This is our third monthly installment highlighting labor relations issues arising from the convergence of political, legislative and economic events.  This alert focuses on an employer’s need to downsize or institute cost savings measures. 

 I.          Overview

             Faced with declining balance sheets, more employers are reducing operating costs by implementing a Reduction In Force ("RIF") and/or wage and fringe benefit reductions.  A well conceived and timely game plan for implementation of such measures is necessary to avoid creating additional problems.

 II.        Limitations On RIF

             An employer’s efforts at diminishing its workforce may be adversely impacted by Contract or Statute.  In either situation, the failure to recognize the associated responsibilities may eliminate, or significantly lessen, the intended cost savings. 

             A.        Contract

                         1.         Collective Bargaining

                                    If employees are represented by a union, any attempt to reduce staff must be in accordance with the collective bargaining agreement ("CBA") and with the National Labor Relations Act ("NLRA").    

                                    A CBA will often address the manner in which employees are selected for layoff, the notice required to be given and any severance obligations.  An employer need only follow the procedure outlined in its CBA.  If a CBA does not apply but a union has been certified as representative, the NLRA mandates bargaining over all the elements of the RIF.  Indeed, if the union is capable of providing contractual relief as an alternative to layoffs, an employer is obligated to bargain over its decision to do so.  This is referred to as decision bargaining.  If there are no alternatives, an employer is still obligated to engage in effects bargaining; to discuss the selection process and the economic payout to laid off employees, if any.  Although an employer is not obligated to agree with the union regarding decision or effects bargaining, it is obligated to bargain in good faith over the subjects.  Failure to adhere to these bargaining obligations violates the NLRA and may be remedied by injunctive relief and make whole remedies such as reinstatement and back pay. 

                         2.         Employment Agreements

                                     Laying off a contractual employee requires compliance with the agreement.  Although careful craftsmanship can eliminate most issues, many agreements fail to address the consequences of a termination of employment due to business economics rather than individual performance.  Compliance with notice and severance provisions must be maintained lest an employer be deemed to have materially breached the agreement relieving the employee of, inter alia, post employment restrictions on competition or solicitation.

             B.         Statute

                         1.         Protection For Those Selected For Layoff 

                                     Federal and State statutes mandate that the process of selecting employees for layoff be free of discrimination on the basis of age, sex, race, ethnicity, religion or other protected status.  This seemingly innocuous requirement has proven extraordinarily costly to the unwary employer.  Common sense may not apply and the unintended impact on a class of employees may be costly. 

                                     Under the discrimination statutes absence of discriminatory intent may be irrelevant if those laid off are disparately impacted.  In the absence of criteria, or even as a result of facially valid criteria, the layoff may affect more members of a protected group than permissible.  Further, apparently valid criteria, such as those making the most money (thereby reducing the total number of employees laid off) may be found impermissible.  Typically, however, the employees earning the most are the most senior and the oldest, violating the Age Discrimination in Employment Act ("ADEA").  See, e.g., Meacham v. Knolls Atomic Power Laboratory, 461 F.3d 134, 139-40 (2d.Cir. 2006) 

                                     Consequently, the lack of a previously articulated process of selection or the lack of an objective/empirical basis (length of service, productivity, etc.) for selection may result in unwarranted, difficult to defend, litigation. 

                                     Typically state discrimination statutes and their federal counterparts (e.g., Title VII of the Civil Rights Act of 1964, ADEA, etc.) must all be considered.  However, other state statutes must also be considered if the full benefit of a RIF is to be realized.  For instance, under New York law absent a written policy stating that an employee is not entitled to accrued benefits upon separation from employment for any reason, the employer would be obligated to pay the separating employee accrued time off benefits. (Section 198-C NY Labor Law)  Glenville Gage Co., Inc. v. Industrial Bd. of Appeals of New York 70 A.D.2d 283 (1979) Also, absent a written agreement with commissioned sales personnel, the New York employer may be responsible for commissions well beyond employee termination. (Section 191-B NY Labor Law).

