Downsizing the Right Way

First, employers must review all individual employment contracts, the majority of which are executed for the benefit of managerial and executive level employees. Absent unusual contract language, a termination that is part of a RIF likely will be viewed as “without cause.” Therefore, true performance-based terminations that may allow employers to avoid severance should be handled outside of, and well in advance of, a RIF event.

Second, employers need to review all published severance policies to determine whether the proposed downsizing incentive package, if any, is consistent with written policy. Even if the severance policy is not part of a written contract per se, failure to provide payments according to the policy may lead to lawsuits over the failure to provide accrued benefits.

Third, employers must consider whether any collective bargaining agreement is in place that governs the specifics of layoffs. If a union is involved, cooperation with its representatives, including inviting participation in the RIF process, often leads to a better result.

Once all potentially applicable contracts are reviewed, each employee with a contract (either individual or union) may be classified as being appropriate or inappropriate for the RIF. Of course, this initial classification should be “in pencil” and reviewed and reconsidered as the analysis of other factors continues. After all factors are considered and weighed, the employer may finalize its RIF targets and offer appropriate incentive packages with a clear understanding of its contractual requirements.

Select Objective Criteria; Minimize Subjective Criteria

When defending any form of claim arising out of a RIF, it is best to be able to point to clear objective factors developed and used to separate affected and unaffected employees. As with any other case, if personal opinion is taken out of the equation, wrongful termination and, particularly, discrimination claims may be defeated at summary judgment and otherwise be much harder to prove at trial. Objective factors typically used in downsizing events include: 1) reverse seniority (e.g., laying off most recent hires in each affected unit); 2) lowest documented objective performance (i.e., sales figures); and 3) objective skill sets (e.g., employees without a certain level of education or practical skill training).

Frequently, however, use of purely objective criteria does not fit with the specific goals and/or is not politically acceptable. Assuming that some subjective analysis will be part of the RIF process, the primary goal should be implementing subjective criteria in a manner that is defensible in the event that one or more lawsuits are filed following the downsizing. In other words, the goal should be to make the subjective analysis as objective and consistent as possible. Process, in consultation with counsel, should be established before any selection analysis takes place.

Typically, employees are ranked in some fashion. Specific criteria should be used to rank employees, and may come from performance evaluation forms (and include factors such as assumption of responsibility, leadership, qualitative performance, attendance and the like). While certain factors may be inherently subjective, the employer should be put to the test of evaluating employees within a structured and consistent framework. The results of this grading system then may be compared to prior performance reviews to identify potential inconsistencies.

Furthermore, the objective factor criteria should be applied across the board throughout all potential units and divisions that contain candidates for the RIF. Otherwise, litigation may ensue over the employer's decision to use different criteria for different parts of the organization. With consistency throughout the organization, even the use of subjective criteria may be defended successfully.

Documenting and Reviewing the Criteria Evaluation

Before applying the criteria, the employer should have the criteria reviewed by counsel as a precautionary measure. This criteria review is time and money “well spent” because the criteria ultimately used by the employer will be the focus of any ensuing litigation.

After obtaining feedback from management, human resources should review all documentation created by management during the evaluation process, including the standard criteria grading forms and any accompanying notes prepared by management. All such documents need to be kept, regardless of their content, to avoid issues of incomplete documentation or allegations of concealed or destroyed documentation.

Once all documentation is gathered, human resources and/or members of management responsible for the RIF should conduct an initial review to determine whether management has provided all necessary information. This initial review should be for thoroughness only. The final stage review may then begin.

The Final Review: Refining Your Analysis Depending on Your Risk Tolerance

At this stage of the evaluation process, the employer should have a list of the candidates that will be terminated or otherwise impacted by the downsizing event. This list then needs to be evaluated to determine whether any classes of person are impacted disproportionately by the downsizing when compared to the workforce as a whole. Counsel should be consulted to perform an adverse impact analysis to determine whether the RIF is susceptible to disparate impact claims brought by a particular class of protected persons.

If the statistical analysis reveals any weaknesses, the employer may take any or all of the following steps: 1) reassess the selection criteria to determine whether any arguable disparate impact may be avoided by modifying the criteria; 2) request criteria review by the next line of management (higher, not lower) and counsel; and 3) shore up the employer's documentation of the necessity of the RIF and the criteria selected for the RIF. It is critical that the employer does not simply change the results by picking the next person (i.e., a male) on the list to change the numbers. Such a decision, even though designed to avoid disparate impact, may lead to a disparate treatment discrimination claim filed by the selected employee wherein the employee argues that the only reason that he was terminated is because of his gender.

