Legal Implications Of Layoffs & Furloughs
Make sure you know the legal considerations of layoffs
Disclaimer: These guides are an overview and by no means detailed, in-depth or an exact list of rules to programs and provisions. Always consult professionals and lawyers that understand the items and laws surrounding the subjects you are interested in learning more about. The potential legal exposure faced by employers when navigating reductions in force can be immense.
While the effects of COVID-19 and the economic downturn are being felt drastically and globally, employers are rushing to confront hard decisions in relation to their workforce.
Of course, a company is more than numbers on a spreadsheet. It’s a living, breathing entity that survives and thrives only because of the people that comprise it. Both the short and long-term strategic and operational impacts of knee-jerk layoffs can be severe.
There are a number of legal considerations that must be carefully reviewed in order to help equip your company with the foundation it needs to run a smooth and efficient reduction in force.
Avoiding legal pitfalls requires planning and research. It also requires speaking to and/or hiring a lawyer to review your plan of action. Your policies already in place, federal and state law, and the employment contract.
As with so many things in business, the process is absolutely essential to navigating a successful layoff or furlough.
Understanding Unemployment Benefits
According to the U.S. Department of Labor, “Unemployment insurance is a joint state-federal program that provides cash benefits to eligible workers. Each state administers a separate unemployment insurance program, but all states follow the same guidelines established by federal law.”
Now, it’s important to understand and recognize that unemployment is not welfare. It’s a joint federal-state insurance program funded through taxes paid by employers.
The Basics
The basic program in most states provides up to 26 weeks of benefits to unemployed workers, replacing about half of their previous wages, on average. Although states are subject to a few federal requirements, they are generally able to set their own eligibility criteria and benefit levels.
Who Is Eligible?
Program specifics are determined on a state-by-state basis, but given that it is overseen by the U.S. Department of Labor, most if not all states use the following guidelines to determine eligibility.
You are unemployed through no fault of your own. In most states, this means you have to have separated from your last job due to a lack of available work.
You meet work and wage requirements. You must meet your state’s requirements for wages earned or time worked during an established period of time referred to as a “base period.” (In most states, this is usually the first four out of the last five completed calendar quarters before the time that your claim is filed.)
You meet any additional state requirements, which can be determined by clicking here.
Who Pays For It?
In general, all employers have to pay unemployment taxes. Some exemptions exist, which are discussed later. Employers need to know about federal and state unemployment taxes.
The federal unemployment tax is mandated by the Federal Unemployment Tax Act (FUTA). FUTA tax pays for the federal government’s oversight of each state’s unemployment insurance program.
You must also pay for state unemployment insurance (SUI). State unemployment insurance pays out benefits to unemployed workers in your state. You also pay a tax for this, called SUTA tax or SUI tax.
Avoiding Discrimination Claims
Make sure your HR team runs a discrimination analysis as part of the process. The organization can target different levels of employees for furlough, as long as you have too much capacity in that group or if they are higher-paid employees. Often, targeting high-level employees for furlough can generate superior cost savings, but that strategy does carry with it the potential for increased damage to morale and retention.
Review company policies and employee contracts. You’ll want to abide by any agreements you set in place between your company and the employees. Remember if ever in a situation where you are in front of a judge, you will have wanted to follow the rules of legal documents – the judge can help you if you follow the rules of the legal document, you don’t want to be his foe and disregarded contracts – you’ll have no legal footing. Here are a few things you should do.
- Create A Strategy
-
- Consider All Options.
- Research The WARN Act
- Identify Which Roles Can Be Eliminated
- Decide On Objective Criteria
The Impact Of Non-Compete Agreements In Layoffs
Non-compete agreements are a mainstay of many employment agreements. On the surface, they’re designed to prevent employees from leaving a company in favor of a competitor and taking valuable trade secrets along with them.
These agreements are generally designed with voluntary resignations in mind. When a company decides to reduce its workforce, however, the standing of these non-compete agreements may change.
When employees are laid off due to lack of work, elimination of the position, or an economic downturn, it’s viewed as an overly-restrictive clause that can prevent people from earning an honest living.
