Implementing a Reduction in Force During a PandemicMay 26, 2020 – Article
While many businesses are cautiously reopening their doors and welcoming back employees, many others are still fighting to stay afloat. To remain economically viable amid the COVID-19 crisis, a struggling business may, unfortunately, need to consider implementing a reduction in force (RIF). Carrying out a RIF is a complicated process, fraught with legal risk even during normal times. Doing so in the middle of a pandemic, where the legal landscape can shift daily, can be even more perilous. This article examines a few (of many) issues employers should consider when initiating a COVID-related RIF.
The WARN Act
Before implementing a RIF, certain employers may be required to provide advance notice to employees under the federal Worker Adjustment and Retraining Notification (WARN) Act. The WARN Act generally requires employers with 100 or more full-time employees (excluding workers who have been on the job for fewer than six months) to provide at least 60 calendar days advance written notice of a qualified plant closing or mass layoff. A “plant closing” is defined as the permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment, if the shutdown results in an employment loss during any 30-day period at the single site of employment for 50 or more employees (excluding part-time employees). A “mass layoff” is defined as a RIF that is not the result of a plant closing and results in an employment loss at a single site of employment during any 30-day period for (a) at least 50 employees and at least 1/3 of the active workforce (excluding part-time employees) or (b) 500 or more employees (excluding part-time employees).
Employers considering temporary layoffs or furloughs should be aware that, in certain circumstances, those events may also qualify as “employment loss” and trigger notice obligations. The WARN Act defines “employment loss” as “(A) an employment termination, other than a discharge for cause, voluntary departure, or retirement, (B) a layoff exceeding 6 months, or (C) a reduction in hours of work of more than 50 percent during each month of any 6-month period.” Thus, a temporary layoff or furlough that lasts more than six months requires a WARN notice. Additionally, an employer that implements what it initially expects to be a short-term (i.e. six months or less) layoff or furlough without notice, but later extends the layoff or furlough beyond six months, must be able to show the extension is due to business circumstances not reasonably foreseeable at the time of the initial layoff or furlough, and provide notice as soon as it becomes reasonably foreseeable the extension is required.
Notably, the WARN Act contains three limited exceptions to its notice requirements: (1) the “faltering company” exception, (2) the “unforeseeable business circumstances” exception, and (3) the “natural disaster” exception. Since COVID-19 began forcing businesses to close their doors, the burning question for many employers has been whether a pandemic fits into any of these exceptions. The U.S. Department of Labor (DOL) recently released an updated FAQ providing some guidance, though likely not much relief. The FAQ did not address the faltering company or natural disaster exceptions and only suggested the unforeseeable business circumstances exception might apply. Quoting the WARN Act regulations, the DOL explained:
(1) An important indicator of a business circumstance that is not reasonably foreseeable is that the circumstance is caused by some sudden, dramatic, and unexpected action or condition outside the employer’s control. A principal client’s sudden and unexpected termination of a major contract with the employer… and an unanticipated and dramatic major economic downturn might each be considered a business circumstance that is not reasonably foreseeable. A government ordered closing of an employment site that occurs without prior notice also may be an unforeseeable business circumstance.
(2) The test for determining when business circumstances are not reasonably foreseeable focuses on an employer’s business judgment. The employer must exercise such commercially reasonable business judgment as would a similarly situated employer in predicting the demands of its particular market. The employer is not required, however, to accurately predict general economic conditions that also may affect demand for its products or services.
Employers that assume their situations fit the criteria set forth in the regulations or that the myriad “shelter-in-place” orders will undoubtedly qualify as “government ordered closing[s]” sufficient to satisfy the exception’s requirements should beware—the DOL also specified that applicability of the exception “rests on an employer’s particular business circumstances” and that “[a]ny dispute regarding the interpretation of the WARN Act including its exceptions will be determined on a case-by-case basis” in court. That is, not every COVID-related closing or layoff will meet the exception’s requirements, and employers invoke the exception at their own risk.
