March 2, 2009

RIF Checklist: Key Issues in Managing a Reduction-In-Force

Holland & Knight Alert
William B. deMeza Jr.

It is an unfortunate but increasingly common fact of business life in these troubled economic times that even successful organizations are being forced to reduce the numbers of their personnel in order to maintain economic viability. Although a reduction-in-force (RIF) often can improve an entity’s financial picture, there can be serious legal and financial consequences if the layoff is not properly conceptualized, designed and implemented. This checklist is designed to help organizations contemplating personnel “downsizing” consider the critical elements of a RIF.

This checklist is intended to be a concise, plain-English and practical summary of the most significant components of a RIF that should be considered by employers. The checklist cannot, by its nature, cover all of the nuances or explain in complete detail all of the aspects of the RIF process that might be found in book-length treatises, nor is it a substitute for situation-specific advice from a RIF-experienced employment lawyer. The checklist is designed to provide employers with an overview of the RIF process that allows them to plan for these unpleasant (and potentially risky) events.

The checklist is divided into four sections: Section I – Planning, Section II – Involuntary RIFs, Section III – Voluntary RIFs and ERIs, and Section IV – Problem Avoidance.

Section I - Planning

Identify the goals.

The most commonly stated RIF goals are to reduce payroll expenses and to better align personnel resources with available work. It often is helpful to state the goals more specifically (“reduce payroll expenses in Finance department by 10 percent;” “eliminate ketchup bottle production line”) and to put the goals in writing so that the decision makers will have an ongoing point of reference in carrying out their mission.

Determine the nature of the RIF.

RIFs typically are “involuntary” (i.e., the employer identifies the employees to be discharged) or “voluntary” (i.e., the employer offers a severance package to a specified group of employees who individually decide whether to take the package and leave the company). Involuntary RIFs give employers more control over which workers leave, but are more often the basis for employees’ lawsuits. Voluntary RIFs (which are sometimes in the form of early retirement incentive plans, or “ERIs”) often are less disruptive/emotionally painful and result in greater cost-savings (because employees nearing retirement frequently are among the most highly paid workers and more willing to accept an attractive severance opportunity), but often give the employer less ability to retain the best workers. Employers sometimes use sequential RIFs: a voluntary RIF and then, if that does not result in sufficient employee departures, an involuntary RIF.

Consider alternatives.

RIFs are useful but often are expensive and sometimes lead to lawsuits. Payroll expense reductions and personnel-work alignments also often can be achieved by other alternatives, such as (a) waiting for normal workforce turnover/attrition, (b) reducing hours being worked by hourly personnel or changing their jobs from full-time to part-time, (c) job sharing, (d) pay freezes or pay cuts, (e) implementing short-term (one or two-week) layoffs or plant shutdowns, (f) allowing employees to volunteer for unpaid leaves of absence, and/or (g) transferring existing personnel to different jobs or departments or facilities. These alternatives to RIFs may not be as cost effective but they likely are less risky.

Arrange for advice.

RIFs implicate human resources, benefits, tax/finance and legal issues. Unless an employer has competent professionals on staff, it should ensure, in advance, that there is ready access to such advisors familiar with RIF-related issues.

Ensure confidentiality.

The RIF process should be strictly confidential until formally announced. Maintaining confidentiality will minimize both employees’ anxiety/distraction and preemptive claims by worried workers trying to “guarantee” their jobs (that is, employees thinking “they won’t include me in the RIF next month if I announce I’m disabled or make a sexual harassment claim this month”). Limit the dissemination of sensitive demographic data about employees. Password protect electronic RIF documents and communications among the RIF decision makers and advisors. Keep the RIF working papers and analyses in locked storage when not in use. Shred draft documents. Use only support staff who can keep secrets.

Ensure security.

Formally assess—as part of the ongoing planning process—the risks of violence, sabotage and theft by employees who will be RIF’d. Make plans to exclude the departing employees from the building and computer/telephone systems immediately upon being informed of their separations, to the extent feasible. If the company anticipates certain employees becoming violent or disruptive, notify building security or law enforcement in advance of the RIF to put them on notice and inform key personnel of the contact information for key security personnel (but recognize that some departing workers will be offended or become unruly if they suspect they are being disrespected by an obvious police presence). Train senior staff how to respond to threats/violence.

