Employee Layoffs: Considerations and Legal Risks of Downsizing

This is the fourth in a series of brief articles that Moye White is sending to its clients and friends to provide practical advice about the opportunities and challenges presented by today's economy.

The current turbulent economy is causing employers of all sizes to examine measures to cut costs, including scaling down their workforce. The decision to layoff employees is not an easy one, and there are many considerations and legal risks. The following is a brief overview of some of the issues to consider when faced with a layoff decision:

  1. Use Only Objective Criteria. In making determinations as to which employees to let go, employers must rely on only measurable objective criteria, such as seniority or employee competencies (i.e., knowledge, skill, education level). As employers will be required to sufficiently explain their selection criteria if challenged, it is important for employers to thoroughly document the measurable objective criteria used.
  2. Review Employment Agreements and Employee Handbooks. Before deciding to layoff any employee, an employer must review applicable employment agreements and company policies. If there is an employment agreement in place with an employee, it may set forth important separation details, such as whether a notice period is required, how a layoff should be treated in the context of the agreement (i.e., for cause or not for cause), and whether any severance benefits are required.
  3. In addition to reviewing employee agreements, employers should verify that the anticipated layoff complies with the policies and procedures contained in the company’s employee handbook and/or policies, including any specific layoff policies. Although we advise against any step-by-step termination or progressive discipline policy, if one exists, it must be complied with.
  4. Ensure Personnel Files Are Complete. The maintenance of complete and accurate personnel files for all employees, including documentation of any problem behavior or productivity issues, is an employer’s best practice, especially when employees are being involuntarily let go. Now is the time to ensure that personnel files are kept up to date and contain all appropriate documentation, not after a claim has been made.
  5. Consider Protected Classes. In making any termination decision, including a layoff, employers should consider whether any of the affected employees are members of protected classes, such as age, race, national origin, religion, sexual orientation, disability, gender, or otherwise. Additionally, depending on an employer’s size and the number of employees being discharged, a disparate impact analysis may be necessary to determine whether the layoff will have a disparate impact on any protected class of individuals. Because the risk of claims by employees who fall into protected classes is high, it is prudent for employers to consider offering severance packages in exchange for releases of claims.
  6. Worker Adjustment and Retraining Notification Act. The Worker Adjustment and Retraining Notification Act (the “WARN Act”) generally requires private employers with 100 or more employees to give 60 calendar days notice prior to a “plant closing” or “mass layoff” as those terms are defined by the Act, and also may require appropriate notice to the Department of Labor. Noncompliance with the WARN Act can be a costly mistake for employers resulting in back pay and benefits damages to employees who did not receive proper notice, civil penalties, and attorneys’ fees and costs.
  7. Payment of Wages. Employers are subject to both federal and state laws that regulate the payment of final wages to employees upon their termination. In Colorado, employers are required to pay all earned and accrued wages on the date of termination, if such termination is at the instance of the employer, as in a layoff. Earned wages include all earned and accrued vacation as set forth in the employee handbook and/or policies, and accrued commissions or bonuses. Employers face strict penalties for the failure to pay employees all earned and accrued wages upon separation from employment.
  8. Continuation of Benefits. Employers should not overlook employee benefits when laying off employees. Under certain circumstances, an employer has an obligation to provide separated employees with notice to continue their health care coverage. Generally, this obligation arises when the employer provides an employee with medical coverage pursuant to the terms of an employer-sponsored benefit plan. Specific notice requirements are set forth in the applicable federal or state continuation of coverage law, depending on an employer’s size.
  9. Employees on Leave. Employers often wonder if they can terminate employees who are on leaves of absence. An employee may be on leave for various reasons including medical reasons, pregnancy or military service. Whether an employer may lawfully include an employee on such a leave in a layoff decision will depend on a number of factors, including the business reasons for the layoff, the objective criteria used, and whether such layoff equally affects both active and leave employees.
  10. Immigration Considerations. Many employers employ individuals who hold an H-1B visa. Federal law requires that if an employee is terminated before the end of the authorized period of stay, an employer must provide the employee with the reasonable costs to return to his or her last country of residence. Also, employers who terminate H-1B employees have other obligations, including making reports to the federal government. There are many other immigration considerations, and we recommend that employers laying off foreign nationals consult with immigration counsel.
  11. Consider Voluntary Reductions. A voluntary reduction, in which an employer offers severance pay, continuation of health care coverage and/or other exit incentives in exchange for a release, may minimize exposure to claims following the layoff. However, consider the risk that the best employees may take an employer up on the voluntary package and leave. If an employer has significantly invested in training certain employees, it may not be prudent to offer this type of package across the board.
  12. Communication & Job Transition Assistance. Finally, employers should communicate openly and honestly with employees regarding how and why a layoff may occur. Employees often become disgruntled when there is too much unknown. Although layoffs are rarely viewed as positive events, keeping employees adequately informed and offering assistance in making the job transition can go a long way to help employees feel as though they were fairly treated.

With the many considerations and legal risks surrounding layoff decisions, it is always prudent and advisable to consult with employment counsel.

For more information contact: Jennifer L. Gokenbach or Nicole M. Lucius at (303) 292- 2900.

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Moye White LLP has prepared this bulletin to provide general information, however this bulletin does not provide legal advice and does not create an attorney-client relationship between the reader and Moye White. No legal or business decision should be based solely on the content of this bulletin.