Claims Bound to Increase as a Faltering Economy Prompts Layoffs

Sunday, July 1, 2001
by Jackson Lewis

The number of layoffs in recent months has increased significantly - a sobering development likely to continue for the near future at the very least. New claims filed with state agencies for unemployment insurance benefits climbed by 18,000 to a total of 383,000 during the week ending March 31,2001.This is the highest level since July 1998. In fact, December,2000,had the highest number of layoffs since the Labor Department began keeping statistics in 1955.

Increased workforce reductions are likely to lead to an increase in employment claims. These claims will be far-ranging, including (1) legal challenges to the methods utilized by employers for deciding who to terminate; (2) allegations that layoffs violated contractual commitments; (3) claims for severance pay; and,(4) statutory claims for failing to adhere to statutory notice requirements.

Disputes arising in the context of workforce reductions will present numerous issues and challenges for employers, claims managers, and underwriters charged with EPL coverages. Nonetheless, with proper planning and advice, employment claims in the wake of upcoming layoffs can be avoided, or, at least, managed appropriately.

Alternatives to Layoffs May Reduce the Risk of Claims

Before planning a reduction in force, employers should consider whether other options are available, including: (1) freezing wages; (2) postponing wage increases if cash needs are an immediate issue; (3) work furloughs; (4) reducing work hours with proportionate pay cuts; (5) assessing expected job attrition; (6) freezing hiring; or (7) allowing affected employees to transfer to other vacant positions within the organization. Some employers look to voluntary early retirement programs, while others ask for volunteers by offering enhanced severance benefits. While less severe than an involuntary layoff, these measures still require sensitivity to the manner in which they are communicated and the effect on employee morale.

When Layoffs Are Unavoidable, Proper Planning May Reduce Risk of Employment Disputes

Once a determination is made that a reduction is necessary, the task generally falls to operations, human resources and legal counsel to devise a plan which minimizes the risks of litigation. At a minimum, the following steps should be considered:

  1. Articulate management's legitimate business reasons. The need for cost savings and a reduction in the number of full time positions are among the most common reasons for a reduction. All levels of management should understand reasons for the downsizing. This is particularly important if a discrimination charge is filed, and the employer may have to produce witnesses who can articulate a legitimate business reason for the reduction. The reasons should be documented and consistent with financial and corporate data.
  2. Review any prior written policies for reductions in force. If there have been prior layoffs, the employer should be aware of written policies which defined the criteria for layoff selection and the benefits which will be provided. Current policies also should be reviewed. Employees may rely on existing policies and mount legal challenges accordingly.
  3. Decide whether to obtain waivers and releases. If employees selected for layoff are over 40 years of age, their release agreements must comply with the Older Workers Benefit Protection Act, 29 U.S.C. § 626(f). This also will affect the timing of any layoff since affected employees must be given 45 days to consider whether to execute any such release and be provided with a significant amount of data about co-workers.
  4. Determine whether statutory notices of layoff are required. The number of employees to be laid off may trigger the implications of the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Sections 2101-2109,or possibly a state plant closing statute. If WARN is implicated, timetables for advance notification of employees also will be affected.
  5. Identify criteria for layoff selection. It is helpful to have a layoff committee to take responsibility for effectively accomplishing the reduction. In addition, it is imperative to have a written plan outlining how individuals are to be selected for layoff to insure consistency in the process among all units or departments of the company. Common criteria for evaluating and selecting employees for reduction in force include: (a) a length of service or seniority; (b) category (e.g., first eliminate all temporary, part-time or contract employees); (c) strict use of pre-existing job performance data; and, (d) work functions remaining after a layoff. It is critical the process include a review of each layoff decision to assess the risk of adverse impact upon members of protected classes, as well as the justification for each selection decision. Legal counsel should be involved in this phase of the process.1
  6. Prepare a script for communication layoffs. It is helpful for the layoff committee to prepare a script or outline of points to assist management when meeting with employees selected for layoff. In conducting the interviews the management representative should (a) keep to the point and be firm and consistent; (b) specify whether the layoff is permanent or temporary; (c) explain any available recall or rehire rights; (d) provide a written explanation about any available severance benefits, health insurance conversion rights and other termination payments; (e) discuss any outplacement services which will be offered and any other transitional services; (f) anticipate employees' shock, surprise and difficulty absorbing the information; and (g) describe final paychecks, including accrued vacation, sick leave, etc.
  7. Assess the potential risk of harm to the employer. Employees with sensitive positions, or who may pose a risk of harm or sabotage to other employees or company property, may require special treatment. Determine whether there are any such employees and conduct interviews to minimize any disruption or subsequent misconduct. Alert security personnel and revoke access to company property, such as computer systems, as soon as possible. Implement the extra security measures as discreetly and respectfully as possible.
  8. Heighten management awareness to the impact of the layoff on all employees. Reductions in force have a significant impact on all employees, those laid off and those remaining. Employers should be sensitive to the importance of treating employees fairly and with respect. Those involved in the decision making process must prevent any premature disclosure or leaks of information.
Take Extra Precautions to Minimize Increased Risk

Workforce reductions present an increased risk that adversely affected employees will seek legal redress for perceived unfairness - often in the form of multi-party or classwide claims. Insurers writing EPLI coverages, as well as employers, must therefore focus on appropriate planning - and preventive measures - before management undertakes layoffs which may lead to costly and protracted litigation.


1. Numerous court decisions have addressed discrimination and other issues involved with layoffs, for example: Scott v. Goodyear Tire & Rubber Company,160 F.3d 1121 (6th Cir.1998) (claim of discrimination where employee was offered early retirement rather than reassignment in a layoff); Salvato v. Illinois Department of Human Rights,155 F.3d 922 (7th Cir.1998) (employees aged 44 and 61 challenge layoff due to $670,000.00 budget cut); Beaird v. Seagate Technology, Inc.,145 F.3d 1159 (10th Cir.1998) (27 of 200 employees laid off sue for age, race and/or sex discrimination); Hartley v. Wisconsin Bell, Inc.,124 F.3d 997 (7th Cir.1997) (claim of discrimination results from failure to rehire after a layoff); Burger v. New York Institute of Technology,94 F.3d 830 (2d Cir.1996) (layoff challenged where duties transferred to younger employee); Woodhouse v. Magnolia Hospital,92 F.3d 248 (5th Cir.1996) (age discrimination complaint from reduction resulted from statements allegedly made by employer which showed age animus); Hutson v. McDonnell Douglas Corp.,63 F.3d 771 (8th Cir.1995) (challenge to inclusion in second round of layoffs where performance was criteria for a layoff); and Rea v. Marietta Corp.,29 F.3d 1450 (10th Cir.1994) (objective evidence of poor performance precludes liability for layoff).
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