As mentioned above, the DOL conspicuously omitted any discussion of the faltering company or natural disaster exceptions, perhaps signaling it believes neither will apply. A closer examination of those exceptions may reveal why. The faltering company exception, which applies to companies that can show they have sought to secure financing sufficient to avoid a shutdown and that providing notice would have precluded them from securing that financing, is available only in cases of plant closings and cannot be used for mass layoffs. Moreover, the WARN Act regulations specifically explain that the faltering company exception “should be narrowly construed.” As a result, courts tend to view it somewhat skeptically. The regulation applicable to the natural disaster exception lists specific examples of qualifying events, including “[f]loods, earthquakes, droughts, storms, tidal waves or tsunamis and similar effects of nature.” Though not necessarily exhaustive, it bears noting that the list makes no mention of pandemics. Additionally, the regulation specifies an employer invoking the exception must be able to demonstrate its plant closing or mass layoff is a “direct result” of the natural disaster. To date, case law interpreting this requirement in the context of a pandemic does not exist, making the exception’s applicability to COVID-related shutdowns unclear.
In light of the DOL’s guidance, employers seeking to avoid the WARN Act’s 60-day notice requirement may find the most success invoking the unforeseeable business circumstances exception. Should the exception apply, employers must be aware that they will still be required to (1) give as much notice as is practicable and (2) include a brief statement of the reason for giving less than 60 days’ notice along with the other required elements of a WARN notice. Employers should also be aware that several states have their own “mini-WARN” statutes, some of which mandate longer notice periods and lower thresholds for triggering notice obligations. Employers in those states must ensure compliance with both the federal and state-specific WARN requirements before implementing a RIF.
The current pandemic does not suspend an employer’s anti-discrimination obligations. The Equal Opportunity Enforcement Commission recently made clear that it is continuing to enforce federal anti-discrimination laws, which prohibit discrimination based on several protected characteristics, including race, color, religion, sex, national origin, age, and disability. RIFs are fertile grounds for discrimination lawsuits. For example, unscrupulous employers have used RIFs as pretext for cutting loose their older, often higher-paid employees in violation of the federal Age Discrimination in Employment Act (ADEA). But even the most well-intentioned employer harboring no discriminatory animus while implementing an otherwise dispassionate RIF can invite a discrimination lawsuit if that RIF adversely affects one legally-protected group more than another segment of employees.
To reduce legal exposure, employers must take steps to ensure they conduct non-discriminatory RIFs. Employers should, to the extent possible, develop objective, business-related criteria for selecting employees for release (e.g., quantifiable productivity, education, documented performance evaluations, and/or disciplinary history). If used, subjective criteria should be (1) necessary for the job and (2) applied in a consistent, non-discriminatory manner. Employers should also conduct a disparate impact analysis to determine whether a seemingly-neutral RIF plan will have a disproportionate effect on a protected class of employees. Larger employers should consider retaining experts to perform the analysis (a proper analysis up front will likely be significantly cheaper than defending against a disparate impact action later).
Employers offering severance packages in exchange for waivers or releases must also make certain they comply with certain heightened obligations geared toward protecting older employees. Under the Older Workers Benefit Protection Act (OWBPA), employers are required to ensure employees age 40 or over provide “knowing and voluntary” waivers of any ADEA claims. To be OWBPA-compliant, release agreements must contain specific language and information advising older employees of their rights before agreeing to waive potential age-related claims. For RIFs, the OWBPA also requires employers to provide employees age 40 or over with 45 days to consider the offer (as opposed to 21 days for non-RIF releases) and disclose, in writing, the (1) class, unit, or group of individuals covered by the exit program; (2) eligibility factors for the program; (3) job titles and ages of all individuals eligible for or selected for the program; and (4) ages of all employees in the same class who were not eligible or selected for the program.
The WARN Act and federal anti-discrimination laws are complicated and contain nuances beyond the scope of this article, which addresses just a few of many issues employers may need to consider when implementing COVID-related RIFs, including, among others, employee benefits, disability and workers’ compensation claims, union obligations and collective bargaining agreements, and taxes, as well as state and local laws. The RIF process is complex and can be dangerous for even the most sophisticated employer. Add a layer of pandemic-created uncertainty to that process and it can be a minefield. To navigate that minefield, employers should consult with experienced labor and employment attorneys.
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