In fact, several states including Arkansas, Iowa, Kentucky, Maine, Mississippi, New York, Pennsylvania, South Dakota, or Tennessee, and the District of Columbia, have ruled that non-compete agreements are not considered to be enforceable when they apply to an employee who has been laid off.
Preparation of severance package
When conducting a layoff, it’s often customary to design a severance package for outgoing employees. A severance package is an agreement between a departing employee and his or her employer. Severance pay is generally a matter of agreement between an employer and an employee or the employee’s collective bargaining representative.
According to SHRM, “there is no legal obligation under the federal Fair Labor Standards Act or any other alternative federal law to provide severance pay to terminated employees. However, many unionized employers may be obligated to provide severance pay benefits under the terms of a collective bargaining agreement, and some nonunionized employers may be obligated to do so in accordance with any relevant state or local law provisions.
There are so many reasons to offer severance when conducting a layoff. First and foremost, severance packages can help avoid lawsuits. It’s common to make the severance payment contingent on the signing of various legal releases. This can provide solace for employers who are concerned over the possibility of legal action against them. Further, the more “taken care of” the employee feels, the less likely it is that he or she will initiate legal action.
Severance packages also help companies remain competitive in the marketplace. Companies that have robust severance packages in place are generally more attractive than those who don’t. Setting severance programs up in advance can be a serious competitive advantage in the battle to attract employees.
Managing FMLA and Paid Sick Leave In Layoffs
An employee that is out on FMLA or Paid Sick Leave can be included in a layoff. They cannot, however, be terminated due to being on FMLA or Paid Sick Leave. Concrete, objective criteria are important for dodging any legal action against the company that assumes the termination was because the employee was on leave.
It’s important to note, however, that employees on FMLA are not totally exempt from a layoff or other type of termination as long as the action is not related to FMLA leave. According to the U.S. Department of Labor, FMLA regulation 825.216 (a) applies. The regulation states: “An employee has no greater right to reinstatement or to other benefits and conditions of employment than if the employee had been continuously employed during the FMLA leave period. An employer must be able to show that an employee would not otherwise have been employed at the time reinstatement is requested in order to deny restoration to employment.”
As the regulation indicates, the employer has the responsibility of proving that the layoff was not related to FMLA leave.
For that reason, an employer should be cautious when laying off or terminating an employee on FMLA leave. Before taking action, an employer should make sure that it has a valid business reason for laying off the employee, that the employee would have been laid off even if he or she was working and not taking FMLA leave, and that it has appropriate documentation to justify the action. As with other types of termination decisions, advice of legal counsel is strongly encouraged.
In business, there are always things that you’d prefer your former employees don’t share or disclose to the public. That’s why it’s common for companies to prepare confidentiality agreements (also known as non-disclosure agreements).
When should you seek to secure a non-disclosure/confidentiality agreement? There are many instances where securing a non-disclosure/confidentiality agreement makes a great deal of sense for employers. For example, you’d want to protect your intellectual property when showing a new invention to a potential investor or distributor. In this instance, there is a very real possibility that the individual witnessing your creating could, at least in theory, copy it for their own benefit or share it with competitors for their own gain.
One particularly challenging issue that employers may face when conducting reductions in force is wage and hour claims. These claims, if not handled with the proper degree of care and attention, can often lead to lengthy and expensive legal proceedings. It is wise for employers to explore these issues in-depth and, if possible, consult with legal counsel should there be any suspicion of underlying claims.
According to IRMI, Wage and Hour Claims are “an assertion by an employee-plaintiff that his or her employer has failed to pay overtime wages owed to the employee. Within the past several years, a number of high-profile, high-dollar wage and hour claims have been filed on a class action basis, a fact that has vastly increased the dollar amount payable under such lawsuits. Given the magnitude of this exposure, most employment practices liability insurance (EPLI) policies specifically exclude coverage for wage and hour claims.”
The U.S. Department of Labor’s Wage and Hour Division (WHD) administers and enforces our nation’s worker protection laws.
Understanding HIPAA & Applicable Privacy Laws
One often-overlooked aspect of managing a reduction in force is maintaining compliance with state and federal privacy laws. The layoff process is taxing from a human and emotional perspective. Often, this stress can cause employers to overlook key aspects of the administration of the process. Doing so, however, would be a grave mistake.
