Reductions In Force 09-28-2005

INTRODUCTION
Work force reductions expose an employer to significant liability if improperly conducted. Group layoffs are a regrettable fact of business life. According to the U.S. Department of Labor statistics, there were 20,277 mass layoffs (reductions involving more than 50 persons from a single establishment) in the United States in 2002, and 18,963 such layoffs in 2003. Preliminary reports indicate that in Minnesota, there were 51 mass layoffs in December 2003, and 113 such layoffs in Wisconsin for the same month.

This article is designed to highlight some of the legal issues of which an employer should be aware in planning and implementing group terminations. Issues addressed include notice requirements, selection of terminees, union concerns, benefits and releases.

I. NOTICE REQUIREMENTS.
State and federal laws exist which, if applicable, require an employer to give reasonable notice to its employees and to local and state officials if it is going to close a plant or effect a substantial reduction in force. Those same laws often impose penalties for an employer's failure to do so. The legislation is based on the theory that advance notice provides workers and their families some time to adjust to the prospective loss of employment, to seek and obtain alternate jobs and, if necessary, train for new employment.

The applicable federal law is the Worker Adjustment and Retraining Notification Act ("WARN Act" or "Act"), codified at 29 U.S.C. § 2101, et seq. Minnesota laws encourage notification in certain layoff circumstances but do not mandate notification or impose penalties. Those laws appear at Minn. Stat. §§ 268.967 and 268.98. Wisconsin laws and rules impose requirements similar to the WARN Act and are codified at Wis. Stat. §§ 109.07, 111.322 and 893.97.

A. The WARN Act.
The WARN Act requires employers who are planning a plant closing or a mass layoff to give affected employees advance written notice. Not all plant closings and layoffs are subject to the WARN Act and certain employment thresholds must be reached before the Act applies.

The WARN Act sets out specific exemptions and provides for a reduction in the notification period in particular circumstances. Employers can be liable for damages and civil penalties for violation of the Act.

In a nutshell, the WARN Act applies to employers with 100 or more full-time employees or 100 or more full and/or part-time workers who work more than 4,000 straight-time hours per week. It requires covered employers to give a 60-day advance written notice for a plant closing (shutdown of a single site of employment resulting in a loss of 50 or more full-time employees) or a mass layoff (a reduction in force at a single site affecting at least 50 employees, provided the number is at least 33% of the site employees; or 500 employees).

With certain exceptions, the notice must be provided to each employee, or if part of a bargaining unit, to the bargaining unit representative, to the state dislocated worker unit and to the chief elected official of the unit of local government within which the closings or layoffs will occur.

1. What Employers Are Subject to the WARN Act?

The Act applies to any business enterprise that employs:

100 or more employees, excluding part-time employees; or
100 or more employees, including part-time employees who in the aggregate work at least 4,000 hours per week (exclusive of overtime).

However, federal, state, local and federally-recognized Indian tribal governments are not covered by the WARN Act. The Act does apply to nonprofit organizations of the requisite size. It also includes public and quasi-public entities which engage in business and which are separately organized from the regular government which have their own governing bodies and which have authority to manage their personnel and assets.

Independent contractors and subsidiaries which are wholly or partially owned by a parent company are treated as separate employers or as a part of the parent or contracting company, depending upon the degree of their independence from the parent. Some of the factors to be considered in making this determination are: (1) common ownership, (2) common directors and/or officers, (3) de facto exercise of control, (4) unity of personnel policies emanating from a common source, and (5) the dependency of operations.

Coverage is generally determined as of the date notice first should have been given. The Department of Labor's WARN Act regulations state that coverage may exist even where the employer does not meet the 100 employee test as of the time of the first layoffs in a series. They provide that when a "snapshot" of employment levels on the date notice first should have been given is "clearly unrepresentative of the ordinary or average employment level, then a more representative number can be used to determine coverage." Suffice it to say, this alternative measure is vague. Therefore, employers who effect layoffs or terminations that meet the minimum numerical test for either a plant closing (50 employees) or a mass layoff (50 employees/33% or 500 employees) should assume coverage.

2. Which Employees Are Counted for Purposes of Determining WARN Act Coverage?

For purposes of determining whether a company is deemed to be an employer under the Act, all full-time employees at all sites of work, including U.S. workers at foreign sites, are counted.

