Layoffs Mean Lawsuits: What Employers Can Do to Reduce Exposure to Costly Litigation

July 2009Newsletters California Update - Third Quarter 2009

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Employers continue to face tough decisions about layoffs. Many employers have sought alternatives, such as hiring freezes, cancelling costly business trips, reducing hours, cutting salaries, and implementing voluntary retirement plans. Unfortunately, as the economy continues to struggle, many companies can no longer avoid reducing their workforce (or reducing it further). Those companies fear lawsuits, and their accompanying costs, disruption, and negative publicity.

These fears are legitimate. We reported in our last issue that, according to the Department of Fair Employment and Housing, employment discrimination filings in California last year rose more than 14 percent, to 18,750 – their highest level since 2002. Similarly, the Equal Employment Opportunity Commission reported that workplace discrimination charges increased by 15 percent from 2007. However, employers can minimize the risk of post-layoff employment lawsuits by proactively creating and implementing a self-audit checklist.

1. Identify and Document Objective Criteria for the Layoffs and Select Neutral, Unbiased Decision Makers.
Employers should create objective criteria for deciding which employees to let go. For example, an employer’s decision may be based on years of service; experience in the field; documented job performance; documented disciplinary history; the status of the worker (e.g. temporary, part-time, or contract employees); or on any combination of these categories. The cost of developing an objective plan is only a fraction of the cost of defending a single lawsuit.

Similarly, direct managers or supervisors should not necessarily decide who gets laid off. An employer should select a neutral, objective final decision maker, such as someone in human resources. Having a neutral and detached decision maker will help guard against discrimination and retaliation claims, and can serve as an important internal check as well. Even smaller employers should involve more than one manager in the decision-making process to avoid the appearance of bias, and document the reasons each manager supports the decisions made.

2. Audit Applicable Company Policies
Before an employer lays off employees, it should audit applicable company policies and procedures, and if necessary, revise written policies to provide maximum flexibility in making decisions about layoffs. For example, employers should have a well written at-will employment policy stating that employees may be terminated at any time, with or without notice. Employers should also remove the word “permanent” from their employment applications, employment advertisements, confidentiality agreements, offer letters, and policies so as to avoid conflict with the employer’s at-will employment policy.

Each reduction has its own peculiar circumstances and employers may need to handle each reduction differently. If the employer already has a company policy for reductions in force or layoffs, it should follow that policy. If the policy needs to be changed, the employer should make (and communicate) those changes as far in advance of the layoffs as possible. Layoff policies should be designed to preserve employer flexibility in handling workforce reductions.

3. Determine Whether the Company Has Obligations Under the WARN Act
Under the Federal Worker Adjustment and Retraining Notification Act (“WARN”) and the California WARN Act, employers may have statutory obligations when discharging a large number of employees.

The California WARN Act is applicable to business entities with 75 or more employees, while the Federal WARN Act applies to businesses with 100 or more employees. Both laws require employers to give employees at least sixty days’ written notice of any mass layoff or plant closing. (California WARN also requires employers to provide advance notice of plant relocations). Employers who ignore these rules are liable to employees for back pay and benefits for each day of violation up to 60 days, plus penalties and attorneys’ fees. Accordingly, employers should consult with employment counsel to determine whether they have state or Federal WARN Act obligations.

4. Consider Offering a Severance Package in Exchange for a Release
If financial conditions permit, employers should seek to limit their liability by having employees sign a release of legal claims in exchange for a severance package or other benefit above and beyond the benefits that are received by the employees who do not sign a release. Remember: for a release to be valid, the employer must give the employee something of value to which he or she is not otherwise entitled. And an employee’s signature must be given knowingly and voluntarily. Employers should seek the advice of counsel to ensure that the release protects the employer to the maximum extent possible.

5. Risk Assessment: Review the Layoff List
After an employer determines whom to discharge, but before taking steps to implement the layoffs, the employer should review the selected employee list and the supporting documentation to evaluate the risk associated with each employee’s termination. Employers should consider whether the data suggests that an employee was selected for termination on the basis of a protected category, such as age or race, or for some other unlawful reason, such as union participation. The employer should also be aware that employees on certain leaves of absence may be protected. And employees who recently engaged in protected activity, such as filing for workers’ compensation or acting as a witness in a harassment investigation, have potential retaliation claims if they are included in layoffs on that basis.

Review of the “layoff list” will also help to ensure that the employer’s actions do not disproportionately affect a protected group, such as older workers or minority groups. If there are significant disparities, it would be wise to review the process more closely to ensure that there are legitimate, verifiable reasons for the decisions. But unless the employer has a valid written affirmative action plan in effect, it is just as dangerous – and just as illegal – to favor minorities as it is to favor those in any other protected group. Reverse discrimination lawsuits are just as disruptive and just as costly.

6. There is No Obligation to Rehire Laid Off Employees, but Employers Must be Consistent
There is no obligation to rehire employees who were laid off. However, if the employer has implemented special procedures regarding the rehiring of laid off employees, it must comply with its own internal policies. Similarly, if the employer has made any promises to the former employees, it may be required to comply with such promises or potentially be liable for a claim of breach of contract. And if an employer hires someone new for a position soon after laying off their predecessor, it raises questions as to whether the layoff was legitimate.