In normal times, employers must go to great lengths to ensure the privacy and ongoing security of their employee’s personally identifiable information and health-related information in particular. This means ensuring that any records, either physical or electronic, are safely handled and stored when employees are laid off.
Since the Novel Coronavirus (COVID-19) took hold on American soil, companies from all corners of the economy have been shedding jobs with abandon. Many of these companies have self-funded or self-administered health benefits they offer to their employees and are thus governed by HIPAA regulations.
Some employees, depending on the department they work in, can be more difficult to furlough or lay off than others. Sales professionals, for example, can be slightly more difficult to handle than others.
Many sales professionals are paid using a commission structure, wherein they earn a percentage of the sales they bring in to the business. These are designed to motivate the salesperson and align their interests with that of the company.
When an employee is terminated, it’s your responsibility as an employer to pay the employee the full value of the compensation that he or she had earned up to that point. Full compensation includes salary and wages, vacation pay that was earned but unpaid and of course commissions.
Communication with the employee is important so they don’t assume you don’t plan to pay. A conversation during termination that lays out the plan for payment is needed and so is follow-up during the duration of time until the final payment is sent.
Staying Compliant With IRC Section 409a
Understanding Internal Revenue Code Section 409a can be a challenge, to say the least. It’s a relatively complicated yet widespread aspect of our tax accounting system that is especially important when handling layoffs.
What is Section 409a?
In brief, Section 409a refers to deferred compensation for work performed. It can apply to SERPs, restricted stock, stock options, long-term commission programs, and severance agreements.
What does Section 409a do?
According to The Motley Fool, “The main function of Section 409a is to govern the timing of when deferred compensation can be paid. In part, Section 409a was created in response to executives from Enron, Worldcom, and other companies who decided to accelerate their deferred compensation payments in order to “cash-out” before the company went bankrupt.”
COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) is a federal law that requires employers with 20 or more employees and who offer health benefits to provide the option of continuing this coverage to people who would otherwise lose those benefits due to termination.
If you are an employer covered by the COBRA laws, you’ll need to get to know the basics of the law, including understanding which employees are eligible for COBRA, what is covered, the events that trigger COBRA, and what you’re responsible for communicating.
Handling Layoffs When You Have A Unionized Workforce
Union relationships can be one of the most difficult things employers are forced to navigate. They’re fraught with adversarial interactions and potential legal liability. Employers must tread carefully and intentionally in order to emerge successfully.
Terminating any employee can be a difficult process; however, terminating or laying off a union employee may prove even more difficult. HR often plays a key role in understanding and analyzing the collective bargaining agreement (CBA), its rules and procedures for handling employee performance, and its restrictions on discipline, layoffs or outright termination.
At a minimum, HR should strive to comply with the terms of the CBA where possible. Working closely with in-house or external counsel is always advisable during this process, particularly where the HR specialist believes the unionized employee in question should leave the organization. Equally important, however, is understanding the restrictions on employee discipline imposed by the National Labor Relations Act (NLRA), which forbids employers from restricting or disciplining any employee conduct that could be viewed as “protected, concerted activity.” This type of activity typically includes any employee discussion or activity that addresses wages, terms or conditions of employment or criticism of superior officers.
Developing And Managing Employment Agreements
When you’re ready to begin rehiring employees, it’s important to make sure that you’ve developed a comprehensive employment agreement that you can utilize to protect the hiring relationship going forward. If you didn’t have agreements in place prior to your reduction in force, this can serve as a great opportunity to fix things that have been overlooked in the past.
An employee agreement is a traditional document used in relationships between employees and employers for the purpose of laying out the rights, responsibilities, and obligations of both parties during the employment period.
Given its purpose, an employment agreement can be one of those vital documents utilized by an employer. The employee agreement will allow an employer to solidify the relationship with employees to make certain that the key terms of the contractual relationship are understood by each party. Examples of these key terms are:
- Salary
- Benefits
- Work schedule
- Vacation allotment
- Restriction on confidential information
Develop and Maintain A Robust Employee Handbook
Another essential tool in your employer toolkit is the tried-and-true employee handbook. The handbook serves as the central hub of expectations and documentation for the organization and should be readily available to each and every employee.