Anticipate litigation.

There are various documents created in a RIF, including working papers, statistical analyses and separation agreements and their exhibits. If a lawsuit arises from the RIF, it is very likely that those papers will have to be furnished to plaintiff’s counsel and could become courtroom exhibits in the litigation. The company should consult with counsel about methods for maintaining certain documents as protected by the “attorney-client privilege.” Be careful about what is written and how it is expressed; a jury may be looking over your shoulder in two years.

Minimize P.R. problems.

Public relations are important. Consider whether a prepared press release (rather than spur-of-the-moment answers to a reporter’s questions) will most effectively position the employer in the eyes of the general public. A single designated spokesperson to answer all post-RIF questions from both inside and outside the organization is often the most effective way to disseminate accurate and consistent information about the RIF.

Section II - Involuntary RIFs

Determine its scope.

Is the RIF going to be throughout the plant or the company, or limited to certain departments or production lines? Is the RIF going to eliminate job titles (perhaps by combining two jobs into one) or reduce the number of people in certain jobs or both?

Identify decision makers.

There should be a limited number of individuals making decisions as to which employees will be released. The decision makers should be a diverse group of objective, credible executives who have been trained (or can be trained quickly) on how to conduct the RIF in a careful, non-discriminatory manner. (“Credibility” is useful in obtaining employee buy-in if the identities of the decision makers become known.)

Set realistic timetables.

An involuntary RIF can be conceived, planned and implemented in seven to 10 days in smaller organizations, but larger employers will require more time to ensure that the RIF is thoughtful and legally defensible. When setting the timetable for implementing the RIF, think about the necessary transition of work resulting from departures of the RIF’d employees and whether there will be phased RIF departures (that is, one large group followed in weeks or months by another large group of employees).

Determine severance benefits.

Pay. Severance pay is not generally required by law unless (a) the employer previously has committed to pay it (by employment contract, collective bargaining agreement or severance pay plan), (b) there is some state or local requirement, or (c) it is being paid as “consideration” to buy an employee’s signature on a release/waiver of claims against the employer. Similarly, the amount of severance pay typically is within the employer’s discretion. Many employers use a “two weeks’ pay for every year of service” rule of thumb, with minimum and maximum amounts. (However, be careful of “special deals”; enhanced severance benefits for a select few employees can generate discrimination lawsuits.)

Other Benefits. There are other types of severance benefits that often are provided, including reimbursement of employees’ premiums for continuing group health coverage, outplacement assistance/training, eligibility for recall to work, more-than-neutral letters of reference, etc. If the departed employees will have continuing obligations to the employer (e.g., transition assistance, confidentiality, non-disparagement), consider paying severance in installments over time rather than in a lump sum in order to encourage compliance with such obligations. Determine whether the severance scheme (particularly any installment pay-out protocol) is a “plan” governed by the federal Employee Retirement Income Security Act (ERISA) and, if so, comply precisely with its requirements.

Comply with the laws.

Many statutes impact RIFs. The laws are numerous, complex, sometimes conflicting in their requirements/prohibitions, often contain harsh penalties for non-compliance, and frequently are the basis for both individual and class-action lawsuits against employers. The advice of a competent RIF lawyer is highly recommended. The RIF-related laws include:

