case scenario is to pay severance in exchange for a release that is later deemed unenforceable
Release Requirements Under the OWBPA
The Older Workers Benefit Protection Act (OWBPA) imposes specific requirements for requesting releases from employees who are 40 or older. Particularly in group terminations, the OWBPA can present challenges for employers.
To be considered knowing and voluntary under the OWBPA, a release of claims must satisfy several criteria. Among these, it must:
- Be written in a manner calculated to be understood by the average individual eligible to participate in the severance program;
- Specifically refer to a waiver of rights or claims under the Age Discrimination in Employment Act;
- Specifically advise the employee to consult with an attorney prior to executing the release; and
- Inform the employee that he or she has 21 days to consider whether to sign the release and seven days to rescind the release after signing.
If the release is requested in connection with a group termination program—i.e., any termination program where two or more employees are offered severance in exchange for signing a release—the 21-day consideration period increases to 45 days. In connection with a group termination program, employers must also provide terminated individuals information, in writing, about the class, unit, or group of individuals covered by the program (often referred to as the "decisional unit"), eligibility factors for the program (which may include a brief description of the selection criteria), and job titles and ages for all individuals offered severance and for all individuals who were considered but not offered severance.
While it is not necessary to include information required by the OWBPA in releases for employees under age 40, employers may choose to do so for administrative reasons and to avoid potential concerns regarding different release documents.
Although OWBPA requirements may appear straightforward, federal regulations and several recent court decisions can make compliance difficult. Courts may invalidate releases for reasons such as the failure to correctly disclose the decisional unit (by disclosing too many or too few employees); a failure to identify complete job titles (such as omission of established job levels or grades); or disclosing dates of birth rather than ages as of the date of the disclosure.
In a slow economy, laid-off employees may find it particularly difficult to find another job, making them more likely to consider litigation against a former employer. Employers can prevent such litigation by ensuring that releases comply with all legal requirements, particularly those imposed by the OWBPA.
WARN Act Requirements
The federal Worker Adjustment and Retraining Notification (WARN) Act requires any "employer"—generally, any business that employs 100 or more employees for an average of 20 hours or more per week—to give at least 60 days' written notice to each "affected employee" before a "plant closing" or "mass layoff." About 40 percent of states have similar laws, which must also be considered. These state laws may apply to employers and workforce reductions that do not implicate the federal WARN Act.
Anticipating the need to close a location or eliminate a large number of employees more than 60 days in advance is not always possible—making compliance with the WARN Act and similar state laws difficult for some employers. Generally, however, employers considering a significant reduction of workforce over any 90-day period should consider doing the following:
- Determine who the "employer" is. Parent-subsidiary, joint venture and common ownership issues are often relevant for WARN Act purposes.
- Determine whether a "plant closing" or "mass layoff" will occur. A plant closing is the temporary or permanent shutdown of a single site of employment, or one or more operating units within that site, during any 30-day period that results in an "employment loss" for 50 or more employees. A mass layoff is a reduction in force, not due to a plant closing, that results in an employment loss at a single site of employment during any 30-day period for (a) at least 33 percent of the active workforce and (b) 50 or more workers. Where 500 or more employees are affected, the 33 percent requirement does not apply. A series of smaller "employments losses" during any 90-day period—depending on the total number of affected employees—can also the trigger WARN Act requirements.
- If 50 or more employees will be affected (considering both 30- and 90-day periods), determine whether any of the employees (a) may not be protected by the WARN Act or (b) may not need to be counted for WARN Act purposes. For example, strikers, workers assigned for temporary projects and independent contractors are not counted toward the 50-employee threshold.
- Confirm all affected employees will, in fact, experience an "employment loss" that is (a) an involuntary termination, (b) a layoff expected to exceed six months or (c) an expected reduction of work hours of more than 50 percent during each month of any six-month period.
- Determine whether notice exceptions, such as the "faltering business" and "unforeseeable business circumstances" exceptions, may be available. But be mindful that these notice exceptions are narrowly construed and may be difficult to establish.
Conclusion
Many employers are facing difficult economic decisions. Those who understand their legal obligations under a variety of state and federal laws, as well as the associated risks, will be well-prepared to make these decisions and should be well-protected against any litigation that may result. On the other hand, a failure to prepare adequately may erode some of the very savings the employer had hoped to achieve.
