Layoffs in a Down Economy: Reducing the Risk of Litigation by Offering Severance in Exchange for a Release

In the current economic downturn, businesses of every size are looking to save money by cutting labor costs through employee layoffs, also known as reductions in force. Rather than be penny-wise and pound-foolish, companies should consider ways to reduce the risk of lawsuits following layoffs—lest the wages they saved be lost to (or surpassed by) the cost of litigation.

Safeguards for Employers

Employees are generally employed “at-will,” which means they can resign or be fired at any time without cause or notice. In a down economy, however, fired or laid-off employees are more likely to look for ways to challenge the at-will doctrine by alleging discrimination or retaliation on the basis of some protected characteristic (e.g., race, color, national origin, age, ancestry, citizenship status, marital status, sex, sexual orientation, disability or religion). To reduce risk, employers should establish and document their legitimate business reasons for a reduction in force prior to executing any layoff. More than sound documentation of legitimate business reasons and selection criteria may be necessary in this economic climate, however. Companies should consider offering laid-off employees both a severance package and a release, or risk having discrimination charges and lawsuits filed against them.

For an employer, obtaining a signed release from the departing employee is the crucial part of the severance process. For example, a Chicago-based company laid off a significant portion of its sales force that was over the age of 40. Although the laid-off employees received severance packages, the company deemed it “unseemly” and inconsistent with its corporate culture to ask them to sign releases. Angry, the laid-off employees didn’t care that their former employer purportedly thought so much of them that it didn't ask them to sign a release. Instead, they took their severance pay and filed age discrimination charges with the EEOC, which in turn filed an age discrimination class action against the former employer.

Companies should review separation agreements from past layoffs or terminations to ensure that they comply with the Older Workers Benefit Protection Act (OWBPA) and any relevant changes in the law. Employers must comply with OWBPA's many requirements to obtain a valid release and waiver of older employees' rights under the Age Discrimination in Employment Act (ADEA). OWBPA has different time frames and requirements depending on whether one or more employees are placed on layoff. If a layoff involves two or more employees, the company must provide statistical information regarding the job title and age of the employees selected for layoff and the age of all employees in the same job classification or organizational unit not selected.

Companies conducting reductions in force should also be sure they are in compliance with state and federal Worker Adjustment and Retraining Notification (WARN) acts. The Illinois WARN Act, for example, requires employers to give 60 days notice of a plant closing or mass layoff to employees, their unions and certain state and local government officials. Notice is required when 25 or more full-time employees are laid off if they constitute one-third or more of the full-time workforce at the site. Under the federal WARN Act, a mass layoff of 50 or more full-time employees will trigger the 60-day notice requirement if the affected employees constitute one-third or more of the full-time workforce at the site.

Take Away

Employers put themselves at risk of multiple lawsuits when they undergo a reduction in force. Consequently, they should document their legitimate business reasons for any layoffs and evaluate whether severance agreements should be part of the process. These steps are an effective means of reducing risk, and their cost is relatively insignificant when compared to the expense associated with litigation.

Additionally, employers should work with legal counsel to prepare (or revise) separation agreements to ensure they comply with OWBPA and that accurate and complete statistical information is produced. Employers may also want these agreements to contain confidentiality, non-disclosure and non-disparagement provisions to further protect the company.  Finally, employers should determine whether federal and state WARN acts apply to their layoff scenarios and, if so, make sure they are in compliance with all requirements.