The creation, wording, and curation of employee handbooks are incredibly important as well. Put simply, how the handbook is written is almost more important than what it contains. According to SHRM, “Handbooks need not include every detail of an employer’s policies or every provision of the laws impacting the workplace. Rather, they should be worded carefully so HR isn’t boxed in. For example, it’s best to leave out the nitty-gritty of the company’s severance policy and to avoid speculating on possible future changes to overtime pay rules in order to preserve flexibility. In addition, the handbook should include a disclaimer that it is not an employment contract; provisions affecting such disclaimers vary by state.”
Don’t Stick It On The Shelf
Some companies put a lot of work into their handbooks and introduce them to their employees with a lot of enthusiasm…and then rarely speak of them again. Practice good communication from day one by providing your handbook as part of your onboarding process; then, follow up in a few days to discuss points of the greatest importance and answer questions.
At a minimum, all employees should be encouraged to review the handbook annually. Keeping your handbook on a secure portal or your company’s intranet can be helpful and give employees easy access.
You can also share portions of your handbook with potential recruits to help them (and you) determine if they’re a good fit for your organization. The content of your handbook can actually be a recruiting tool that sets your company apart from competing organizations.
An Employer’s Guide to Avoiding Litigation Risks
As employers, you must always be mindful of the ever-present possibility of employee-driven litigation. It’s unfortunate, but it’s simply an inescapable aspect of modern business.
The best way to handle potential litigation is to prevent it from happening in the first place. This is, of course, easier said than done, but it is possible. The key is to hire the right people, set the right expectations, and maintain consistency throughout the process.
- Hire The Right People, The Right Way.
- Communicate Your Policies.
- Pay Employees Correctly.
- Address Employee Complaints.
- Train Decision-Makers.
- Give Employees Objective Goals.
- Use Performance Evaluations.
- Use Progressive Discipline, But Don’t Promise It.
- Empathize With Employees.
- Prepare To Be Sued.
A Legal Checklist for Large Scale Layoffs
☐ Discrimination: When making the decision to layoff employees, you want to make sure you have objective criteria for determining who you are letting go. It can’t be based on race, age, gender or sexual orientation, etc.
☐ WARN Act: One of the first things to research is whether the employee falls under the WARN ect. If they do, you will need to give 60 days’ notice.
☐ Review Employment Contract: You’ll want to make sure the company lives up to its side of the agreement. If hiring promises were made – written or oral, you’ll want to follow-through with those promises. A review of the employee handbook is also essential.
☐ Overtime Pay: A review of overtime practices and determining if the company has followed the rule of overtime and if a legal claim for unpaid overtime is a possibility.
☐ Final Paycheck: Company policies will determine if unused vacation or sick leave will be paid out at time of termination. State law will determine when that final paycheck is due to the employee.
☐ Severance: It’s important to follow through with any severance offered during the hiring process.
☐ Stock Option: According to findlaw, “Some companies offered lucrative stock options to attract talented employees. Not all companies followed through with formal stock-option plans Continued from Page 1 or written stock agreements. Consequently, promises of stock options may become fertile ground for litigation, especially if employees believe that the business prospects of the company or the value of stock options were overstated.”
☐ Non-Compete Clause: are to ensure your employees do not start poaching your clients and business after they have left your organization. This is important to have in place to prevent a mass exodus of clients after a significant layoff event.
☐ Release of Claims: To protect the company from potential litigation they may want to have the employee sign the release in exchange for something of value over what they would already receive.
As stated earlier, it’s always wise to consult an attorney with expertise in employment law prior to initiating a reduction in force. There are so many elements of the process that can go sideways, and the legal exposure can be significant. The benefits that come from consulting with your legal advisor is well worth any cost you may incur.
“Layoff Checklist for Employers” FindLaw, October 17, 2017
https://corporate.findlaw.com/human-resources/layoff-checklist.html
Susan M. Heathfield, “What Notice Must an Employer Provide for Job Termination or Layoff?” The Balance Careers, March 17, 2020 https://www.thebalancecareers.com/notice-of-layoff-or-termination-1917605