Layoffs: How to Handle Bad News

Posted on March 13, 2015 in Compliance, Consulting

Layoffs are dominating the business news since West Texas Crude dropped in half.    The world’s three biggest oilfield service firms — Schlumberger, Halliburton and Baker Hughes — have announced a combined 22,000 layoffs in recent months according to a recent NPR report.  It’s not just the giant companies that are impacted.  The trickle-down effect of cheap oil and gas hits plenty of Texas employers.

Here are some tips for employers considering layoffs.

Selection Process

A well defined and rationale criteria for selecting people for a reduction in force (RIF) lessens the risk of exposure to claims of discrimination.  Merely uttering the words “layoff” is in no way a complete defense to any allegation of discrimination. (Surprisingly, I often have to explain why.)  The choice over who is selected versus who is retained can, and very often is, questioned at the EEOC or in litigation.

The traditional, old-school method for RIF selection was seniority based: last-in, first-out.  Although seniority based selection is typically easy to defend, tenure and quality do not necessarily align.   Most employers have abandoned seniority as the sole criteria for RIF selection, but still might consider it as a factor in their analysis.

Ranking employees as part of a RIF process is more commonplace.  A ranking-based RIF selection can be defensible so long as the criteria is objectively reasonable.  For example, prior performance reviews and documented disciplinary action must be strong factors.  Reliance on intangibles (e.g., a “better fit” or “more a team player”) or other undocumented factors will always be suspect.

Communicate the Decision    

The difficultly in conveying bad news often results in sugarcoating the truth.  It is imperative, however, that management explains to laid-off workers how the company went about selecting people for layoff – even when the facts are not what the employee wants to hear.  The failure to communicate a justifiable rationale leads to the presumption that the decision was biased.    Good communication of bad news is a key to precluding litigation.  See http://www.employment-matters.com/consulting/better-communication-in-the-workplace-2/

Severance Payments

People hold many misconceptions about an employer’s obligation, if any, to pay severance.  One common myth is that employers must pay severance when they lay-off workers.   There is no legal obligation to pay severance to workers outside of a contractual obligation (which may take the form of an ERISA plan).   (I distinguish “severance” from the notice obligations under the Workers’ Adjustment and Retraining Notification Act, the “WARN Act”, which is worthy of a separate newsletter.)   Some companies have a practice of paying severances, but have not bound themselves contractual to always provide the benefit.

A second common misconception is that severance payments must be uniform and consistent with past practices.  In truth, an employer is free to offer severance to workers on whatever basis best fits the circumstances of the time, provided of course, that the severance is not subject to a contractual or ERISA obligation and the payments are not weighted in some discriminatory fashion.

Finally, an employer offering severance should in most cases consider obtaining a release of claims for the receipt of the severance.  Severance and Release Agreements should be prepared or reviewed by legal counsel to ensure that they comply with applicable federal and state law.

Writing about depressing topics is never fun, but until oil prices rise (and we pay more at the pump) we need to be prepared.

I hope you found this newsletter helpful and enjoy your Spring Break.