The term "employees" includes workers on temporary layoff or on leave who have a reasonable expectation of recall. An employee has a reasonable expectation of recall when he or she understands, through notification or through industry practice, that his or her employment with the employer has been temporarily interrupted and that he or she will be recalled to the same or to a similar job.

3. Triggering Events.
The WARN Act notice obligation can be triggered by two different events that involve substantial employment loss at a single U.S. site. Those events are: (1) plant closings; and (2) mass layoffs.

Even though an employer may come within the WARN Act's jurisdiction as a result of aggregation of employees at all U.S. and international sites, the obligation to give notice only arises when terminations at a single U.S. site exceed the specified numerical thresholds. The notice obligation does not apply, nor can it be triggered by terminations that occur at foreign sites.

a. Definitions:

Plant Closings. The term "plant closing" is defined by the Act as the permanent or temporary shutdown of a single site of employment or one or more facilities or operating units within a single site of employment if the shutdown results in an employment loss during any 30-day period at the single site of employment for 50 or more employees, excluding any part-time employees.
Mass Layoff. The term "mass layoff" is defined by the Act as a reduction in force which first, is not the result of a plant closing, and second, results in an employment loss at the single site of employment during any 30-day period for:
1. at least 33% of the active employees (excluding part-time employees); and
2. at least 50 employees (excluding part-time employees); or
3. at least 500 employees (excluding any part-time employees).

Thus, where 500 or more employees (excluding part-time employees) are affected, the 33% requirement does not apply, and notice is required if the other criteria are met.

b. Counting Rules.
Several rules apply in determining whether WARN Act numerical thresholds are reached in a plant closing or mass layoff.

Only layoffs and terminations at a single site of employment are counted. A single site is defined as including, among other things, buildings in reasonable geographic proximity that are used for the same purpose and share the same staff and equipment. Buildings at the same site that have separate management, work forces, and products are considered separate sites. Geographically separate buildings in which the same work is performed generally will not be considered a single site.

Numerical thresholds for a plant closing or mass layoff must be reached at a single site; once those thresholds are reached, notice must go to all employees at all sites who lose their jobs as a result of the plant closing or mass layoff.

The WARN Act only counts certain types of layoffs or terminations in determining whether a mass layoff or plant closing has occurred. Employees to be counted include employer-initiated terminations (except discharges for cause) and layoffs that exceed six months. Employees counted also include employees having their hours reduced by 50% over a period which is at least six months in duration.

The WARN Act only applies in instances where the employer orders a plant closing. An employer is held not to be liable under the Act where a government entity forced the closing of a business.

Certain terminations are excluded from the count in determining whether a mass layoff or a plant closing has occurred. Excluded terminations include: (1) discharges for cause, retirements, and voluntary quits; and (2) terminations of part-time employees.

The count must aggregate all employment losses. The Act counts the number of employment losses that occur at a single site within any 30-day period. Alternatively, even when terminations during any 30-day period do not exceed a WARN Act threshold, a plant closing or mass layoff may still occur if a WARN Act threshold is reached during any 90-day period. The WARN Act provides that if, within any 90-day period, separate employment losses occur, each of which involves fewer than the number of workers necessary to trigger coverage (under the 30-day test) but which together add up to the minimum number necessary to trigger coverage, then WARN Act notice must be given unless the employer can demonstrate that the employment losses arose from different causes and no single cause prompted losses in a number sufficient to reach the statutory threshold.

4. Sale or Relocation of a Business.
The seller of a business has the responsibility to give notice for plant closings or mass layoffs that occur up to and including the time of a sale. The buyer is responsible for plant closings or mass layoffs occurring after the sale.

The Act treats a buyer's decision not to hire the seller's workers after a sale and the seller's termination of the work force at the time of a sale of assets as though it was a termination decision by the buyer. Accordingly, the buyer is required to give notice to the persons who were employees of the seller as of the date of sale and who are not going to be hired by the buyer - assuming the numerical thresholds for a plant closing or mass layoff are reached. The regulations note that a notice of intent not to rehire must be given 60 days in advance of the sale date, even though the buyer does not employ the seller's employees at that time.

No notice is required when the employees of the seller are hired by the buyer within six months after the sale of a business.

