Uncertain Economy Could Raise Reduction in Force Issues for Many Businesses

With the rise of inflation and other negative economic indicators, most news reports are suggesting that the U.S. economy is facing uncertain times. Some economists predict that the economy is headed for a recession or that the United States has already entered one, while others are more optimistic. Despite this uncertainty, data suggest that the U.S. economy grew in the third quarter and that hiring remains strong. According to the U.S. Bureau of Labor Statistics (BLS) September 2022 jobs report, the U.S. economy added 263,000 new jobs and unemployment dipped down to 3.5 percent—a 50-year low.

At the same time, these welcome signs for the economy are hedged by the fact that businesses in some sectors of the economy are being forced to reduce headcount, which could be a sign of what is to come in 2023 across the economy.

Given this uncertain economic climate, employers may be considering potential reductions in force (RIF) of their own as a way to reduce costs or discover increased efficiencies. Accordingly, employers may want to start developing a well-planned strategy for conducting RIFs that reduces litigation risk, accomplishes all business needs, and complies with applicable local, state and federal laws. In doing so, employers may want to keep the following issues in mind.

1. Statistical Analysis/Discrimination Claims

Before implementing a RIF, employers may want to consider conducting a statistical analysis in order to confirm that the selection criteria they use does not disproportionately impact individuals from any protected class (i.e., age, race, gender, national origin, etc.). While there are defenses to disparate impact claims, analyzing selection criteria and running statistical analyses during the planning may eliminate such claims from the start. Further, employers may want to analyze their selection criteria to reduce claims of direct discrimination. If the business needs allow, employers may want to focus on more objective factors for selection, such as length of service, which are less likely to result in a successful discrimination claim.

2. Federal, State, and Local Notification Requirements

Employers meeting certain triggering events may have additional notice obligations under the federal Worker Adjustment and Retraining Notification (WARN) Act, which generally requires qualifying employers to give 60 days’ notice of either a mass layoff or a plant closing. The threshold for triggering the WARN Act is further complicated by employees working remotely from home. These employees may be considered part of a single worksite, and if a sufficient number of these workers is reduced, WARN Act obligations might be triggered.

Multistate employers also may need to consider the “mini-WARN” acts in many states, including, but not limited to California, New York, and Illinois, with different requirements, definitions, and thresholds. Additionally, employers may want to also look at any state requirements that are associated with terminations, such as last pay check rules and additional notices.

3. Severance Agreements and Voluntary Separation Plans

As an alternative to implementing involuntary reductions, employers may offer employees the option of voluntary separation with a severance package. Regardless of whether the separations are voluntary or involuntary, employers may want to review severance agreements that contain a release of claims for state law compliance as many states have different requirements for an enforceable release of claims.

4. Older Workers Benefit Protection Act

The Age Discrimination in Employment Act (ADEA) and Older Workers Benefit Protection Act (OWBPA) provides protections for employees 40 or older and comes into play when severance packages include a release and waiver of claims from employees 40 years of age and older. In order to have an enforceable release of age claims, the OWBPA requires employers to provide employees in a group termination program (generally, when two or more employees are exiting) who are 40-years-old and older with 45 days to consider whether to sign a release and seven days to revoke it. Further, in a group termination program employers must provide an additional disclosure with the age and title of those selected and not selected from the group of employees considered for such a program, known as a “decisional unit.” Such disclosure is required for a proper waiver of an age claim. Again, states may have differing requirements.

Ogletree Deakins’ RIF/WARN Practice Group will continue to monitor and report on developments with the labor market and will post updates to the firm’s Reductions in Force blog. Important information for employers is also available via the firm’s webinar and podcast programs.