  • “Plant closing” laws: Federal law and similar laws in several states are not limited to RIFs in which there is an actual “closing.” The laws require employers to furnish advance notice of their intent to release specified portions of the employee population even if the plant remains open. For example, the federal WARN Act requires employers with more than 100 employees (excluding part-time employees) to provide 60 days’ notice to certain workers, government agencies and unions of a layoff that will result in employment losses by at least a third of the workforce at a single site of employment if that number is at least 50 employees. There are a few exceptions to the plant closing laws (such as “faltering company” and “unforeseen business circumstances”), but the exceptions are very limited and generally permit only less than normal notice (and not no notice). The plant closing laws sometimes have peculiar requirements for “phased RIFs” (that is, when employees are released in multiple large groups over a period of time.)
  • Discrimination laws: Federal and state statutes prohibit treating employees differently because of their gender, race, age, religion, pregnancy, disability and other legally protected categories. RIFs are frequently attacked for being discriminatory against older workers. The age discrimination laws apply to every aspect of a RIF. The federal law protects employees who have reached their 40th birthday but some state statutes have no minimum age (i.e., an employer can be liable for discriminating against a 21-year-old employee). Employers generally are not permitted to terminate employees because they have reached a certain age (there are a few, but very limited, exceptions to that prohibition). The federal age discrimination laws have specific and strict requirements for waivers of age discrimination claims (discussed under “prepare the papers,” below).
  • Employee benefits laws: The federal pension laws (including ERISA) impact RIFs. For example, certain severance pay plans and even less formalized severance arrangements may be “plans” governed by ERISA. ERISA has specific and sometimes burdensome requirements for covered “plans.” However, the statute also provides certain attractive benefits to employers (including preemption of many state laws and for non-jury trials of ERISA claims). Thus, employers should carefully assess whether their proposed severance pay schemes are subject to ERISA and how that law’s potential advantages compare to the disadvantages associated with statutory compliance.
  • Tax laws: The “deferred compensation” regulations in the federal Internal Revenue Code (Section 409A) provide serious penalties, primarily for employee recipients of the monies, for certain types of severance pay arrangements (typically those in which large sums are paid over an extended period of time). The 409A regulations are not only applicable to formal severance pay plans but also to individual severance agreements.
  • Immigration laws: The federal immigration laws often provide that a visa holder’s legal status to remain and work in the United States ends when the employment ends. The employer may have continuing obligations to visa holders. For example, an employer likely will have to offer the holder of a H-1B visa terminated in a RIF the reasonable cost of returning to the home country.
  • Retaliation/whistleblower laws: Many statutes include protections for workers who complain to their employers about or oppose suspected violations of those statutes. There are separate “whistleblower” laws in many states. Employers generally cannot select employees for termination in a RIF because they have reported or complained about suspected illegal company activity.
  • Leave laws: Federal and state laws prohibit retaliation against employees who exercise their rights to take leave allowed by law or company policy. While taking a leave does not insulate the employee from being discharged in a RIF, employers should carefully analyze the employees tentatively selected for separation to ensure that workers who have been on or are on leave have not been targeted.
  • State laws: Every state (and a few counties and cities) has discrimination, wages and wage payment and other laws protecting employees and imposing requirements on employers, laws which impact RIFs. State/local protections and requirements are often more protective and burdensome than federal laws (such as state or local laws protecting gay, lesbian, bisexual and transsexual employees). The laws are as numerous and various as the states, counties and cities themselves. Employers must know and comply with any local requirements.

Gather but selectively disseminate data.

A detailed organization/jobs chart, showing the existing (pre-RIF) reporting relationships and numbers of job incumbents, will be very useful in comparison to a similar “after” chart (showing the desired anticipated changes from the RIF). A list of employees, showing their genders, age, minority/disability/whistleblower status, leave/workers compensation status and other characteristics protected by law will be necessary for the “disparate impact” analysis (discussed below). This demographic data is very sensitive so it should have very limited circulation and should NOT be given to the decision makers before they identify workers to be discharged: this is essential so that it cannot later be claimed that an employee’s protected status was any factor in his/her selection for separation.

Identify the selection criteria.

The criteria must be business-related and consistent with both the employer’s contractual and collectively bargained obligations and announced policies. The most legally defensible criteria are objective (such as length of service, demonstrated skills, education, quantity of production, written performance evaluations, discipline history) but subjective criteria (such as “enthusiasm,” “versatility,” “personality”) also are permissible if they are actually required for the particular job and are not applied in a discriminatory manner. Impermissible criteria, in addition to the characteristics protected by law, include “whistleblowing” (not only the prior filing/voicing of claims of employment discrimination but also allegations that the employer is not complying in some manner with the laws regulating its business), use of disability or FMLA leave, filing a workers’ compensation claim and support for or affiliation with a union. Many employers selecting employees to be RIF’d engage in employee “rating” (giving a grade to each worker) or “ranking” (sorting the workers by skills, value/contribution to the organization, etc.) to assist in the selection. Such ratings and rankings should be as objective as possible (and, of course, employers should compare RIF-related ratings and rankings to prior performance evaluations to ensure that there are not inexplicable discrepancies). Consistency in selection and application of criteria is critical, recognizing that certain criteria may not be applicable from department to department or from job to job; consistency in use of criteria in successive RIFs is desirable but not essential if the RIFs, in fact, vary in size, scope and motivation.

