This article originally appeared in Law360 on August 25, 2022. It is republished here with permission.
As economists and news outlets inform us daily, there's a high chance that a recession is coming. In fact, some believe it is already here.
As the threat of recession looms, forward-looking employers should prepare for a change in course regarding labor challenges.
Contracting markets will force many employers — who just recently could not find enough employees — to downsize their workforces. Taking steps now to prepare for the possibility of future reductions in force will help to lower risk for companies.
The Worker Adjustment and Retraining Notification Act requires employers to provide 60 days' notice of impending mass layoffs and plant closures.
Failure to comply with the requirements of the WARN Act can be very costly and lead to class action litigation. On the other hand, compliance with the WARN Act — the timely sending of WARN Act notices — is very low cost but requires advanced preparation.
In a typical plant or operating unit closure, an employer will know well before 60 days prior to shut down that the plant or operating unit will cease operations. In that case, compliance with the WARN Act is fairly straightforward. More often, employers are faced with the prospect of rolling layoffs.
Under the WARN Act, a mass layoff — and the triggering of the WARN Act — takes place when an employer either:
Without careful planning and tracking of layoff numbers and dates, an employer may not be aware 60 days before a layoff that the layoff will be part of a 90-day period that triggers the WARN Act.
In order to mitigate potential liability in this area, careful planning is needed.
Employers should designate a person who is highly involved and up to date in reduction in force decision making to track reduction plans and flag possible actions that could trigger the WARN Act. It's crucial to implement proper analysis of when and whether the WARN Act is triggered and whether one of the exceptions — natural disaster, unforeseeable business circumstances and the "faltering company" exception — may apply.
At first glance, it may appear that the natural disaster exception could be helpful for pandemic-related layoffs. However, the U.S. Court of Appeals for the Fifth Circuit's June decision in Easom v. U.S. Well Services Inc. dampens this prospect by holding that COVID-19 is not a natural disaster under the WARN Act.1
More likely to assist employers who experience unexpected layoffs due to COVID-19 is the
"unforeseeable business circumstances" exception. In fact, the U.S. Department of
Labor has suggested that it may be available in certain pandemic-related circumstances.2
If an employer thinks it may have layoffs in the next six months, it is not too early to start the planning process to determine the number of layoffs and when they will take place in order to ensure the company has sufficient time to issue WARN notices where required. Employers must also be aware of and consider any so-called mini-WARN Acts in the states in which they operate.
The WARN Act is not the only legal issue to consider when facing a reduction in force. Employers must also ensure that their reduction in force is conducted in a nondiscriminatory manner.
When conducting a RIF, employers should be sure to also analyze the final decisions through a disparate impact analysis. Under Title VII of the Civil Rights Act of 1964, as well as many state equivalents, discrimination includes not only intentional discrimination but also any action caused by a facially neutral policy that has a disparate impact on a group based on their protected status.
Like WARN Act litigation, disparate impact cases typically involve many plaintiffs and can result in costly class action lawsuits. As a result, RIF decisions should be carefully analyzed to confirm that no protected group is disproportionately chosen for termination.
Employers should also keep in mind that sexual orientation and gender identity are protected categories under U.S. Supreme Court precedent3 and include those protected statuses in any disparate impact analysis. Employers should also be aware of other potentially complicating factors such as inclusion in the RIF of employees who are on leave or who have recently engaged in protected activity such as complaints of discrimination or harassment.
In addition to a statistical analysis, if feasible depending on the size of the RIF, an employer should review each termination decision to ensure it is properly supported by documentation. If a position is being eliminated, employers should ensure that there are no plans to reinstate the position in the near future.
There are steps that employers can take now to ensure a smooth process later if RIFs are necessary. Employers should train supervisors about the importance of giving and documenting frequent and candid performance feedback to employees. Proper performance management is key not only to driving the performance of employees but also to have a defensible and documented basis for employment decisions based on performance, including RIF decisions.
In addition to the disparate impact issues discussed above, employers should be aware of the Older Workers Benefits Protection Act, which imposes requirements for agreements that release age claims for workers 40 years old or older. Employers should ensure that the severance agreement forms and their required attachments are in order now, prior to any reduction in force, to avoid wasted time and uncertainty later.
If an employer reaches the point where a reduction in headcount is required, it has a few options to effectuate that change.
First, it could consider reduction via attrition. As employees leave the company for other positions, the employer can take the opportunity to restructure and eliminate positions where necessary. Depending on the reduction needs and attrition rate, it may be possible to avoid layoffs altogether.
If all the necessary changes cannot be covered by natural attrition, employers can also consider voluntary separation programs, in which employees have the option of resigning, typically with a predetermined severance amount as incentive. The key to implementing such a program is that it must be truly voluntary and free from discrimination in its availability and application.
Depending on market and labor conditions, an involuntary RIF may be necessary.
As noted above, there are many actions that employers can take now to prepare themselves for possible future reductions in force that are made more likely with the coming recession.
Proper performance management and attention to the details of possible reductions now will save time and risk later when a recession occurs and requires reductions in your workforce.
1Easom v. U.S. Well Services Inc., 5th U.S. Circuit Court of Appeals, No. 21-20202.