Avoid Costly Mistakes in Layoffs

​Without careful planning, layoffs can result in costly errors. Here is an overview of common errors some employers make when conducting layoffs and how to avoid them. This piece is the first of a three-part series on layoffs. A subsequent article will outline steps to limit potential liability for layoffs, and a third will examine Worker Adjustment and Retraining Notification (WARN) Act and state "mini-WARN" requirements.

"The losses incurred in discrimination litigation following a badly executed layoff can easily exceed the amount that was sought to be saved by implementing the layoff," said Gerald Hathaway, an attorney with Faegre Drinker in New York City.

"Whenever a company or employer has to contemplate a reduction of employees, it can be very emotional and stressful for those responsible for making the selections and the communications—and of course for those impacted," said Trina Ricketts, an attorney with Ogletree Deakins in Kansas City, Mo. No employer wants to conduct a reduction in force (RIF), because organizations understand the personal impact on their employees, she added.

"As such, the way to minimize the stress associated with such a difficult task is to have as much time as possible to analyze and plan," Ricketts said. This is especially true if a company is new to RIFs on a large scale, she added.

Common Errors

The most common error with layoffs is being oblivious to the WARN Act and the mini-WARN laws of many states, which often have stricter obligations for employers than the federal WARN Act, Hathaway said.

"Sometimes, on the eve of a layoff, someone within the company will ask, 'What about WARN?' " noted Hathaway, who was involved in the layoffs of more than 300,000 workers during the Great Recession. Only three lawsuits resulted from those layoffs—two discrimination claims and one WARN Act claim—and the employer won all on summary judgment, he said.

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"Worse, sometimes WARN is a literal afterthought—the layoffs were implemented with no thought at all given to WARN obligations," Hathaway added.

The next most common error is disorganization when preparing the job title and age data that must be provided to laid-off employees ages 40 and older in order to get valid releases under the Older Workers Benefit Protection Act, he said.

"That data has only one chance to be right," Hathaway explained. "If it is wrong and employees sign releases before the data is corrected, the employer has an obligation to make a payment pursuant to the signed separation agreement but does not have the benefit of an enforceable release."

Plus, there is the error when supervisors succumb to the temptation to use a layoff to get rid of all their "troublemakers," who may have whistleblower or retaliation claims, Hathaway noted.

Another mistake is not giving sufficient focus to justifying the choices made. "Why Jane and not Joe?" he asked. "All layoffs create risk of disparate treatment discrimination claims. Layoffs can also create disparate impact claims—run the numbers before finalizing layoff choices" to see if the layoff will result in a disparate impact.

[SHRM members-only HR Q&A: What are disparate impact and disparate treatment?]

Pay attention to immigration issues, as well, Hathaway recommended. "Some layoffs may require the company to pay for transportation for the return of foreign nationals to their home countries," he said.

Avoid acting inconsistently with the stated reasons for the layoff, cautioned Robin Samuel, an attorney with Baker McKenzie in Los Angeles.

Such inconsistent action might include handing out bonuses or going on hiring sprees despite justifying the layoffs as a necessary belt tightening for economic reasons, he said.

In particular, employers that have conducted layoffs should not fill positions that were recently eliminated in a RIF, said Ted Hollis, an attorney with Quarles & Brady in Indianapolis.

Preparation Is Key

Not preparing sufficiently is a common mistake, Samuel said.

"Some layoffs may require employers to give impacted employees and government agencies 60 or 90 days' advance notice of the layoff," he noted. The WARN Act requires 60 days' notice from covered employers, but some states, such as New York, require more, he explained.

"Employers also need to prepare their RIF selection criteria and adverse impact analysis well in advance so that changes can be made as needed to mitigate the risk of claims," Samuel said. It takes time, as well, to prepare the termination paperwork, internal and external messaging, severance packages, and final pay requirements in compliance with applicable law, he added.

Some company officials think U.S. layoffs can be completed within days because most U.S. employees are employed at will, said Amanda Cohen, an attorney with Baker McKenzie in Palo Alto, Calif.

Nonetheless, "there is a lot of informational diligence, document preparation, process and planning that goes into a layoff," she said. "Where possible, we recommend budgeting at least a few weeks for a smaller layoff and several months for a larger layoff that may trigger the federal WARN Act or state mini-WARN statutes."

Alternatives to Layoffs

Employers should consider alternatives to layoffs, such as furloughs, reduced work schedules, pay reductions and state work-share programs, Samuel said.

Pay reductions should be across the board, and pay can't go beneath minimum wage, said Dan Kaplan, an attorney with Foley & Lardner in Madison, Wis. For the most part, employers are free to set and modify terms of employment, but if an organization is unionized, it will need to consult with the union, he added.

Hour reductions should be across the board, as well, such as a 20 percent or 25 percent reduction in hours, or a reduction to a four-day workweek, Kaplan said.

Other options include rolling short-term layoffs or an extra week off during a month.

"It is better not to have layoffs than to have layoffs," Hathaway said. "Look at other ways to save."