An employee does not experience an employment loss under the Act if he or she is terminated after refusing an offer of transfer to another position within a reasonable commuting distance.

5. WARN Act Notice Requirements.
An employer must provide 60-day advance written notice to all affected employees in a mass layoff or plant closing. Failure to provide that notice exposes an employer to back pay liability to affected workers and fines. Affected employees are all those who may reasonably be expected to experience an employment loss as a result of a mass layoff or plant closing, including:

full-time workers;
part-time workers;
employees on layoff with a reasonable expectation of recall; and
employees who work at other sites other than the one where a mass layoff or plant closing has occurred. Although terminations of such workers at other sites are not counted in determining whether the numerical thresholds have been met, once the obligation to give notice arises, it extends to workers at other sites who are likely to lose their jobs because of a mass layoff or plant closing at another site.

Notice to unrepresented employees is accomplished by delivering written notice to each employee. Notice to employees who are part of a bargaining unit is accomplished by delivering a single notice to the union. Where a collective bargaining agreement recognizes a national and local union, notice to the chief elected official of both entities is required.

The WARN Act also requires that notice be provided to the chief elected official of the local government and to the state dislocated worker unit where the plant closing or mass layoff will occur.

6. Notice Contents.
Federal regulations specify the contents of the notice required by the Act.

a. Notice to Union-Represented Employees.
The contents of the notice directed to a union must contain the following:

the name and address of the site where the mass layoff or plant closing will occur and the name and telephone number of the company representative to contact for further information;
a statement as to whether the planned action will be temporary or permanent and, if the entire plant is to be closed, a statement to that effect;
the expected date for the first separation (or a range of fourteen days during which the separations are expected to occur) and the anticipated schedule for separations; and
the job titles of the positions to be affected and the names of all employees currently holding such positions. This list is seemingly not limited to employees in the affected job titles who are likely to be laid off. (It is presumed that the obligation here extends only to positions in the bargaining unit.)

b. Notice to Unrepresented Employees.
All affected employees not represented by a union must also receive notice. That notice must contain the following information:

a statement as to whether the shutdown or reductions are expected to be permanent or temporary and, if the planned action involves closing the entire plant, a statement to that effect;
the expected date when layoffs or terminations will begin and the date on which (or a range of fourteen days within which) the termination of the individual employee will take place;
a statement whether bumping rights exist; and
the name and telephone number of a company representative who can be contacted for further information.

c. Notice to State and Local Government Officials.
The WARN Act also requires that employers give notice of plant closings and mass layoffs to the state dislocated worker unit and to the chief elected official for the local government where the layoff or closing will take place. These notices must contain the following information:

the name and address of the site affected and the name and telephone number of the company representative who can be contacted for further information;
a statement as to whether the planned action is temporary or permanent and, if an entire plant is being closed, a statement to that effect;
the expected date for the first layoffs and the anticipated schedule for such layoffs;
the job titles affected and the number of affected employees in each such job;
an indication as to whether bumping rights exist; and
the name of each union representing affected employees and the name and address of the chief elected official for each such union.

7. Exceptions to the 60-Day Notice Requirement.
Three exceptions exist to the 60-day advance notice requirement:

The faltering company exception, which applies only in the context of a plant closing;
The unforeseeable business circumstances exception; and
The natural disaster exception.

Even if an exception is applicable, an employer must still provide as much advance notice as possible.

a. The Faltering Company Exception.
Notice is not required when an employer is taking specific steps to obtain new capital or business to keep the company running and the giving of notice would cause the sources of new capital or business to evaporate. The exception has been interpreted narrowly, applying only to plant closings that occur after an effort to procure capital proves unsuccessful.

The exception does not apply when an effort is being made to sell or merge the business. It is limited to efforts to raise capital to continue to run the business.

