HR Scenario: Reduction in Force (Part 1)

HR Scenario: Reduction in Force (Part 1)

This article is part of our ongoing Weekly HR Scenario series by our National HR Client Service Manager, Kim Schaff, SHRM-SCP, PHR. In each of these articles, Kim will walk you through a real-life HR scenario and break down how this situation should be handled and all the ins and outs of the rules and regulations that impact the scenario. 

This week’s scenario is an especially detailed and complex one, so we are bringing it to you in two parts! In today’s part, Kim will walk you through the scenario and the first few issues to start considering and will wrap things up with a few more issues and overall conclusions in tomorrow’s part! 

HR Scenario:

The owner of a small business has determined that they need to cut their staff by a certain number of full-time employees by the end of the quarter due to a decline in business and economic conditions. The business owner does not foresee a need for these positions in the near future. What should the owner consider in planning for this reduction in staff?

Response:

PLEASE NOTE: Employers should always consider both state and federal laws and regulations. The following scenario and response is not intended to cover all possible considerations to conduct a legally compliant Reduction in Force (RIF), but highlights many of the issues commonly faced by employers.

A downturn in the economy or other internal business conditions may force an employer to consider making a reduction in staff (RIF). A RIF, as with other types of involuntary terminations, may have a long-term effect on the remaining workforce and the success of the business.

An employer considering a reduction in force needs to identify the laws involved, plan ahead and review alternatives to the staff reduction, consider selection and liabilities, decide how to communicate its decisions to employees and think about how to keep remaining staff motivated and productive.

Issue #1) What are the relevant laws and regulations?

The Worker Adjustment and Retraining Notification Act (WARN)

WARN protects workers, their families and communities by requiring most employers with 100 or more employees to provide notification 60 calendar days in advance of plant closings and mass layoffs.

The notice must include specific information to be in compliance with the law. In addition, a number of states have enacted “mini-WARN” legislation that extends notice requirements to smaller businesses conducting layoffs and often imposes additional requirements that differ from federal law.

Non-discrimination laws to be considered include:

Title VII of Civil Rights Act of 1964:

Prohibits discrimination on the basis of race, color, religion, sex and national origin.

The Americans with Disabilities Act (ADAAA):

Prohibits discrimination on the basis of disability.

The Age Discrimination in Employment Act (ADEA):

Prohibits discrimination on the basis of age.

The National Labor Relations Act (NLRA):

Prohibits discrimination on the basis of union activities.

Many states have additional anti-discrimination laws (e.g., sexual orientation, etc.).

The Older Worker Benefit Protection Act (OWBPA)

OWBPA sets strict criteria for release of both protected rights (a release before a claim is filed) and disputed claims (releases in settlement of EEOC charges or lawsuits). The act requires employers to provide affected employees age 40 or older with demographic details of individuals considered and affected by a group reduction in force.

Under the OWBPA, employers also need to provide workers age 40 and over a consideration period of at least 21 days when one older worker is being separated, and 45 days when two or more older workers are being separated. Additionally, employees must receive a revocation period of at least seven days.

During a reduction in force or voluntary group incentive program, two additional requirements are needed to validate the releases:

  1. The employer must publicly identify the targeted employees.
  2. The affected employees must be informed in writing of the job titles and ages of all individuals selected for the group program, along with employees in the same job classification or unit that were not selected for the program. (1)

Issue #2) What kind of planning should the company be doing?

An employer must first establish an objective, business-related reason or reasons for deciding to reduce its workforce. For example: economic necessity, loss or downturn of business or reorganization.

The reason, or reasons, given should be well-supported and documented. The EEOC has made clear that a cost-cutting goal, without more information, will not be sufficient to establish a reasonable factor defense in defending claims.

Instead, an example might be: “Loss of business due to multiple client contracts terminating, including our 2 largest clients results in a need to decrease business expenses by $X.”

The company should consider alternatives to the reduction in force first.

Examples of these alternatives might include (but are not limited to):

  • Improving internal processes.
  • A hiring freeze.
  • Reducing or freezing compensation.
  • Curtailing overtime.
  • Introducing shorter workweeks or reduced work hours.
  • Job-sharing.
  • Increasing employees’ share of benefit costs.
  • Cutting perks.
  • Implementing early retirement programs.
  • Reducing advertising costs.

If it is determined that a reduction in force is unavoidable, the company should determine the financial or business goal.

For example: reducing human capital costs by a percentage or dollar amount.

The company should then consider the scope of the reduction in force.

For example: are all employees at all locations and levels considered in this RIF, or is the RIF localized to one or more plants, divisions or job categories? Employers in unionized environments need to take additional precautions to ensure that an existing Collective Bargaining Agreement is not violated.

Many employers offer severance packages to their displaced employees.

A written severance package policy allows employees to realize the steps involved in the involuntary termination. Employers are not obligated to provide severance to laid-off employees under federal law, but severance packages may lessen the chance of legal action filed on behalf of former employees. Some states, however, have specific criteria for required severance.

Severance packages may include:

  • Salary continuation.
  • Vacation pay.
  • Employer-paid period of benefits coverage.
  • Employer-paid COBRA premiums.
  • Outplacement services.
  • Counseling and resume workshops.
  • And more.

(See above for applicable rules related to the OWBPA). (2)

Issue #3) How should the company go about determining which employees they are going to let go?

After the company has determined which employees within which job categories will be affected by the RIF, they must determine who will be retained or offered other positions within the organization and which positions will be eliminated.

As a rule of thumb, you are obliged first to identify a position that is no longer necessary for some legitimate business reason, and then you should identify the least-qualified person in the department for the remaining duties.

The company may use seniority-based selection (a “last hire/first to let go” concept) or employee-status based selection (e.g. contingent or part-time).

Merit-based selection is often a preferred choice among many managers because of its added flexibility for weeding out marginal or poorly performing employees.

However, it should be scrutinized carefully because merit selection criteria are based either in part or in whole on documented performance evaluation information (which is not always objective and may contain rater biases).

Another popular method is skills-based selection.

With this type of system, it is sometimes possible for employers to retain those workers who have the most sought-after skills. However, be aware that this method may cause a company to retain younger workers with needed and versatile skill sets, and to lay off older workers who may not have the necessary skills. The older workers are protected from discrimination by the Age Discrimination in Employment Act.

All of these methods can be equally effective when planned carefully, but using a multiple-criteria ranking method is considered a best practice. (3)

Commonly selected criteria include:

  • Education and experience levels.
  • Quantity and quality of work.
  • Project/client status.
  • Advancement potential /versatility.
  • Attendance history.

Then you can add tenure, status, skills and/or merit if you desire.

It can be helpful to use a spreadsheet and “rank” each individual being considered for the RIF on a numerical scale and then total each person’s “score.” If you needed to eliminate 10 jobs, you would eliminate the 10 individuals with the lowest total score.

A simple multiple-criteria ranking method might look like this:

reduction in force multiple-criteria ranking method chart

Sources:

1 Source: https://www.eeoc.gov/eeoc/history/35th/thelaw/owbpa.html
2 Source: https://www.eeoc.gov/policy/docs/qanda_severance-agreements.html
3 Source: https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/selectingemployeesforlayoff.aspx

 

Check out Part 2 of this Scenario, where Kim walks you through the final few issues to consider! 

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