Downsizing the Right Way

Finally, significant layoff events increase the likelihood that the Equal Employment Opportunity Commission (“EEOC”) may conduct an investigation into the RIF. Expansive EEOC investigations are particularly dangerous because findings, depending on the circumstances, may be used against the employer in litigation. While not frequent, the EEOC also could initiate litigation against the employer on behalf of aggrieved employees.Part Two will discuss implementing a methodical plan for a downsizing event, alternatives to downsizing and going forward with compassion.

Henry M. Perlowski is a partner in the Atlanta law firm of Arnall Golden Gregory LLP, where he is a member of the Litigation Practice Group. He can be reached at 404-873-8684 or at [email protected]. Bruce Jackson, a member of this newsletter's Board of Editors, is also a partner in the same office, where he is a member of the Corporate Practice Group. He can be reached at 404-873-8590 or at [email protected].

This first part in a two-part series deals with the primary risks of a “downsizing” event. In today's economy, law firms and their clients are implementing reductions in force (“RIFs”) in order to cut costs, meet profitability targets and/or correct imbalances created by growth in recent years and the recent economic downturn. In some cases, firms and their clients are simply giving up and are closing units or entire businesses.

Every downsizing event presents specific legal risks and traps for the unwary, as a number of law firms already are facing legal action arising out of the recent flood of layoffs. Therefore, before beginning the downsizing process, firm management should develop a plan that is designed to minimize litigation risk. Implementing a reasoned plan provides the needed transition towards an improved bottom line instead of costly problems.

The Primary Legal Risks Associated with Downsizing Events

The Worker Adjustment And Retraining Notification Act (WARN)

The Worker Adjustment and Retraining Notification Act, 29 U.S.C. ' 2101 et seq. (“WARN”) is the primary federal statute governing “plant closings” and “mass layoffs.” Local jurisdictions may have laws that are more expansive than WARN. Thus, the laws of all potentially impacted local jurisdictions should be considered before any meaningful layoff event.

The primary purpose of WARN is to provide workers (and their communities) with advance notice of layoffs so that they may begin to search for other employment or obtain training for another occupation. Accordingly, WARN places specific timing and notice content requirements on employers that are engaging in any defined “plant closing” or “mass layoff.” If these procedural requirements are not met, WARN provides for civil penalties, as well as private rights of action for all aggrieved employees.

Are You Subject to WARN?

WARN applies to all profit and non-profit enterprises, including law firms, that employ: 1) 100 or more employees (not including part-time employees); or 2) 100 or more employees who, in total, work at least 4,000 hours per week, excluding overtime. The “trigger” number of employees generally is measured on the date that notice must be given to all affected employees. If this number is “clearly unrepresentative,” however, then a more representative number, such as an average over a recent period of time, may be used. WARN thus may not be avoided by unusual timing events, such as pre-event layoffs designed to avoid the statute.

Independent contractors and subsidiary employees also may be counted toward the WARN number depending on the degree of independence of the individual from the contracting or parent company. Following traditional methods of proof, the degree of independence relevant under WARN is determined by factors including: 1) common ownership; 2) common directors or officers; 3) de facto exercise of control; 4) unity of employment operations; and 5) the general interdependency of operations. Therefore, if the number count is close, employers should not assume that WARN does not apply without first engaging in a detailed review of all non-traditional employee arrangements, like the engagement of contract attorneys.

Is The Event Subject To WARN?

Assuming 100 or more employees, WARN only applies if a statutory “plant closing” or “mass layoff” occurs. A “plant closing” is defined as a permanent or temporary shutdown of all or part of a single site of employment that results in an employment loss at such site for 50 or more employees during any 30-day period. An actual shutdown is not required, as the regulations interpreting WARN state that an “effective cessation” of production or work at a site may constitute a “plant closing.” Part-time employees are not included in this calculation.

A “mass layoff” is something less than a “plant closing” and is defined as any RIF during any 30-day period that results in the termination of: 1) at least one-third of all employees at the site, assuming this number equals 50 employees or more; or 2) at least 500 employees regardless of percentage. Again, part-time employees are excluded from this calculation. The “mass layoff” component of WARN is the primary risk facing law firms given the large scale terminations of non-equity partners, associates and administrative staff ' the “employees” of the firm.

It is critical to note that the 30-day period for “plant closings” and “mass layoffs” cannot be avoided through the use of creative timing. WARN specifically provides that if two or more events within any 90-day period collectively amount to a “plant closing” or “mass layoff,” then WARN is implicated unless the employer can show that the actions were the product of separate causes. Generally speaking, this is a difficult burden for employers to, as RIFs normally are the product of general economic conditions and not distinct events.

WARN Notice Content Requirements

WARN provides that notice of any plant closing or mass layoff must be given at least 60 days before the downsizing event to each of the following persons and entities: 1) to the authorized union representative(s), if any, for the affected employees (defined as all employees to be terminated, laid off for six months or more, or who experience greater than a 50% reduction in hours for six consecutive months); 2) if there is no authorized union representative, then to each affected employee; 3) to the dislocated worker unit for the states involved; and 4) to the chief elected official of the unit of local government within which the plant closing or mass layoff is to occur. If there is any question as to which unit of local government (e.g., a city and/or a county) is applicable, notice should be given to the unit to which the employer paid the highest amount of taxes for the preceding year.