To qualify for reduced notice under this exception:

An employer must have been actively seeking capital or business at the time that 60-day notice would have been required;
There must have been a realistic opportunity to obtain the financing or business sought;
The financing or business sought must have been sufficient, if obtained, to have enabled the employer to avoid or postpone the shutdown; and
The employer reasonably and in good faith must have believed that giving the required notice would have precluded the employer from obtaining the needed capital or business. The employer must be able to objectively demonstrate that it reasonably thought that a potential customer or source of financing would have been unwilling to provide the new business or capital if notice were given, i.e., if the employees, customers or the public were aware that the facility, operating unit or site might have to close.

b. The Unforeseeable Business Circumstances Exception.
The unforeseeable business circumstances exception applies when a sudden, dramatic and unexpected event that was not reasonably foreseeable places the employer in a position where it must incur immediate layoffs. Examples potentially qualifying under the exception are a principal client's sudden and unexpected termination of a major contract with the employer, a strike at a major supplier of the employer, an unanticipated economic downturn, or a government-ordered closing of an employment site occurring without prior notice. The test for determining when business circumstances are not reasonably foreseeable focuses on an employer's business judgment. An employer must exercise commercially reasonable business judgment as would a similarly situated employer in predicting the demands of a particular market.

c. The Natural Disaster Exception.
This exception applies to plant closings or mass layoffs due to any form of a natural disaster, including, for example, floods, earthquakes, droughts, storms, tidal waves or tsunamis. Even when reductions are not the direct result of a disaster, the unforeseeable business circumstances exception may apply when they are an indirect result.

8. Special Notice Requirements for Exceptions.
If an employer is able to rely on an exception, it must include in the notice to its employees the reason for the shortened notice period. A company's statement of its basis for a shortened notice period should set forth the specific underlying factual events which led to the shortened period, thereby allowing the workers to understand the employer's situation and its reasons for shortening the notice period.

9. Additional Notice.
Additional notice is required when the date or schedule of dates of a planned plant closing or mass layoff is extended beyond the date or the ending date of any 14-day period announced in the original notice. If the postponement is for less than 60 days, the additional notice should be given as soon as possible and should include reference to the earlier notice, the date to which the planned action is postponed, and the reasons for the postponement. If the postponement is for 60 days or more, the additional notice should be treated as a new notice.

Rolling notice, in the sense of routine periodic notices, given whether or not a plant closing or mass layoff is impending, and with intent to evade the purpose of the Act rather than give specific notice as required by the Act, is not acceptable.

10. Penalties.
An employer is exposed to the following penalties for failure to timely give the required notice:

Back pay to each terminated employee for a period up to 60 days;
Lost benefits to each terminated employee for a period up to 60 days (such loss would include any medical claims not covered due to an employee's decision not to take COBRA coverage);
Reasonable attorney's fee, paid to the aggrieved employee's attorney (fee award is subject to the court's discretion); and
A $500 per day fine (for up to 60 days) paid to the local government.

B. Minnesota.
Minnesota has notification laws which encourage notice to employees and local and state officials for plant closings, layoffs or relocations. Plant closing is defined as a permanent or temporary shutdown of a facility causing employment loss during any 30-day period for 50 or more full-time employees, excluding employees who work less than 20 hours per week. A substantial layoff occurs when a work force reduction not caused by a plant closing affects the same number of employees.

Minnesota law contains no mandatory notice requirements and no penalty provisions. However, it does create a rapid response program and a program for providing pre-feasibility study grants to eligible organizations to provide an initial assessment of the feasibility of alternatives to plant closings or substantial layoffs. The state assistance may well be of benefit to an employer or to its employees, and a Minnesota employer contemplating a plant closing or substantial layoff should review its provisions to determine whether it or its employees could benefit by it.

C. Wisconsin.
Wisconsin maintains notification laws similar to the WARN Act. Wisconsin employers of 50 or more workers are required to give at least 60 days written notice of business closings and mass layoffs. The notice must go to any affected employee, the union representative, the state's labor department, and the highest official of the city, town or village in which the affected facility is located.

A business closing is defined as a permanent or temporary shutdown of an employment site or of one or more facilities or operating units at an employment site or within a single municipality that affects twenty-five or more employees, not including new or low-hour employees. A mass layoff is defined as a reduction in force that affects 500 workers, or that affects at least 25% of the employer's work force or 25 employees, whichever is greater.

Employers that fail to comply with Wisconsin notification requirements face fines of $500 a day, back pay for the days during the recovery period that the employee would have worked if the business closing or mass layoff had not occurred, and the value of any benefit that the employee would have received under an employee benefit plan during the recovery period but not received because of the business closing or mass layoff, including the cost of medical treatment incurred that would have been covered under the employee benefit plan.

