Avoiding Litigation When Downsizing

Employment Line Newsletter

Winter 2002

By: Jerald J. Oppel and Jesse B. Hammock

The attacks of September 11 and an already weakening economy have forced many companies to lay off employees. While layoffs are generally implemented in an attempt to solidify corporate profits or to stem losses, poor planning before layoffs may simply divert money from the payroll to fighting former employees in court. Workers are not without protection when faced with losing their jobs, both the federal and state governments provide it, and workers often resort to the courtroom to demand the protection these laws afford. Forethought and effective planning can limit substantially the risk of costly and adverse legal verdicts.

Federal Statutory Protection

The highest paid employees are often the oldest and most experienced. Employers choosing to downsize this category of the workforce must be aware of the special rules that protect them. The Age Discrimination in Employment Act (ADEA) for instance, prohibits employers from requiring "early retirement" of any employee because of age. The Older Workers Benefit Protection Act (OWBPA) ensures that any early retirement is truly voluntary and it requires written documentation that includes certain provisions. The document must make specific reference to the employees' rights under the ADEA and the additional compensation the employee will receive in exchange for early retirement. These are only two of the several protections afforded older workers under the OWBPA and the ADEA.

According to statistics, America's senior workforce is predominantly white and male, with women and minorities more likely to have less seniority. Downsizing based on seniority, therefore can be especially tricky. On the one hand, care must be taken not to layoff more senior employees which may suggest less favorable treatment than that given to minorities and women. Such circumstances are ripe for allegations and lawsuits claiming reverse discrimination. On the other hand, an employer should be aware that if a disproportionate number of women and minorities are being downsized then Title VII of the Civil Rights Act of 1963, as amended, may rear its head. Title VII prohibits discrimination on the basis of race, color, religion, sex or national origin.

Several federal laws require that employers take certain actions before implementing downsizing or layoffs. The Worker Adjustment and Retraining Notification Act (WARN Act), for example, requires that covered employers give sixty days notice to affected employees and applicable state agencies before closing a plant or laying off a mass of covered workers. If proper notification is not given, all covered employees are entitled to lost wages, the cost of certain fringe benefits, attorneys' fees, and are subject to monetary fines up to $500 for each day of the violation.

Some Protection for Employers

While statutes are generally designed to protect employee rights, they also contain pro-business provisions. If an employer is actively seeking investors in order to avert layoffs, for example, the WARN Act allows the employer freedom to keep the prospect of layoffs confidential and a lesser warning is allowed. Otherwise, Congress reasoned, such news may make a company a less attractive investment and actually hasten the layoffs the statute is designed to ease. Other "business-reason" exceptions exist under the WARN Act and other federal statutes as well.

When downsizing, women and minorities can be disproportionately affected. This, however, does not mean that an employer is liable for "disparate impact" discrimination, or any other type of discrimination for that matter. Federal courts specifically require that employees claiming that downsizing or layoffs were racially motivated must show that race was actually a factor in the decision to reduce the workforce. See Anderson v. Deer Park Hospital, 834 F. Supp. 133 (S.D. Tex. 1993).

State and Common Law Protection

Most employees in the United States are "at-will." They can be fired at any time for any non-discriminatory reason, or for no reason at all. Despite this, some employees can make legitimate arguments that their layoff is a breach of contract on several grounds. Employees can claim breach of an express contract (i.e., one with a definite duration), an "implied-in-fact" contract, or a breach of the implied covenant of good faith and fair dealing.

If an employee has a written contract for a definite duration, the employee can only be fired, downsized, or laid off according to the express terms of that contract. Even where an express written contract does not exist, however, courts have found the existence of implied contracts based on promises made in employee handbooks and manuals. This can limit an employer's ability to downsize employees to the express terms of the promises. In some states, even without an express or implied contract, an employee can resort to the implied covenant of good faith and fair dealing even if their employment is at-will. This theory is especially confusing because whether the implied covenant of good faith and fair dealing exists, and how it applies, varies from state to state.

How Do Employers Avoid These Pit-Falls?

In uncertain economic times, employers are more concerned with keeping their business running, and profitable, than, for instance, the difference between the implied covenant of good faith and fair dealing in the several states in which they operate. But there are simple steps that employers can take now to avoid litigation in the future. For instance, an employer that has not already done so may be wise to circulate to employees (and retain copies of) an employment policy containing conspicuous "at-will" language. In the alternative an employer can circulate the same policy statement but limit the employer's ability to layoff or downsizing only when a "business necessity" exists.

Review Employee Disciplinary Procedures

Employers with comprehensively documented employee review and disciplinary proceedings may be in the best position when layoffs or downsizing is the only alternative. Since "at-will" employees can legitimately be terminated for any and no reason, the most troublesome employees can be the first let go. However, troublesome employees may also be the first to become litigious employees. To eliminate such problems employers can do several things: review all documents containing the "termination standard" to ensure that it accurately reflects the employees' rights; describe and distribute to each employee the disciplinary and termination policies and have them sign and acknowledge receipt and acceptance of the terms of both.

What Else Can You Do?

The examples above are only a very few of the many ways that employers can protect themselves from litigation when downsizing is in the future. What else can you do? Ober|Kaler's Employment & Labor Group is hosting a special seminar to answer many of the questions you, and other employers are asking about layoffs, downsizing, and terminating employees in general. We hope you can join us on January 24, 2002 from 8:15 to 10am, in our offices.

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