Reductions in Force and Layoffs

In the United States, when companies need to reduce costs significantly, they frequently undertake a systematic “reduction in force” (RIF) or lay off employees on a more ad hoc basis.  Usually these RIFs or layoffs are precipitated by a difficult economic climate and the need to reduce costs.  However, companies may also reduce their number of employees because a segment of the business is shut down or sold or a new method of production or service requires fewer employees.

Employers should carefully assess all of their options before resorting to a RIF of any kind.  Although the intent of a RIF is to reduce costs, the cost of hiring and training new employees when the market improves and time it will take new employees to reach the productivity of more experienced employees could cost more than the RIF saves.  Of course any RIF is likely to have a negative impact on employee morale.   Employers are well served to consider cutting hours of all employees and exploring other alternatives before implementing any type of RIF or layoff.  Other alternatives include:

• Reduced or cut salaries
• Reductions in benefits
• Transfers to more cost-efficient locations
• Early retirement

RIFs may trigger additional costs including:

• Increased Unemployment Insurance (UI)
• Severance pay
• Outplacement services
• Litigation or other dispute resolution

If feasible, the employer should consider granting persons who are laid off a right of recall if and when the employer begins hiring again.  It may be more economical for the employer to rehire laid off employees than to train new employees.  In addition, having the opportunity of recall available may help sustain employee morale.

Implementing the RIF

If an employer determines that a RIF is the only viable alternative, the employer’s  managers need to prepare for this transition.  Preparation includes both determining what , if any, severance or other benefits will be given the laid off employees and determining which employees are to be laid off.   In addition, the employer must prepare those employees being retained for the impact of the layoff, as their workload and responsibilities may be affected, and their morale will certainly be impacted.  A hastily implemented mass firing can backfire on an employer for a variety of reasons, from disparate legal claims from former employees to the business being ill-equipped to move forward.  Thus, businesses planning a layoff should make strategic decisions based on the following:

• How many positions must be eliminated to achieve the goal of the RIF.
• Whether the layoff will be permanent or temporary.
• How much advance notice the employer will give to employees, assuming the statutory requirements of WARN or a state statute are not triggered.
• Which employees will be targeted for layoff.  These considerations might include employee length of service, skill, experience or recent job performance.  The employer must meticulously analyze the workforce so as not to cause a disparate impact on any protected class of employees.
• Whether the employer has  contractual obligations to employees  through a collective bargaining agreement or other contract.
• How the reduction will affect business operations, i.e., output and productivity.

Communicating to Employees During a Temporary Layoff

When an employer anticipates that the RIF or layoff will be temporary, the plan for the RIF should include a mechanism for staying in close contact with employees who may be eligible for rehire.  Because of the costs of recruiting, selecting and training new employees, rehiring laid off employees at the end of a temporary layoff can help the employer save the costs recovered by implementing the RIF.  The employer should seek to keep the employees updated regularly.   

Avoid Discrimination Issues

As noted above, in making RIF decisions an employer must be careful not to discriminate against any protected class of employees.  Decisions regarding which employees are to be laid off or terminated must be made without regard to age, disability, sex, race, national origin, military service, or genetic information.  State laws may extend nondiscrimination laws to other classes, such as marital status or sexual orientation.  Not only must the employer avoid any intentional discrimination, it must also avoid adversely impacting one or more protected classes of employees. Employees who lose their jobs often reach for any tool at their disposal to address the impact of the lost employment.  Those tools may include bringing discrimination claims against the employer.  Careful planning to avoid either intentional or adverse impact discrimination will strengthen the employer’s defense against any such claims.