Wisconsin law incorporates exceptions to the notice requirements. Those exceptions include:

A faltering company exception similar to the WARN Act exception;
The sale of part or all of the employer's business if the purchaser agrees in writing, as part of the purchase agreement, to hire substantially all of the affected employees with not more than a six-month break in employment;
The relocation of part or all of employer's business within a reasonable commuting distance, if the employer offers to transfer substantially all of the affected employees with not more than a six-month break in employment;
The completion of a particular project or work of a specific duration, including seasonal work, if the affected employees were hired with the understanding that their employment was limited to the duration of such work or project;
Business circumstances that were unforeseeable when the notice would have been timely given;
A natural disaster beyond the control of the employer; and
A temporary cessation in business operations if the employer recalls the affected employees on or before the 60th day beginning after the cessation.

II. CONSTRAINTS ON SELECTION.
An employer's plan for reducing forces must recognize and address any contractual obligations it has to its employees and must be based on lawful, non-discriminatory factors.

Failure to satisfy those requirements will expose an employer to liability.

A. Contractual Constraints.
Prior to implementing a group layoff, an employer should review any potential contractual obligations it has to its employees as a whole or to any individual terminee. Typical issues of concern that should be reviewed include: (1) the employer's right to terminate an employee; (2) any contractual limitations on the manner terminations are to occur, i.e., seniority, merit or otherwise; (3) any employee rights to transfer or bump into other positions; and (4) any post-termination obligations to a terminee, such as severance.

The obligations may be contained in various sources, including:

Individual employment contracts;
Employee handbooks;
Collective bargaining agreements; and
Oral agreements.

B. Statutory Constraints.
Federal and state laws place constraints on the manner in which an employer may lawfully conduct a reduction in force. Statutes of particular concern to employers contemplating reductions in force include:

1. Anti-Discrimination Statutes.
Various federal and state statutes bar discriminatory employment practices based on unlawful factors such as age, sex and race. Such statutes include:

Title VII of the Civil Rights Act of 1964;
Section 1981 of the Civil Rights Act;
Age Discrimination in Employment Act;
Minnesota Human Rights Act; and
Wisconsin Fair Employment Act.

To prevail on such claims, a terminated employee must prove that membership in a protected group was a determining factor in his or her selection for termination.

2. ERISA Section 510.
This statutory provision prohibits discrimination against an employee on the basis of his or her fringe benefits or that employee's exercise of any rights under the fringe benefits. For example, an employer with a provision in its pension plan which calls for vesting at the end of ten years of employment would violate Section 510 by terminating most of its workers after nine years of employment to keep them from vesting.

3. Older Worker's Benefit Protection Act ("OWBPA").
OWBPA basically prohibits a company from requiring or "permitting" the retirement of anyone on account of age, with one exception. That exception is a voluntary early retirement program.

4. National Labor Relations Act ("NLRA").
The NLRA, if applicable, may impose obligations on an employer beyond the contractual constraints arising from an existing collective bargaining agreement.

An employer may have an obligation to bargain with the union about the effects of a plant closure, including issues such as transfer and severance rights.
An employer who closes a plant based on labor costs may have an obligation to bargain about the decision to close the plant.
An employer may commit an unfair labor practice if it closes down a plant or curtails the operations of a unionized plant for the principal purpose of switching that work to a non-unionized facility.

C. Non-Discriminatory Selection.
An employer should strive to design a reduction in force plan that minimizes the number of such challenges and maximizes the likelihood of successfully defending those claims. To do so, it should confirm that it can articulate a non-discriminatory business reason for the reductions and document that reason. It should then create an objective selection procedure to identify terminees. Two systems typically utilized are seniority and merit.

1. Seniority.
Seniority has the advantage of ease of application. Additionally, it is clothed with a degree of protection by most anti-discrimination statutes which allow an employer to observe the terms of a bona fide seniority system even if its application produces discriminatory results against persons in a protected class.

2. Merit System.
A merit system is more burdensome to administer and, because it requires an employer to exercise more discretion, it exposes an employer to claims of selection discrimination. However, its use is likely to result in a more qualified post-reduction work force. An employer using a merit system should utilize objective performance criteria, judge each employee against those criteria, and be able to explain and justify each termination of a protected class member.