Develop a preliminary list.

Using the agreed-upon selection criteria, the decision makers should prepare a confidential preliminary list of jobs/employees to be eliminated in the RIF.

Analyze/revise the preliminary list.

Perform a “disparate impact” analysis by comparing the demographics of the workers preliminarily selected for discharge with those who will be retained in order to ensure that employees in protected classes are not inadvertently being selected for separation at a higher rate than their percentages in the workforce. For example, if 85 of 100 employees on a production line are under the age of 40, it would be anticipated that only roughly 15 percent of that production line’s employees being RIF’d would be over 40 (that is, persons protected by the age discrimination law). If the employee population is sufficiently large, the assistance of professional statisticians can be very useful in the “disparate impact” analysis (and their reports may be helpful in defending any lawsuits arising from the RIF). Investigate and resolve any apparent disparities in the preliminary list (e.g., Hispanic women or workers over 40 being selected at a higher than expected rate).

Explore possible union issues.

If a union represents any portion of the workforce subject to the RIF, carefully examine the collective bargaining agreement and consider the National Labor Relations Act for limitations on the RIF. The collective bargaining agreement or the federal labor laws likely will require notice to and bargaining with the union about the effects of the RIF and may require that the employer use certain criteria (such as seniority) or procedures (“bumping”) in the RIF.

Identify any immigration issues.

Determine whether any employees to be laid off hold visas or have applied for green cards. Identify the company’s obligations if those workers are RIF’d and make arrangements to satisfy those obligations.

Conduct reality checks.

Ensure that the overall business and its individual departments and production lines can continue to function after the RIF (the use of “before” and “after” reporting-relationships and staffing charts often is helpful), and that the RIF is not eliminating persons with critical skills. Confirm that the workers on (or not on) the separation list make sense; for example, was someone inexplicably left off the list—and is being protected—for some reason that later can be challenged in court (e.g., because of an ongoing sexual relationship with a supervisor)? Ensure, to the extent possible, that the supervisors of all departing employees are in agreement with their employees being placed on the list.

Prepare the papers (and waivers).

Most employers want departing employees to sign a legally binding document releasing the company from any claims and bringing the employment relationship to an amicable end without legal controversy. A separation agreement containing a waiver/release of claims is commonly used. Agreements for management-level employees typically are longer and more comprehensive than those for non-management employees. Think about the value of obtaining from the departing employee promises of non-disparagement, confidentiality, and non-solicitation of customers or other employees. There are specific federal statutory requirements for waivers of age discrimination claims in a RIF, including, most notably, that the employee be (a) expressly advised in writing to consult a lawyer before signing the agreement, (b) given 45 days to consider the agreement before signing it (a period the employee can waive voluntarily), (c) given seven days (a period that cannot be waived) after signing the agreement to revoke it (that is, the waiver is not effective until the seven-day period passes without revocation), and (d) given disclosures consisting of general information about the RIF decision process as well as specific information about the job titles and ages of persons selected and not selected for separation in the RIF. (The required RIF disclosures for a large employer often are time consuming to prepare so organizations should allow sufficient time to draft them.) There are varying state law requirements for waiver agreements. Given the complexity of the applicable laws, and the desire to have the agreements be binding and enforceable to bar future claims, the agreements should be prepared or reviewed by counsel before presentation to the departing employees.

Provide necessary notices.

The WARN Act and any applicable state “plant closing” laws might require, and collective bargaining agreements generally do require, that the employer furnish notice of the RIF (and, often, some basic information about it, such as the numbers of employees being released and the timing of the separations). After reviewing the requirements for the content of such notices, draft and transmit them. Be careful: it is important to comply precisely with the requirements to avoid penalties or lawsuits.

