Reducing Legal Risk in a Downsizing Economy

September 11, 2009

Q.  After the failed launch of its new product, “June is Sunny Sunblock,” Weatherdoomer, Inc. has decided to layoff 35 of its 79 employees.  How do we avoid legal risk?
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:

1. Evaluate the Strategic Goals of the Reduction
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.  Will the reduction affect the entire workforce, or a limited group such as a particular facility or department?  Consider the impact a reduction will have on all affected constituencies including employees, customers, investment commitments, media and governmental units.

2. Decide How Many Employees Will be Affected & Comply with Notice Requirements
Be mindful of notice requirements under federal and state law.  Weatherdoomer, Inc. is not subject to the Federal Worker Adjustment & Retraining Notification Act (“WARN”), which applies to certain large employers, including those with 100 or more full-time employees. 

Effective January 1, 2010, Weatherdoomer, Inc. may have notice obligations under state law, the pending New Hampshire Worker Notification Adjustment & Retraining Notification Act (the “Act”).  The Act is expected to be signed by Governor Lynch shortly and 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 which 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% or more of the full-time employees of the company. Under this Act, Weatherdoomer will be required to provide 60 days’ prior notice of mass layoff to: (i) affected employees; (ii) the Commissioner of Labor; (iii) the NH Attorney General; and (iv) 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.

3. Engage in a Non-Discriminatory Selection Process
Identify positions that can be eliminated based on your strategic plan from Step 1. 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.

Be mindful that it is illegal to terminate an employee in New Hampshire on the basis of race, color, religion, sex, national origin, ancestry, citizenship, pregnancy, physical disability, mental disability, age, veteran status, marital status, gender, or sexual orientation  (note: effective November 21, 2009, “genetic information” will be added to this list).  It is also illegal to terminate an employee for taking certain medical leave, filing workers’ compensation, discrimination or sexual harassment claims, or for “whistle-blowing.” 

Employees who have any of the above characteristics or who have made any of the foregoing claims in the recent past should be considered carefully, as these are certainly legal risk factors.  Working with legal counsel will help you minimize risk.

4. Check for Disparate Impact
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.

5. Offer Severance Pay in Exchange for a Release of Claims
Although not legally required, offering severance in exchange for a full release of claims 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.  For example, to obtain a valid release in a group reduction under the Age Discrimination in Employment Act, an employer must provide employees over the age of 40 with: (i) 45 days to consider the release; (ii) a 7 day revocation period to rescind the release once it is signed; and (iii) a list of positions and ages (not names) of both employees within the decisional unit who are affected and those who are not.  Other requirements may apply. 

6. Get Organized
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 (note: there is pending legislation in NH requiring payment of wages in full on the separation date), vacation, 401(k), and other benefits.  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. 

7. Delivering the Message to Affected 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 this termination meeting is two-fold: (1) inform the employee that their position was selected and provide related information; and (2) 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. 

8. Other Communications
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. 

Having a basic understanding of the issues presented by any workforce reduction, as well as the analysis that you should conduct as part of that process, will help you avoid unnecessary exposure to legal claims.

Colleen Karpinsky is an Associate in the Employment Practices Group of  McLane, Graf, Raulerson & Middleton, Professional Association. Colleen can be reached at 603-628-1495 or at The McLane Law Firm is the largest law firm in the State of New Hampshire, with offices in Concord, Manchester, Portsmouth and Woburn, Massachusetts.