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Employers should minimize risks of liability when implementing RIFs

Michael A. Warner, Jr.
CCH WorkWeek (online)
December 2008

With the current economic climate, we can expect to see workforce reductions at a rate previously unseen - at least during his 17 years of law practice, advised Michael Warner, Jr., partner with the Chicago firm of Franczek Radelet, addressing attorneys attending the Chicago Bar Association's seminar, Reductions in Force: A Sign of the Times - How to Implement and Challenge a RIF. Employers should use a selection process that reflects business needs, but also minimizes the risks of liability when implementing reductions-in-force (RIF), he suggested.

In terms of minimizing employer liability during the selection process, age discrimination is the big issue that everyone thinks about in the context of RIFs, Warner pointed out. It’s the one protected classification where the assumption is that age will correlate with reduced costs. But, employers also need to be cognizant of other protected categories, as well protected conduct, particularly under the Employee Retirement Income Security Act and the Family and Medical Leave Act, Warner noted. Employers need to steer away from decisions that are based on, or appear to be based on, protected categories or protected conduct, he said.

Age discrimination. While the appearance of age bias may be a big concern for employers implementing RIFs, showing disparate impact based on age is pretty much a loosing proposition for plaintiffs, according to Noelle Brennan, principal of Noelle Brennan & Associates in Chicago, and former supervisory and trial attorney in the Chicago District Office of the Equal Employment Opportunity Commission. When issued, the Supreme Court’s decision in Meacham v Knolls Atomic Power Lab, 126 S. Ct. 2395 (2008), was thought to be a blow to employers since the opinion assigned them the burden, once a prima facie case of age disparate impact was met, of showing that the reason for the employment decision was not based on age, Brennan pointed out. But the High Court also instructed, pursuant to Wards Cove Packing v Antonio, 490 US 642 (1989), that plaintiffs must identify the particular employment practice that had a disparate impact, and noted that this was not a trivial burden.

Court decisions interpreting Meacham, rather than focusing on the employer’s burden, have focused on the burden faced by plaintiffs in demonstrating a prima facie case. These courts have concluded that it is insufficient for a plaintiff to merely assert that a RIF had a disparate impact, Brennan advised. The RIF itself is not a specific enough employment practice. The piece of the decision making process that caused the disparate impact must be identified, which is very hard to do, Brennan said. After Wards Cove, Congress amended Title VII to get rid of this very stringent standard, but failed to take the same action as to the Age Discrimination in Employment Act, she explained, expressing the hope that legislative action will be forthcoming.

Union/non-union context. Employer considerations when implementing a RIF may differ in union and non-union workforce environments, Warner observed. In the context of a unionized workforce, the selection process is governed by the collective bargaining agreement (CBA) and is usually seniority-based. An employer that follows CBA seniority provisions during a RIF will basically have an air-tight defense to discrimination claims. Although an employer may have no duty under the CBA to bargain over the RIF decision, there may be a duty to bargain over the affects of the decision, Warner said. The duty requires notice in advance to the union and an opportunity to bargain. While an employer’s duty to bargain does not necessarily require agreement, an employer must go through the bargaining process, Warner advised.

In a non-union workforce, employers have the flexibility to use a process that conforms to their business needs, but there are more issues related to sources of liability, Warner explained. Since selection in a non-union environment inevitably involves subjectivity and second-guessing, there is an increased exposure to discrimination claims.

Selection process. Warner advises his clients to use a selection process that best meets their business needs, but that also balances or minimizes potential legal risks. If possible, the appearance of statistical disparity between groups should be avoided, such as an adverse impact on older workers. Employers should also avoid pretext - giving untrue reasons for RIF selection decisions. Warner also recommends use of severance agreements, particularly in the non-union context.

Statistical analysis. After making tentative RIF selections, Warner suggested that employers perform a statistical analysis that mirrors the process used. If a disparity exists, the selection process and rationale should be scrutinized. But statistics should not trump business needs. Rather, statistics should be used as a “yellow flag” signaling that prior assumptions should be reconsidered. Employers must ensure that the person making a selection decisions has a defensible, articulable reason as to why the decision was made. Warner also recommended that Legal counsel be used in order to allow candid, confidential assessment of the process that will be protected by the attorney/client privilege.

Avoiding pretext. To avoid some of the common pitfalls related to pretext, Warner suggested that employers refrain from telling employees who are discharged in a RIF that the decision is “not performance related.” Employees are often told this during a RIF, but relative performance is usually an element of the decision. Although, as Warner points out, in this economic climate, there will be a departure from the norm, and good performing employees will loose their jobs. Similarly, employers should refrain telling workers that their job has been eliminated when that is not the case. Warner also cautioned against making assumptions about an employee’s ability to change and adopt - the “can’t teach an old dog new tricks” justification. If this reason for selection is asserted, the decisionmaker should be asked to give concrete examples that demonstrate that the employee selected cannot adapt and change.

Separation agreements. Warner recommended that employers use separation agreements when discharging employees in a RIF. Employers should consider past history, employee expectations, risk of liability and the cost of litigation in making decisions about whether to seek waivers and releases of claims. Most importantly, employers must strictly comply with the Older Workers Benefits Protection Act (OWBPA) when older workers are asked to sign waivers and releases, Warner emphasized.

For example, the OWBPA’s requirements include disclosure of the job titles and ages of the employees selected and not selected in an RIF, by decisional unit. Defining the decisional unit is an issue that is often confusing for employers. While there is some latitude in defining a decisional unit, it should mirror the actual decisionmaking process, Warner said. Further, there may be more than one decisional unit in an RIF. As a cautionary tale reinforcing strict compliance with the OWBPA, Warner cited Peterson v Seagate US LLC, US Dist. Lexis 42179 (DMinn 2008), where a waiver and release was invalidated, in part, because the employer miscounted the number of impacted employees.

WARN Act. Employers also need to be cognizant of the federal Worker Adjustment and Retraining Notification Act (WARN Act) and its state counterparts, under which employees are entitled to 60 days notice, or payment in lieu of notice, if there is a “mass layoff” or “plant closing,” Warner advised. These laws may be implicated by a RIF. WARN Act compliance will be complicated by the “unprecedented deterioration of the economy and freezing credit markets,” according to Warner. Things are happening so rapidly that employers may not have time to comply with WARN Act notice requirements, particularly when a company was seeking, but unable to obtain, more capital. We can expect to see this issue litigated and addressed, Warner said.

As a result, Warner expects that employers will increasingly use the “faltering company defense,” but cautioned that an employer’s general discussions with a lender about financing would not amount to a showing that it was “actively seeking” financing, as required under the defense. An employer is also required under the defense to show that it had a realistic opportunity to obtain the financing it sought; if obtained, the financing would have been enough to avoid or postpone a shut-down; and that the employer reasonably believed that sending a 60-day notice would have precluded it from getting the financing.

The Chicago Bar Association’s Reductions in Force: A Sign of the Times - How to Implement and Challenge a RIF seminar was held at its Headquarters in Chicago, Illinois on November 20, 2008. For information on upcoming seminars, visit the CBA’s Web site.