Gather materials necessary for the exit meetings.

Some state laws require employers to give departing employees their final paychecks on their last day of employment (including payments for accrued but unused vacation time), while other state laws require employers to provide information about unemployment compensation, job training opportunities, etc. Provide these materials to managers who will be doing the exit meetings. The “continuation of group medical coverage” (COBRA) notices should also be provided as required by the federal statute.

Plan and train for termination meetings.

The exit meetings can be held on- or off-site; off-site meetings sometimes are helpful in controlling the reactions of volatile employees. The meetings should be short, simple, clear, informative, unemotional and final. It generally is preferable to inform the departing workers individually. The employee should be told of the decision, the available severance benefits and any conditions to receipt of the benefits (such as signature and return of a separation agreement), the transition procedures (return of company property, requirements of any company-sponsored benefits plans such as group health coverage, stock options, bonuses) and any transition of duties and responsibilities. The employees need not be given all the facts about the RIF but what they are told must be truthful. A hand-out sheet summarizing the available benefits often simplifies the meetings and minimizes post-meeting follow-up questions. The management personnel who must inform the departing employees of the decisions are, as the saying goes, “the point of the spear,” so it is essential that only capable managers are selected for the task: supervisors who are not emotionally equipped to deliver bad news (and face employees’ anger and tears) are likely to make mistakes and put the company at risk. There should be two people representing the company in the exit meeting: a spokesperson and a “non-speaking” witness. Managers should remain calm and sympathetic but not defensive or overly apologetic (because it may imply wrongdoing) or too talkative (because extensive explanation/justification of the RIF may only encourage unproductive debate, suspicion, questions or mistakes). The manager should allow the employee to vent but should not engage in argument or debate and should remain firm (that is, not implying that discharge decisions can be changed). Employers should conduct rehearsals (perhaps even role-playing) of the exit meetings in order to confirm that the selected managers are up to the task and “know the script.”

Meet with “survivors.”

The retained employees will be nervous about the future of the organization and their jobs. Communications from management, ideally in person, often speed a return to normality. Employees can be informed about the future (as it then appears to management), warned that there will be a normal adjustment period in light of the reduced jobs/staff and friends, and enlisted to help the organization stabilize and prosper. Management should carefully avoid promises about the future because additional RIFs, terminations or restructurings might be necessary.

Section III - Voluntary RIFs and ERIs

Some employers may wish to consider voluntary RIFs or Early Retirement Incentive Plans (ERIs) as an alternative to involuntary RIFs. Points to consider for these voluntary separations include the following:

Determine desired outcomes.

Identify the ideal number of personnel to be released from individual departments. Consider “worst case” scenarios: what if everyone eligible for a package opts to take one and leave? What if only the best workers opt to leave? Knowing the ideal outcome will permit the employer to structure the eligibility criteria and severance package to achieve those goals.

Decide eligibility criteria/deadlines.

Employers can legally limit voluntary RIFs/ERIs to employees who have reached a certain minimum age, to certain departments/work groups, to personnel with certain years of credited service with the organization, and to certain time periods (e.g., retirement during a specified but limited “window period”). A “years of service plus age” protocol is relatively common, i.e., the employee is eligible for a severance package if his years of service plus his age exceed a number selected and announced by the employer to achieve its employee reduction goal. The employees must be given sufficient time to consider their options (and the separation agreement) before being forced to make a decision; several weeks is not uncommon, while large voluntary RIFs sometimes allow the employees 30-45 days to opt-in, in addition to the 45-day consideration period required to obtain a valid waiver of age claims under federal law.

Identify inducements.

Severance pay (particularly severance in excess of any “normal” sums previously paid by the employer to departing employees) or early retirement benefits are common components of a voluntary RIF severance package. The goal is to make the separation benefits cost-effective, that is, high enough to induce employees to elect departure but low enough to minimize the cost to the company. Employers can offer lower severance benefits to retiring older employees under very limited—and complicated—circumstances if otherwise consistent with any existing retirement plans; a competent employment/benefits lawyer must be consulted if it is planned that the inducements for a voluntary RIF/ERI will vary based on age.