In addition to the global statistical analysis of the criteria review, the employer should reevaluate whether any high-risk employees are subject to the RIF. Particularly, employees with viable breach of contract claims, who have taken protected forms of leave, or who have filed formal or informal complaints of unlawful conduct (such as a Title VII charge of discrimination) should be identified as potential litigation candidates. The files of these employees then should be reviewed in detail to determine the likelihood of future litigation and the strength of the employer's defenses to any such litigation. If possible (depending on the statistical analysis discussed above and general business considerations), these persons may be replaced by the next tier of RIF candidates identified in the general analysis.

Consider Your Alternatives

More than just a separate step in the process, the employer should consider alternatives to termination throughout its analysis of the downsizing event. In no particular order, common alternatives to termination include shortened work weeks or workdays; temporary plant or shift closings; work-sharing; across-the-board salary cuts or freezes; prohibition of overtime (hours, not just pay); mandatory paid vacations; hiring freezes (other than replacing key employees who leave for other reasons); voluntary separation incentive programs; and voluntary early retirement incentive programs. Common sense dictates that some of these alternatives, particularly hiring and salary freezes, should be part of any downsizing event.

Turning to the last two alternatives listed above, incentivized voluntary separation and retirement programs clearly carry the most protection for the employer because employees will be leaving according to their own will. Furthermore, these programs often require the signing of a release in exchange for the increased consideration provided to the resigning employee. Even without a release, claims predicated on a resignation, as opposed to a termination, are much more difficult to sustain.

When structuring a voluntary separation program, employers should consult with both employment and tax counsel. For example, a program that allows for installment payments over a considerable period of time may implicate ERISA. A program that is limited in potential enrollment, in turn, may create rather than avoid age discrimination problems. Case in point: A program that is limited to employees with a particular length of tenure may provide an argument that the employer is forcing older workers to resign. Likewise, a program that is limited to a certain level of performance only (e.g., only poor performers are eligible) may result in discrimination claims that attack the employer's evaluation of job performance.

When enacting the Older Workers' Benefit Protection Act (see Part One of this article in the April Issue), Congress recognized that certain bona fide employee incentive programs are per se legal. Applying an “equal cost” principle relative to the incentives offered to older and younger employees, Congress has rubber-stamped the following kinds of incentives, among others: flat dollar incentives; service-based benefits (e.g., $1,000 times number of years of service); percentage of salary incentives; and flat dollar or percentage increases in pension benefits.

Going Forward with Compassion

Even after doing all of the “right things” legally, employers should embrace one final, and perhaps the most important, part of the downsizing process ' communicating the RIF to all employees with compassion. Because employment is inherently personal, how an employer conveys the news that many employees are leaving their jobs often is the determinative factor as to whether litigation is filed by affected employees. This communication also often is the determinative factor as to whether the “unaffected” start looking for jobs or experience morale problems that may debilitate their job performance.

In short, compassion goes a long way when bad news needs to be delivered to employees. Therefore, only selected members of management should conduct termination meetings, preferably after training. During these meetings, affected employees should be given time to ask questions about the downsizing and their rights and benefits, and be able to “vent” to the employer. Unless required by union contracts, however, the employer should not make any promises, either express or implied, about future
recalls during these meetings.

Finally, the employer should consider providing assistance to displaced employees to further communicate its concern for them in a difficult time. Such assistance may come in the form of outplacement services, providing consultation time with career professionals, and contacting other companies regarding their hiring capacities. Although these services add to the cost of the RIF, history proves that they are well worth the minimal expense because they show displaced employees that the employer really cares about them and had no choice but to downsize due to current economic conditions.

Henry M. Perlowski is a partner in the Atlanta law firm of Arnall Golden Gregory LLP, where he is a member of the Litigation Practice Group, the Chair of its Employment Law Team and a member of its Business Litigation Team. He can be reached at 404-873-8684 or at [email protected]. Bruce Jackson, a member of this newsletter's Board of Editors, is also a partner at the firm, where he is a member of the Corporate Practice Group. His practice includes counseling companies, individuals and professional firms on transition planning. He can be reached at 404-873-8590 or at [email protected].

In Part One of this article, we dealt with the primary risks of a “downsizing” event. Part Two herein discusses implementing a methodical plan for a downsizing event, alternatives to downsizing, and going forward with compassion.

