9 Things CEOs Should Know Before Reducing Staff

By: Lisa G. Phillips

Why an understanding of potential legal and human risk factors is necessary.

While laying off employees is never an easy task, if CEOs approach reductions in staff with a strategic understanding of potential legal and human risk factors, the organization may reduce the chance of adverse legal actions by former employees. Here are nine things to know to avoid the risks associated with layoffs and terminations:

1. Selecting employees. Develop an objective system for selecting employees for reduction. Seniority, performance, job knowledge, skills, and classification are examples of objective criteria. Explore alternatives (e.g., hiring freezes, transfers, job sharing, reduced hours, reduced pay, salary freezes, early retirement incentives) before finalizing the decision.

2. Federal/state Worker Adjustment and Retraining Notification (WARN) requirements. Most nongovernment employers are required by federal law to notify employees in advance of layoffs or reductions in force. Different notification requirements exist based on the number of employees affected by plant closings, layoffs, business losses, or sale of a business. Review state laws; mini-WARN acts often impose additional requirements.

3. Definition and payment of final wages. Different state laws govern the payment and timeline of final wages and handling payout of accrued vacation leave. Employers may be liable to employees for payment of certain penalties for nonpayment of wages within stipulated timeframes.

4. Disparate impact. Review EEO information of employees selected for layoff to determine if an adverse impact exists for a protected class. Any protected class disproportionately affected requires additional analysis and validation. Protected classes include race, color, ethnicity, national origin, religion, gender, genetic information, sexual preference, gender preference, age (40 plus), veteran status, and those with disabilities.

5. Older Workers Benefit Protection Act requirements. When providing severance, general releases should be utilized. There are different requirements based on employee age (under 40 and over 40).

6. Severance packages. Severance packages may include salary continuation, vacation pay, accrued sick pay, company-paid benefit-continuation coverage, company-paid COBRA, outplacement services, counseling, and so forth. Determine if any legislative changes pertaining to benefits exist. Have releases and severance packages reviewed by an attorney. Determine if confidentiality, trade, or intellectual-property agreements are applicable.

7. Termination meeting. Representatives from management and human resources should conduct the meetings. Properly handled meetings significantly reduce the potential for anger or confrontation. Prepare and train managers for the meeting, and ensure that all pertinent information is prepared for presentation. Objectively explain the reasons for the layoff and the details of the severance package, agreements, or releases. Have a representative available to answer any questions employees may have during their severance consideration period.

8. Benefits. Benefit carriers may require advance notice before policy cancellations or changes can take effect. Ensure employees know well in advance any deadlines for filing medical, dental, FSA, or other claims or for porting policies. Determine if there are legislative changes that affect benefits, if the layoff will affect employees who are about to vest in a retirement plan, or how it will affect employees on FMLA or other leave.

9. Unemployment benefits. Determine if there are legislative changes pertaining to Unemployment Insurance benefits. Include UI information in severance packages of departing employees.

Taking a strategic approach to managing the risks associated with layoffs and terminations will greatly reduce the chance of adverse legal actions by disgruntled employees. Consulting with HR, legal, and benefit professionals prior to taking such measures is part of a sound risk-management process.

Lisa G. Phillips, SPHR, is president of Three Paths HR Consulting, LLC, in Rockville,
Maryland. Email: [email protected]