In these troubled economic times, many of our clients are resorting to reductions in force (“RIFs”) as a cost-cutting measure. A RIF raises a host of complex legal issues that clients will need assistance in navigating. The following is a discussion of the major legal considerations involved in a RIF and the potential pitfalls to be avoided.

Potential Applicability of the WARN Act. First, counsel should consider whether the RIF triggers the Worker Adjustment and Retraining Notification Act (“WARN”). The federal WARN Act requires that employers with 100 or more employees give at least 60 days notice to affected employees in cases of a “mass layoff.” A “mass layoff” is defined as a layoff of any of the following in a 30-day period: 1) at least 500 employees; 2) at least 50 employees and 33% of the employees at a single site; 3) at least 50 employees in the case of a shutdown of a single site or operating units within a single site; and 4) separate but related layoffs that occur within a 90-day period which, in the aggregate, exceed one of the foregoing criteria. Keep in mind that several states also have their own WARN laws which may have different and/or more stringent requirements than the federal WARN Act.

Disparate Impact Analysis. Counsel should perform a statistical analysis of a client’s initial selection of individuals for layoff to determine whether the selection process has a disparate impact on any protected class of employees. Where a disparate impact exists, bear in mind that the employer will have the burden of establishing that the selection was justified by reasonable factors other than age (where the disparate impact involves age), or by business necessity (where the disparate impact involves a protected class other than age). Where the employer is concerned about being able to meet the foregoing standards, or does not want to risk having to litigate the issue (even where the employer is reasonably confident that it would be able to justify its layoff selections), the employer should modify its selection process.

Disparate Treatment Analysis. Counsel should remember that, even if a given RIF passes the disparate impact test, the employer will still have be able to justify individual employment decisions against potential disparate treatment claims. In other words, the employer must be able to justify its decision to choose one employee over another employee for the RIF. This is particularly true where the layoff involves multiple-incumbent positions.

For this reason, it is important that the client utilize objective criteria when determining which employees will be part of a RIF. Examples of such objective criteria are: 1) length of service or seniority; 2) elimination of unnecessary positions; 3) objective and/or quantifiable aspects of job performance, supported by pre-RIF performance evaluations or other data; and 4) any history of significant disciplinary action.

Releases. Many employers will seek to limit the potential liability associated with a RIF by having affected employees sign a release in exchange for an enhanced severance package. Insuring that the release is a valid release of potential age discrimination claims is perhaps the trickiest part of implementing a successful RIF.

The Older Worker Benefits Protection Act (“OWBPA”) imposes a series of specific steps that employers must take whenever they are seeking a release of prospective age discrimination claims as part of a layoff involving as few as two employees. These requirements include the following:

1) The employer must give employees up to 45 days to consider whether to sign the release. Employees may, however, voluntarily choose to sign the release after a shorter consideration period. As with individual releases of age claims, the employer must also give employees 7 days after they sign the release to consider whether to revoke the agreement. This 7-day period may not be shortened or waived.

2) The employer may not seek a waiver of employees’ rights to file a charge with the Equal Employment Opportunity Commission (“EEOC”) or to participate in an EEOC investigation. Therefore, releases that require employees to waive “any and all claims” should have a carve-out enabling the employee to file an EEOC charge, or participate in an EEOC investigation. It is permissible, though, to stipulate in the release that employees are waiving their rights to any monetary recovery stemming from the EEOC claims.

3) At the time the employer provides employees with the release agreement, the employer must also provide employees with the following specific information about the RIF: a) any class, unit or group of individuals covered by such program (this is referred to as the “decisional unit”), any eligibility factors for such program, and any time limit applicable to such program; and b) the job titles and ages of all individuals eligible or selected for the program, and the ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program.

The Supreme Court has directed, in Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1997) that employers must strictly adhere to the OWBPA’s requirements in order to obtain a valid release of age claims, and further, that an employee is not required to tender back any severance received before suing on an invalid release. Not surprisingly, there are myriad cases involving releases which fell short of the OWBPA’s requirements in one or more ways. Simply put, it is imperative that you get the release right.

Counsel with clients in Minnesota should be aware of a troubling case, Pagliolo v. Guidant Corporation, 483 F. Supp.2d 847 (D. Minn. 2007), in which the district court held that the OWBPA’s requirement that employers provide employees affected by a RIF with eligibility factors for the program means that employers must provide employees with the factors used in making the termination decisions. A couple of other district courts have also interpreted the “eligibility factors” requirement in this manner, and counsel with clients in these jurisdictions should be mindful of these cases. They are not, of course, controlling precedent. See Merritt v. FirstEnergy Corp., 2006 U.S. Dist. LEXIS 15089 (N.D. OH March 31, 2006); Commonwealth of Mass. v. Bull HN Info. Sys., 143 F. Supp. 2d 134 (D. Mass. 2001).

Fortunately, there is no controlling appellate-level case which interprets the OWBPA’s requirement that employers disclose eligibility factors as requiring disclosure of the factors used to make the RIF selections. (Although the 10th Circuit Court of Appeals had adopted this interpretation in Kruchowski v. Weyerhaeuser Company, 423 F.3d 1139 (10th Cir. 2005), the court subsequently withdrew that decision and issued in its place a virtually identical decision, minus its earlier discussion regarding eligibility factors. See Kruchowski v. Weyerhauser Company, 446 F.3d 1090 (10th Cir. 2006). While the 10th Circuit has not explained the omission, it is possible that the court subsequently disapproved of the reasoning in its original decision.)

Assisting a client in successfully navigating a RIF requires careful attention to the issues referenced above, as well as any applicable state laws, and/or policies or contracts of the employer that may impose other obligations or restrict the manner in which the employer may conduct the RIF.

Lori Rittman Clar
Hinkley Allen & Snyder

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