Review All Applicable Employment and Union Contracts

Before implementing any downsizing, employers must review all contractual obligations relative to all potentially affected employees. Otherwise, a downsizing may result in a rash of legitimate breach of contract lawsuits.

First, employers must review all individual employment contracts, the majority of which are executed for the benefit of managerial and executive level employees. Absent unusual contract language, a termination that is part of a RIF likely will be viewed as “without cause.” Therefore, true performance-based terminations that may allow employers to avoid severance should be handled outside of, and well in advance of, a RIF event.

Second, employers need to review all published severance policies to determine whether the proposed downsizing incentive package, if any, is consistent with written policy. Even if the severance policy is not part of a written contract per se, failure to provide payments according to the policy may lead to lawsuits over the failure to provide accrued benefits.

Third, employers must consider whether any collective bargaining agreement is in place that governs the specifics of layoffs. If a union is involved, cooperation with its representatives, including inviting participation in the RIF process, often leads to a better result.

Once all potentially applicable contracts are reviewed, each employee with a contract (either individual or union) may be classified as being appropriate or inappropriate for the RIF. Of course, this initial classification should be “in pencil” and reviewed and reconsidered as the analysis of other factors continues. After all factors are considered and weighed, the employer may finalize its RIF targets and offer appropriate incentive packages with a clear understanding of its contractual requirements.

Select Objective Criteria; Minimize Subjective Criteria

When defending any form of claim arising out of a RIF, it is best to be able to point to clear objective factors developed and used to separate affected and unaffected employees. As with any other case, if personal opinion is taken out of the equation, wrongful termination and, particularly, discrimination claims may be defeated at summary judgment and otherwise be much harder to prove at trial. Objective factors typically used in downsizing events include: 1) reverse seniority (e.g., laying off most recent hires in each affected unit); 2) lowest documented objective performance (i.e., sales figures); and 3) objective skill sets (e.g., employees without a certain level of education or practical skill training).

Frequently, however, use of purely objective criteria does not fit with the specific goals and/or is not politically acceptable. Assuming that some subjective analysis will be part of the RIF process, the primary goal should be implementing subjective criteria in a manner that is defensible in the event that one or more lawsuits are filed following the downsizing. In other words, the goal should be to make the subjective analysis as objective and consistent as possible. Process, in consultation with counsel, should be established before any selection analysis takes place.

Typically, employees are ranked in some fashion. Specific criteria should be used to rank employees, and may come from performance evaluation forms (and include factors such as assumption of responsibility, leadership, qualitative performance, attendance and the like). While certain factors may be inherently subjective, the employer should be put to the test of evaluating employees within a structured and consistent framework. The results of this grading system then may be compared to prior performance reviews to identify potential inconsistencies.

Furthermore, the objective factor criteria should be applied across the board throughout all potential units and divisions that contain candidates for the RIF. Otherwise, litigation may ensue over the employer's decision to use different criteria for different parts of the organization. With consistency throughout the organization, even the use of subjective criteria may be defended successfully.

Documenting and Reviewing the Criteria Evaluation

Before applying the criteria, the employer should have the criteria reviewed by counsel as a precautionary measure. This criteria review is time and money “well spent” because the criteria ultimately used by the employer will be the focus of any ensuing litigation.

After obtaining feedback from management, human resources should review all documentation created by management during the evaluation process, including the standard criteria grading forms and any accompanying notes prepared by management. All such documents need to be kept, regardless of their content, to avoid issues of incomplete documentation or allegations of concealed or destroyed documentation.

Once all documentation is gathered, human resources and/or members of management responsible for the RIF should conduct an initial review to determine whether management has provided all necessary information. This initial review should be for thoroughness only. The final stage review may then begin.

The Final Review: Refining Your Analysis Depending on Your Risk Tolerance

At this stage of the evaluation process, the employer should have a list of the candidates that will be terminated or otherwise impacted by the downsizing event. This list then needs to be evaluated to determine whether any classes of person are impacted disproportionately by the downsizing when compared to the workforce as a whole. Counsel should be consulted to perform an adverse impact analysis to determine whether the RIF is susceptible to disparate impact claims brought by a particular class of protected persons.

