Even in boom times, a company may find itself facing the prospect of a reduction in force. The announced proposed merger of Exxon and Mobil was accompanied by an announcement that 9,000 employees would lose their jobs. How does an employer manage a reduction in force?
Union Relations. If the employees are represented by a union, the employer may have a duty to bargain over the decision and the effects of the closing or mass layoff. Basically, if the decision is motivated by labor costs (e.g., wages and benefits), the employer may have an obligation to bargain over the decision. This means giving the union an opportunity to propose alternatives (e.g., a wage or benefit cut). Bargaining over the effects means that the union and employer bargain over such matters as timing of the layoffs, the payment of severance, continuation of health insurance and other related issues.
Statutory Notice. If an employer is terminating or permanently laying off a large number of employees, federal or state law may require 60 days. advance notice. Notice also must be given to the State and the local branch of government. Failure to give the required notice may result in an obligation to provide severance pay and benefits for the statutory notice period.
Selecting Employees for the Reduction in Force. Selecting employees for termination can be tricky business. The safest course is to rely solely on seniority. Few employers do this, however, as they seek to retain the best employees. Care must be taken that supervisors and managers select candidates for the reduction in force on the basis of legitimate business reasons. Failure to do so often leads to lawsuits alleging that the selection process was discriminatory and unfairly impacted older employees, employees of color or women.
An employer must also be careful to follow its own policies. Often, employee handbooks are written in the best of times, and layoff or termination policies make sweeping promises to layoff only by seniority, to layoff only if the business is losing money and the like. An employer is well advised to review existing policies prior to any reduction in force.
Benefit Plan Issues. An employer should also carefully consider the impact the reduction in force may have on existing benefit plans. If a plant or facility is closed, this may result in the termination or partial termination of a pension plan. This may trigger a very large and unforeseen liability. Employers participating in multi-employer pension plans sponsored by unions are often stunned by the size of the withdrawal liability.
Employers also should review their COBRA policies to insure compliance. If an employer intends to continue to provide health insurance for terminated employees for some period of time, it may be necessary for the terminated employees to elect COBRA coverage and for the employer to agree to pay the premiums.
Severance Pay. Generally, there is no obligation to pay severance pay. In a way, unemployment compensation is a form of statutory severance pay. Nevertheless, employers should review their policies to determine if any promise of severance has been made.
Many employers do pay severance. How much severance is standard is a common question. There really is no typical amount. Some employers pay one week of severance for each year of service, but many employers do not pay any severance. If a general statement can be made, it is that the higher the position in the company and the longer the service, the greater the severance pay.
Get It Over. An employer faced with a down-sizing is well-advised to get the reduction in force done in one step. Reductions in force are often demoralizing events (some recent articles have suggested that reductions in force cost companies as much in lost production as they save in reduced costs). A long drawn out reduction in force often results in reduced production and the resignations of employees the company hoped to retain. Accordingly, a business should develop a reduction in force plan, consider all of the business and legal issues, and implement the plan in a way that lets employees know when the process is complete.
Union Relations. If the employees are represented by a union, the employer may have a duty to bargain over the decision and the effects of the closing or mass layoff. Basically, if the decision is motivated by labor costs (e.g., wages and benefits), the employer may have an obligation to bargain over the decision. This means giving the union an opportunity to propose alternatives (e.g., a wage or benefit cut). Bargaining over the effects means that the union and employer bargain over such matters as timing of the layoffs, the payment of severance, continuation of health insurance and other related issues.
Statutory Notice. If an employer is terminating or permanently laying off a large number of employees, federal or state law may require 60 days. advance notice. Notice also must be given to the State and the local branch of government. Failure to give the required notice may result in an obligation to provide severance pay and benefits for the statutory notice period.
Selecting Employees for the Reduction in Force. Selecting employees for termination can be tricky business. The safest course is to rely solely on seniority. Few employers do this, however, as they seek to retain the best employees. Care must be taken that supervisors and managers select candidates for the reduction in force on the basis of legitimate business reasons. Failure to do so often leads to lawsuits alleging that the selection process was discriminatory and unfairly impacted older employees, employees of color or women.
An employer must also be careful to follow its own policies. Often, employee handbooks are written in the best of times, and layoff or termination policies make sweeping promises to layoff only by seniority, to layoff only if the business is losing money and the like. An employer is well advised to review existing policies prior to any reduction in force.
Benefit Plan Issues. An employer should also carefully consider the impact the reduction in force may have on existing benefit plans. If a plant or facility is closed, this may result in the termination or partial termination of a pension plan. This may trigger a very large and unforeseen liability. Employers participating in multi-employer pension plans sponsored by unions are often stunned by the size of the withdrawal liability.
Employers also should review their COBRA policies to insure compliance. If an employer intends to continue to provide health insurance for terminated employees for some period of time, it may be necessary for the terminated employees to elect COBRA coverage and for the employer to agree to pay the premiums.
Severance Pay. Generally, there is no obligation to pay severance pay. In a way, unemployment compensation is a form of statutory severance pay. Nevertheless, employers should review their policies to determine if any promise of severance has been made.
Many employers do pay severance. How much severance is standard is a common question. There really is no typical amount. Some employers pay one week of severance for each year of service, but many employers do not pay any severance. If a general statement can be made, it is that the higher the position in the company and the longer the service, the greater the severance pay.
Get It Over. An employer faced with a down-sizing is well-advised to get the reduction in force done in one step. Reductions in force are often demoralizing events (some recent articles have suggested that reductions in force cost companies as much in lost production as they save in reduced costs). A long drawn out reduction in force often results in reduced production and the resignations of employees the company hoped to retain. Accordingly, a business should develop a reduction in force plan, consider all of the business and legal issues, and implement the plan in a way that lets employees know when the process is complete.