                         2.         RIFs Require Advance Notice

                                     As detailed in our prior Client Alert regarding Worker Adjustment and Retraining Notification ("WARN") acts, both the federal government and nineteen states, including New York, require advance notice of layoffs to employees, their representatives and governmental officials.  In most instances, the circumstances in which notice is not required are extremely limited and it is virtually absolute that payment of sixty (60) to ninety (90) days of pay is required when notice is not given.  The attached chart provides highlights of the requirements and penalties of the Federal WARN and New York State WARN acts. 

                                     Often overlooked are the notification requirements uniquely required in connection with age discrimination claims under federal law.  Under the Older Workers Benefit Protection Act (OWBPA), employers may not obtain a release from age discrimination claims without minimally providing at least twenty-one (21) days advance notice of the terms of the release and seven (7) days to revoke authorization once given. 

                                     Where the layoff is part of an "exit incentive or other employment termination program"; forty-five (45) days advance notice must be given together with statistical information regarding the impacted group (e.g., data reflecting the ages of those laid off as compared to those unaffected by the layoffs).  Assuming adequate notice, an affected employee is entitled to seven (7) days to revoke his/her authorization once given.  An employment termination program refers to a "group or class of employees who were involuntarily terminated and who are offered additional consideration in return for a release." 

                                     The notice requirements of OWBPA for releases are non-negotiable and non-compliance has resulted in employee age discrimination suits after receipt of severance monies.  Imagine the hardship and insult to an employer that finds its severance payments fund the litigation against it because of an ineffectual release. 

 III.       Alternatives To RIF

             If employees are "at will" an employer is free to terminate or modify the relationship with its employees with or without cause, reason, notice or severance, provided its actions are not discriminatory.  Hence, the alternatives to RIF set forth below are subject to most of the limitations previously cited (WARN is not implicated) and caution must be exercised in selecting employees for change.  Certainly, the NLRA does not permit unilateral changes in the wages/hours or other terms and conditions of employment of unionized employees. 

             A.        Wage Salary Reductions

                         Rather than layoff, many employers choose to reduce the wages or salaries of their employees.  Under this scenario employees are expected to work as they have previously         but for a fraction of their prior pay.  Needless to say, such an approach protects and adversely affects the entire workforce.  Practically speaking, a loss of personnel or union organizing are the most significant risks attendant to this approach.

                         Certain employees are exempt from overtime by virtue of their duties (executives, professional or administrative) and their receipt of a weekly salary regardless of hours worked.  In New York, if the salary of those individuals is reduced below $536.10 per week, the exemption from overtime will be lost.

            B.         Work Week Reduction

                         In this scenario all full-time employees, or a designated unit of employees, have their hours and wages reduced.  Under New York law, the advantage of a work week reduction over a comparable wage/salary reduction is that employees may be entitled to partial unemployment compensation benefits for reductions of 20% to 60%.  New York’s Work Share Program allows for such a result upon application to, and approval of, the State Department of Labor.  Employers electing such participation will find their unemployment insurance rates increase, but employees will enjoy the aggregate of partial unemployment benefits and their wages.  Participating employers may not reduce health or fringe benefits.  For details of this program consult the Work Share website at http://www.labor.state.ny.us/ui/dande/sharedwork1.shtm

                         As previously noted, in New York a reduction in salary below $536.10 will result in loss of exempt status.  More importantly, salary exempt employees are not measured by hours so their reduction in hours or work week is essentially meaningless as they cannot be paid based on hours and retain their exemption.

            C.        Unpaid Furloughs

                         Unpaid furloughs, that is forced time off without pay, have long been a feature of some construction trades.  Now, employers are routinely considering their use. Utilization is most frequent where savings to be achieved are ten percent (10%) or less and where staggered absences do not adversely affect productivity. 