Comply with the law.

The discrimination and benefits/pension laws (discussed above) also affect voluntary RIFs and ERIs. It is important to assess ERISA issues early in the planning process and consider such questions as: are the terms of the proposed voluntary RIF program consistent with the terms of the employer’s retirement plan and applicable benefits laws? Will any ERI be deemed an ERISA “plan” and thus subject to that law’s participation, vesting, funding, reporting and disclosure requirements and, if so, can the plan be restructured to avoid ERISA coverage? Will the RIF or ERI create any deferred compensation/Section 409A issues? The complexities of the benefits/tax laws require careful consideration and the advice of an experienced benefits lawyer during the RIF-planning process.

Prepare papers.

Most employers use at least (a) an announcement of the voluntary RIF in which the eligibility criteria, available severance benefits, and deadline dates are clearly set forth and (b) a separation agreement (containing a comprehensive release of claims). The same legal requirements for waivers for involuntary RIFs (discussed above) apply to voluntary RIF documents.

Ensure “voluntary” IS “voluntary.”

Voluntary RIFs are most often challenged in the courts on the basis that the process was not truly voluntary; that is, the former employees were threatened, coerced or mislead into taking the package and signing a waiver of claims. Thus, ensure that workers eligible for the voluntary RIF are given sufficient and accurate information about the benefits, deadlines and consequences of electing a severance package and separation from the company. Supervisors should be cautioned that they cannot make threats, promises or misrepresentations to force or induce employees to leave. Eligible employees must be given time to carefully consider their options (and seek advice of counsel) before being required to make a decision and should be given information about the RIF (including the separation agreement) well in advance of the decision deadline.

Control communications.

Voluntary RIFs frequently are complicated and sometimes controversial and subject to litigation so (a) ensure that there are a limited number of very well-informed company representatives who can answer questions and that other (less-informed) management personnel are instructed not to speak to employees about the plan or the process, (b) direct eligible employees with questions to only those company representatives who are responsible for implementing the voluntary RIF and (c) carefully craft internal and external announcements, explanatory memoranda, and other communications to ensure clarity, completeness and accuracy of all communications.

Section IV - Problem Avoidance

Question assumptions/wisdom of anticipated actions.

Frequently asking “Is this right?” or “Is this fair?” or “Is this respectful?” or “Would a stranger understand and accept this?” and/or “What’s the worst that someone could make of this?” often leads to catastrophe avoidance.

Be consistent.

If the explanation for a RIF is “we’re out of money” or “we have too many people,” don’t give huge bonuses to senior executives or engage in major recruiting efforts shortly before or after the RIF is announced. The employees, the EEOC and the jury will not like you.

Anticipate the need for a RIF.

Unexpected RIFs often seem to generate the most lawsuits. Discharged workers seem more ready to accept their fates (and severance packages offered in exchange for waivers of claims) if they know in advance that the organization is in financial trouble. Thus, employers should consider telling workers about economic difficulties before a RIF is announced. Further, RIF-related lawsuits often are easier for employers to win if there are recent detailed, specific, accurate and fact-based written job performance evaluations of the released employees showing that they were not performing as well as the workers who were retained. The possibility of a RIF is yet another reason why an employer should mandate regular job performance evaluations of all employees.

Anticipate the next RIF.

The RIF decision makers may be here today but RIF’d tomorrow. Be careful about entrusting sensitive, “where the bodies are buried” information to anyone that might be released in the next RIF.

Look to the future.

The economy may change and, with luck, an employer may in a few months wish to rehire a worker RIF’d this month. Keep such rehiring possibilities in mind in planning a RIF when (a) setting severance pay (because it may be awkward to rehire an employee who was given a huge severance package in a recent RIF) and (b) releasing employees with critical but scarce skills (because, once gone, employees may not come back when the company needs them).

Reductions-in-force are never easy or pleasant. However, developing a comprehensive, thoughtful game plan, paying attention to details, and obtaining appropriate professional advice will allow employers to downsize with minimal risk.

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