After preliminarily making its selections, an employer should review the tentative list of terminees to determine if any protected class will be adversely impacted. If so, it may want to eliminate the adverse impact. Alternatively, if it stays with its initial selections, it should confirm that its selection process was objective, based on non-discriminatory criteria and documented.

III. EMPLOYEE BENEFITS.
An employer contemplating a reduction in force should assess employee benefit obligations and confirm that it is not failing to honor any statutory or contractual requirement related to those benefits. An in-depth discussion of such issues is beyond the scope of this article, however, two statutes are of note:

A. Consolidated Omnibus Budget Reconciliation Act ("COBRA").
COBRA provides that if an employer terminates an employee, the employee has to be given the right to continue his or her own fringe benefits (principally health insurance) so long as the employee pays for it. Most companies should already have procedures to comply with this law, but in a reduction in force where a company is terminating a large number of employees, the company should make arrangements to upgrade its ability to handle the paperwork and administrative burdens involved with meeting COBRA requirements.

B. Employee Retirement Income Security Act Of 1974 ("ERISA").
Severance arrangements that meet the statutory definition of an employee benefit plan subject an employer to ERISA fiduciary, reporting and disclosure rules and to sanctions for noncompliance. As a part of its assessment of a reduction in force, an employer must determine whether it has a severance plan in effect. If so, it will have to deal with meeting its obligations under that plan.

A plan can either be a written plan or a practice. A written plan is easily discernible. However, an employer's past practice of paying severance benefits (which sometimes may be evidenced by letters written to previously discharged employees) may establish a plan subjecting an employer to ERISA. Thus, an employer contemplating a reduction in force must determine whether the company has a severance plan. Such a determination will require inquiry into an employer's past history in making payment to discharged employees. If a fairly consistent pattern of paying discharged employees severance emerges, the company probably has a severance plan that is subject to ERISA.

IV. RELEASES.
When implementing a reduction in force, an employer should assess whether it would be advantageous to seek releases from the departing employees. If a decision is made to seek releases, then an employer should take steps to assure that the releases it pays to obtain will be enforceable in the event a terminee seeks to sue.

A. Should A Release Be Pursued?
Obtaining an enforceable release is an effective means to preclude future claims and associated costs. However, an employer should determine whether the cost of obtaining that release, which includes the consideration to be paid and the ancillary costs of compliance with statutory requirements, is worth the protections afforded.

A release provides an employer with valuable protections. While a release of claims signed by a terminee does not legally bar that terminee from commencing a lawsuit against his former employer, it does significantly decrease the chances that a claim will be asserted and provides an efficient means to obtain dismissal of any claim that is made.

A release decreases the probability of a lawsuit. Persons signing a release are likely to abide by its terms. Moreover, even if a terminee desires to challenge the release and assert a claim, the existence of a release will dampen the interest of any attorney evaluating a potential claim by that terminee.

A release, if enforceable, can be the basis for an early dismissal of any claim that is made. Promptly upon being sued, a company can move for dismissal of a terminee's claim based on the terms of the release. If the release is deemed enforceable and it covers the claims being asserted, the case will be dismissed. Early dismissal will save the company the often exorbitant costs of defending a claim through trial and will eliminate entirely any risk of liability from the terminee's claim.

While releases have their value, they are not free. Before pursuing a release, an employer should assess whether the advantages of obtaining the release justify its costs. Those "costs" must include the consideration paid to a terminee over and above what he or she was entitled to as an employee and may also include:

1. The Risk of Generating a Claim.
The mere request for a release may motivate an employee to evaluate and pursue a claim he or she may otherwise never have considered. This is especially true for releases encompassing age discrimination claims, the text of which to be enforceable should advise the employee to consult legal counsel.

2. Administrative Costs of a Release.
In effecting releases, written releases need to be drafted, in certain circumstances group information needs to be compiled and disclosed, and personnel need to devote time to offering and responding to the offer. All such activities have their costs.

3. Timing Constraints.
Federal and state laws impose mandatory review and rescissionary periods for certain types of claims. Those review and rescissionary periods may interfere with the company's preferred schedule for reductions in force.

CONCLUSION
Planning and fairness are necessities for any work force reduction. Planning will assist in avoiding unnecessary liabilities. Fairness will minimize terminee claims and bolster remaining work force morale.