            D.        Reduction In Fringe Benefits

                         Changes in paid time off policies and health benefits are most prevalent in this scenario.  Paid time off benefits already accrued may not, under New York law, be taken away.  An employer may alter or eliminate future accrual. A reduction in time off benefits is a true savings if an employer does not replace employees who are absent or if the cost of replacing the employee exceeds regular wages. 

                         As health care costs have soared, reduction in health benefits has become common.  Alteration of benefit features, changing from a PPO to HMO, and requiring greater employee cost participation in premiums and point of purchase co-pays are but some of the most typical benefit cost reducers.  To the extent that employees bear a greater share of premiums, an employer may realize savings beyond the mere reduction in its share as some employees may cease participation as a consequence of their increased burden. 

 IV.       Recommendations

             Forward thinking and planning are essential to effectuating cost savings. The following steps should be undertaken if the full measure of savings is to be realized.

           A.        Business Forecasting

                         The lead time necessary to comply with federal and state WARN acts, as well as the NLRA requirements for bargaining, mandate forward thinking.   

           B.         Review Existing Handbook Policies

                         Layoffs are best undertaken pursuant to, and consistent with, established policy.  Where policies do not exist or where those provided (e.g., merit) cannot be sustained as a result of deficient or non-existent documentation, new policies should be formulated and distributed. 

           C.        Review Personnel Files

                         Assuming merit, skill or ability are factors in selecting employees for layoff, personnel files must be reviewed prior to final action.  If the files are not consistent with the verbal input of supervisors, allegations of discriminatory pretext are likely.  The failure to maintain disciplinary records or current/accurate evaluations are also dangerous.  Independent of the need for supporting documentation, accurate personnel files are an essential component to success in employment litigation. 

           D.        Review and Renegotiate Employment Agreements

                         As employment agreements may be an impediment to achieving cost savings they should be reviewed to ascertain the following: does a layoff trigger severance provisions or otherwise constitute a material breach; does the agreement recite that a breach under one section does not invalidate other obligations; are there wage contingencies; and, are benefits defined or are they identified as company benefits. 

           E.         Review and Renegotiation of CBAs

                         An analysis of the CBA must be undertaken to ascertain whether employer cost savings measures are possible.  Certainly one would expect delineation of layoff procedures and attendant severance, if any. 

                         Perhaps more importantly is addressing matters in negotiation.  Provisions for new hires, layoff language and health benefit changes are but a few of the most common features which are being sought in this recessionary climate. 

           F.         The Fewer the Changes the Better

                         Given a choice, employers are best served by instituting boldly and deeply rather than frequently and superficially.  Whenever cuts are instituted the employment environment is tainted.  Employee trust and sense of security will be somewhat undermined at each announcement.  The workforce will be more susceptible to union organizing and will be more likely to seek legal assistance as the frequency of change mounts.

           G.        Train Management

                         Management should be trained to effectively and accurately implement and describe management actions. Too often management’s lack of familiarity has led to employee confusion, distrust and lawsuits. For example, an inartful explanation of layoff and the selection process could easily yield a suit alleging that reasons given are pretextual and discriminatory.  Important communications should be witnessed by at least two members of management and documented.

           H.        Perform A Self Audit

                         Employees laid off or whose pay, hours or benefits have been reduced are more likely to allege violations of the wage-hour laws and discrimination statutes than those not facing said changes.  The exponential growth in wage-hour suits over the past three years highlights the need to assess compliance now.  Failure to pay overtime, mischaracterization of individuals as independent contractors or as salaried employees not entitled to overtime, or the failure to pay for all work time (interrupted meal periods, early arrivals at work etc.) are the most common forms of wage-hour complaints. 

 V.        Conclusion

             Whether in response to the present economic climate or in the normal course of business, companies should be able to effectuate cost savings.  To do so legally requires advance planning if federal and state statutes are removed as barriers to action.

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      Comparison of Federal WARN AND NYS WARN Acts