Workforce reductions are a fact of corporate life, but that doesn’t make downsizing any less painful or complex. Planning ahead and addressing any legal issues associated with reducing staff can help ease the process for employers and employees.
Before making any final decisions, analyze and document the reasons for a workforce reduction. Discuss previous efforts to avoid a workforce reduction, including voluntary reductions, hiring freezes and salary freezes, and document why those measures failed or were considered undesirable.
In addition, review all employee handbooks to ensure the anticipated reduction in force does not violate company rules or employment laws.
Next, determine which employees, if any, have employment agreements, non-compete/non-solicit agreements, confidentiality agreements, stock option agreements or any other written agreement pertaining to their employment.
Additionally, discuss potential implications with all insurance carriers and brokers. Be sure to discuss the proposed effective date, which will affect all insurance policies, including medical, dental, life and disability.
Consider the impact on 401(k) and other retirement plans, both for the terminated employees and for those who will remain with the company. If the company offers flexible spending accounts, health savings accounts or cafeteria plans, discuss the implications of the proposed reduction with an accountant or attorney. Also, determine the company’s policy or applicable state law regarding payment of accrued vacation or paid time off to terminated employees.
In terms of what to offer terminated employees, consider the cost of providing outplacement services, as well as the viability of severance payments. If severance is an option, have an agreement drafted and approved by legal counsel that includes a rational, nondiscriminatory basis for the dollar amount to be paid to each employee. Legal counsel also should be sought regarding specific state law on payment of final wages to a terminated employee.
Finally, determine if the proposed workforce reduction appears to have a disproportionate effect on any particular group, especially a legally protected class, such as older workers.
Once these issues have been addressed, the following guidelines will aid the actual downsizing process.
- Comply with the Consolidated Omnibus Budget Reconciliation Act (COBRA), which allows employees to elect to continue their existing medical coverage for a period of time after their employment is terminated or after other “triggering events” occur.
- Provide any notice of termination of employment required by state law. This often is required so employees can apply for unemployment benefits.
- Determine how and when the reduction in force will be announced.
- Decide how much lag time, if any, will occur between the time employees are told of the workforce reduction and their last date of employment. Consider whether the company’s facility or computer systems need to be secured during this time.
- Determine how to manage the confidentiality of the process for each employee.
Establish a system for tracking the return of all company property. - Determine how to manage the impact of the workforce reduction on customers and remaining employees.
- Document any complaints, accusations or whistleblower activities that occur during the workforce reduction, which may need to be followed up with an investigation.
- Reinforce that no disparaging remarks should be made about the terminated employees.
- Ask the employees who are being terminated to verify their current mailing address and to submit any outstanding requests for expense reimbursement.
Economic realities often require workforces to be reduced. With careful planning and a dignified approach to the process, business owners can minimize the toll on the employees and on the company.