In terms of content, the regulations interpreting WARN require that all notice forms contain a detailed list of specific information from the nature of the action to the name and contact information of a company official to contact for more information.

The Implications of Violating WARN

WARN provides for a private right of action for aggrieved employees and allows the recovery of lost wages and benefits for the period of violation, up to 60 days, and attorneys' fees. If a WARN violation is clear, employees should have little difficulty finding counsel to represent them. While allowing the recovery of money damages, WARN does not authorize an injunction to stop the plant closing or mass layoff. WARN furthermore provides for a civil penalty of up to $500 per day for failure to give 60 days' notice of the plant closing or mass layoff to the local government.

The Age Discrimination in Employment Act

The Age Discrimination in Employment Act (“ADEA”) is one of the core anti-discrimination statutes and protects all employees who are 40 years of age and older. The term “employee” is defined by reference to common law tests, and may include non-equity partners depending on the firm's operating structure. ADEA applies to all employers with 20 or more employees.

While all anti-discrimination statutes are implicated in layoffs, ADEA is particularly important because downsizing events frequently impact older (and higher-paid) workers. Employers often choose (or at least want to choose) to terminate the older and more highly compensated salesperson, for example, instead of the younger, entry-level salesperson so that the bottom line may improve immediately. Setting aside whether this decision makes business sense in the abstract or in application, history proves that downsizing events lead to a disproportionate amount of ADEA lawsuits.

Within the RIF context, an ADEA plaintiff generally must show that: 1) he is 40 years of age or over; 2) was qualified to hold a position that existed after the RIF; and 3) there is direct or circumstantial evidence that belonging to the protected age class was a causative factor in the adverse employment decision. Unlike the single-claim context where the evidence often is focused on the individual plaintiff, RIF claims place more positions and more decision-makers under scrutiny. Moreover, RIF claims largely depend on a full analysis of the subjective and objective factors globally considered by the employer, particularly if the “after” group is younger than the “before” group by an amount that is statistically significant. Generally speaking, the focus on the “before” and “after” at the company makes for a more dangerous ADEA claim and places a premium on implementing the reasoned, consistent approach to downsizing recommended in this article.

ADEA allows for the recovery of: 1) back pay, including lost wages and benefits; 2) front pay for future income loss or equitable reinstatement; 3) prejudgment interest; and 4) attorneys' fees. With proof of a willful violation, mandatory “double” damages are imposed. Considering the potential amount of these damages and the potential for multi-plaintiff claims, including class action claims depending on the size of the RIF, ADEA claims present a significant “money” risk of engaging in a downsizing event.

The Older Workers' Benefit Protection Act (OWBPA)

In 1990, Congress enacted the Older Workers' Benefits Protection Act (“OWBPA”) to supplement ADEA and curb potential abuses by employers seeking to procure releases of claims from their older employees. If releases are sought, the requirements of OWBPA must be considered. Otherwise, employers may be left with useless releases, at least as to ADEA claims.

For a release associated with a “group layoff” to be “knowing and voluntary” under OWBPA, it must precisely address a very specific list of requirements and issues. It must: 1) be readily understandable by the employee; 2) refer specifically to claims under ADEA and not encompass future claims that have not accrued; 3) be given in exchange for consideration that is over and beyond any benefit to which the employee already is entitled (i.e., more than any existing severance or contractual obligation); 4) advise the employee to consult with an attorney; 5) state in writing that the employee has 45 days to consider release; 6) give the employee seven days after signing the release in which to revoke the release and return any consideration provided to the employee (although consideration should not be paid until after the revocation period has expired); and 7) disclose in writing the employees eligible for the group layoff; the criteria and scope of the layoff; and the job titles and ages of all employees considered (selected and not selected) for the layoff.

If any of these OWBPA requirements are deficient, the release will not be effective and the employee may keep the consideration provided for the release and pursue an ADEA claim.

Other Discrimination Claims

While age discrimination claims are the most common products of downsizing events, other discrimination claims also may be pursued by employees affected by the RIF, or, more dangerously, by classes of employees disproportionately affected by the RIF.

Title VII of the Civil Rights Act of 1964, as amended, provides the primary vehicle for discrimination claims and allows the recovery of: 1) back pay, including lost wages and benefits; 2) front pay for future income loss or equitable reinstatement; 3) prejudgment interest; and 4) attorneys' fees. Compensatory and punitive damages also may be recovered for egregious violations of Title VII, subject to statutory caps. Race claims also may be pursued under 42 U.S.C. ' 1981, which does not contain any form of damages caps, making these claims even more dangerous than Title VII claims.

Finally, significant layoff events increase the likelihood that the Equal Employment Opportunity Commission (“EEOC”) may conduct an investigation into the RIF. Expansive EEOC investigations are particularly dangerous because findings, depending on the circumstances, may be used against the employer in litigation. While not frequent, the EEOC also could initiate litigation against the employer on behalf of aggrieved employees.Part Two will discuss implementing a methodical plan for a downsizing event, alternatives to downsizing and going forward with compassion.

Henry M. Perlowski is a partner in the Atlanta law firm of Arnall Golden Gregory LLP, where he is a member of the Litigation Practice Group. He can be reached at 404-873-8684 or at [email protected]. Bruce Jackson, a member of this newsletter's Board of Editors, is also a partner in the same office, where he is a member of the Corporate Practice Group. He can be reached at 404-873-8590 or at [email protected].