Small Business Insight:

Downsizing Can Raise Legal Issues

Four important considerations to make before reducing staff

Employers are faced with the tough decision to reduce staff in response to the deepening recession. There are important legal issues that may negatively impact business owners, if not considered prior to downsizing.

The increase in unemployment continues to grow significantly, since the beginning of the recession in 2008. According to the Employment Development Department’s (EDD) report released in April, California’s unemployment rate increased to 11.2 percent during the month of March. This increase is 2.7 percent above the U.S. unemployment rate of 8.5 percent, and 4.8 percent above the same time last year.

If an employer is considering downsizing their workforce, proper planning can save the organization from unlawfully terminating employees. Below are some things to consider before downsizing:

Consideration #1 – Alternatives To Downsizing:

There may be other alternatives to saving money during a challenging economic time. Consider the following:

1. Freeze new hire positions, pay or bonuses
2. Reduce salaries, fringe benefits, or 401 (k) matching
3. Reduce work hours or adopt alternative work schedules
4. Make selective, performance-based terminations
5. Provide incentives for early retirement
6. Telecommuting
7. Job Sharing

These cost-cutting options will allow the organization the ability to retain talented employees who are familiar with the goals of the organization, while not being placed in the position to hiring and training brand new employees once the economy bounces back. If effectively communicated, employees will appreciate an organization that works diligently to look for alternatives to downsizing.

Consideration #2 - Legal Requirements-WARN Act:

If downsizing is the solution to stay afloat, there are federal and state laws that must be considered. The federal Worker Adjustment and Retraining Notification Act (WARN) applies to organizations with 100 or more full-time employees or 100 or more employees who regularly combined total of 4,000 hours (non) overtime in a week. WARN requires employers that fall under the act, to give employees, state and local officials a 60 days notice to mass layoffs or plant closures that are expected to last for at least six months. According to the law, mass layoffs are defined as a 33 percent reduction in the workforce or the layoff of 500 employees within a 30-day period.

WARN further requires employers of unionized employees to give the union 60 days’ notice when any of their members will be laid off. Nonunion employees must receive individual notice, which may be included with the employee’s paychecks or mailed to them. In addition, some states have laws similar to the WARN, those laws may have additional requirements.

Consideration #3 - Selection Process:

Layoffs are difficult; a specific selection process serves as a documented method of selecting employees that are laid off. A written documentation of the process will defend the organization against discrimination charges like American with Disabilities Act (ADA), Title VII, California’s Fair Employment and Housing Act (FEHA). “Seniority and performance appraisals are common methods in selecting the employees that are laid off. Selecting a process and consistently applying it will help if faced with unlawful termination claims,” says Linda Robinson, CPEhr’s Training Manager.

Consideration #4 - Benefits and Services For Laid Off Employees:

Employees that are laid-off may not be aware of the benefits that they may receive. For example, they may be eligible for a severance pay. In addition, if they have accumulated vacation time, they must be paid out for the amount. Under the federal law the Consolidated Omnibus Budget Reconciliation Act (COBRA), laid-off workers are entitled to continue health insurance coverage for themselves and their families for up to 18 months. However, employees must know that they have to pay the entire monthly premium.

For close to thirty years, CPEhr has assisted local employers with all their employment challenges. If you are contemplating downsizing, consider the services an outside firm to guide you through the process and help reduce the impact of layoffs and minimize the risks of lawsuits.