If the statistical analysis reveals any weaknesses, the employer may take any or all of the following steps: 1) reassess the selection criteria to determine whether any arguable disparate impact may be avoided by modifying the criteria; 2) request criteria review by the next line of management (higher, not lower) and counsel; and 3) shore up the employer's documentation of the necessity of the RIF and the criteria selected for the RIF. It is critical that the employer does not simply change the results by picking the next person (i.e., a male) on the list to change the numbers. Such a decision, even though designed to avoid disparate impact, may lead to a disparate treatment discrimination claim filed by the selected employee wherein the employee argues that the only reason that he was terminated is because of his gender.

In addition to the global statistical analysis of the criteria review, the employer should reevaluate whether any high-risk employees are subject to the RIF. Particularly, employees with viable breach of contract claims, who have taken protected forms of leave, or who have filed formal or informal complaints of unlawful conduct (such as a Title VII charge of discrimination) should be identified as potential litigation candidates. The files of these employees then should be reviewed in detail to determine the likelihood of future litigation and the strength of the employer's defenses to any such litigation. If possible (depending on the statistical analysis discussed above and general business considerations), these persons may be replaced by the next tier of RIF candidates identified in the general analysis.

Consider Your Alternatives

More than just a separate step in the process, the employer should consider alternatives to termination throughout its analysis of the downsizing event. In no particular order, common alternatives to termination include shortened work weeks or workdays; temporary plant or shift closings; work-sharing; across-the-board salary cuts or freezes; prohibition of overtime (hours, not just pay); mandatory paid vacations; hiring freezes (other than replacing key employees who leave for other reasons); voluntary separation incentive programs; and voluntary early retirement incentive programs. Common sense dictates that some of these alternatives, particularly hiring and salary freezes, should be part of any downsizing event.

Turning to the last two alternatives listed above, incentivized voluntary separation and retirement programs clearly carry the most protection for the employer because employees will be leaving according to their own will. Furthermore, these programs often require the signing of a release in exchange for the increased consideration provided to the resigning employee. Even without a release, claims predicated on a resignation, as opposed to a termination, are much more difficult to sustain.

When structuring a voluntary separation program, employers should consult with both employment and tax counsel. For example, a program that allows for installment payments over a considerable period of time may implicate ERISA. A program that is limited in potential enrollment, in turn, may create rather than avoid age discrimination problems. Case in point: A program that is limited to employees with a particular length of tenure may provide an argument that the employer is forcing older workers to resign. Likewise, a program that is limited to a certain level of performance only (e.g., only poor performers are eligible) may result in discrimination claims that attack the employer's evaluation of job performance.

When enacting the Older Workers' Benefit Protection Act (see Part One of this article in the April Issue), Congress recognized that certain bona fide employee incentive programs are per se legal. Applying an “equal cost” principle relative to the incentives offered to older and younger employees, Congress has rubber-stamped the following kinds of incentives, among others: flat dollar incentives; service-based benefits (e.g., $1,000 times number of years of service); percentage of salary incentives; and flat dollar or percentage increases in pension benefits.

Going Forward with Compassion

Even after doing all of the “right things” legally, employers should embrace one final, and perhaps the most important, part of the downsizing process ' communicating the RIF to all employees with compassion. Because employment is inherently personal, how an employer conveys the news that many employees are leaving their jobs often is the determinative factor as to whether litigation is filed by affected employees. This communication also often is the determinative factor as to whether the “unaffected” start looking for jobs or experience morale problems that may debilitate their job performance.

In short, compassion goes a long way when bad news needs to be delivered to employees. Therefore, only selected members of management should conduct termination meetings, preferably after training. During these meetings, affected employees should be given time to ask questions about the downsizing and their rights and benefits, and be able to “vent” to the employer. Unless required by union contracts, however, the employer should not make any promises, either express or implied, about future
recalls during these meetings.

Finally, the employer should consider providing assistance to displaced employees to further communicate its concern for them in a difficult time. Such assistance may come in the form of outplacement services, providing consultation time with career professionals, and contacting other companies regarding their hiring capacities. Although these services add to the cost of the RIF, history proves that they are well worth the minimal expense because they show displaced employees that the employer really cares about them and had no choice but to downsize due to current economic conditions.

Henry M. Perlowski is a partner in the Atlanta law firm of Arnall Golden Gregory LLP, where he is a member of the Litigation Practice Group, the Chair of its Employment Law Team and a member of its Business Litigation Team. He can be reached at 404-873-8684 or at [email protected]. Bruce Jackson, a member of this newsletter's Board of Editors, is also a partner at the firm, where he is a member of the Corporate Practice Group. His practice includes counseling companies, individuals and professional firms on transition planning. He can be reached at 404-873-8590 or at [email protected].