Be careful with workforce reductions

The troubled economy has made the unpleasant task of workforce reductions a necessary reality for many employers. Reductions in force (RIFs) are fertile ground for employment discrimination lawsuits and should be carefully planned and analyzed prior to implementation in order to avoid costly litigation.

The U.S. Supreme Court recently highlighted the importance of advanced planning and careful analysis for RIFs. On June 19, 2008, the court issued the decision of Mecham v. Knolls Atomic Power Laboratory, holding that the burden of persuasion in a disparate impact case under the Age Discrimination in Employment Act (ADEA) falls upon employers. This decision will make it more difficult and costly for employers to defend ADEA cases arising out of RIFs.

The case

Due to market factors, the employer in Mecham made a business decision to reduce its workforce by 31 salaried employees. The company used three general criteria for making its termination decisions: performance, flexibility and critical skills. Arguably, these criteria encompassed a number of subjective components used to make final decisions. Use of these RIF criteria resulted in 30 of the 31 affected employees being 40 years of age or older (the triggering age for protection under the ADEA). At trial, the jury found that regardless of the employer’s intent, the workforce reduction had a “disparate impact” on age-protected employees. On appeal, the U.S. Supreme Court held that it is the employer’s burden to show the adverse employment decision is based on “reasonable factors other than age” (the “RFOA defense”).  In other words, in a disparate impact case it is not the terminated employee’s burden to show that the employer’s reasons for termination were unreasonable; it is the employer’s burden to show the reasons were reasonable, and not age related.

The impact on employers

The Mecham case demonstrates the importance of early evaluation of the ADEA risks associated with workforce reductions and the importance of relying upon objectively defensible criteria when making adverse employment decisions in a RIF setting. The more subjective the criteria used to make decisions, the more employers are at risk to legal challenge. Employers contemplating a RIF need to formulate objective and job-related criteria, analyze how a court or jury will react to the criteria, and run a statistical analysis prior to the RIF to determine the risk of a disparate impact claim.

Of course, there are legal concerns in a RIF setting beyond disparate impact claims.  Employers also need to carefully analyze such matters as whether advance notice must be given to employees and others under the Worker Adjustment and Retraining Notification Act (WARN) (and similar state laws), how the RIF will affect those employees out on protected leaves of absence and how employees about to vest in certain employee benefits are affected.

In addition, employers must decide whether to offer severance pay and, if so, whether written severance agreements will be required waiving most employment-related claims. If severance agreements are to be utilized, careful drafting is critically important. For instance, federal law mandates certain provisions in age discrimination waivers in RIF settings, such as a 45-day consideration period and the inclusion of certain workforce demographic data.

While workforce reductions may be unavoidable for some employers in our current economy, carefully navigating the RIF waters is critical to avoiding unnecessary and costly litigation.

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