Legal Implications Of A Reduction in Force

Tommy SimmonsLegal Counsel to Chairman Tom Pauken

Texas Workforce Commissiontommy.simmons@twc.state.tx.us

www.twc.state.tx.us/news/efte/tocmain.html

What to Reduce?

• Hours – 20% or more reduction = good cause to quit and file an unemployment claim

• Pay – same 20% rule applies• Both – 20% rule applied to the bottom-line

pay outcome• Cuts in benefits with monetary value can be

combined with other cuts to see whether the total decrease in compensation is 20% or more

EFTE, p. 249-250

Alternative to Layoffs

• Shared Work Plan through TWC• Available for those whose hours are reduced by

a standard amount between 10% to 40%• Participating employees may receive the same

percentage of their weekly benefit amounts as the percentage by which their hours were cut

• Details: www.twc.state.tx.us/ui/bnfts/sharedwork.html

Avoiding Potential EEOC Liability• Be able to explain how the company is not making the

termination decisions on the basis of minority classifications, but rather on the basis of legitimate, work-related reasons that have nothing to do with protected minority characteristics

• Use a decision matrix of some kind (decision criteria weighted according to neutral business factors)

• Document the criteria• Be able to explain the factors and the weighting• Show how application of the criteria resulted in the

separation decisions• Presumably, those selected for layoff will be in diverse

categories

Avoiding Potential EEOC Liability

• If your company is covered by a leave-related law, it can lay an employee off who is on ADA or FMLA leave if the layoff would occur in any event due to legitimate business reasons that have nothing to do with a protected absence

• The law does not require a last-hired, first-fired procedure for layoffs, but the employer must be able to show that the layoff occurred for neutral, non-minority-related reasons - control of costs is one such criterion

Giving Notice to Employees• No advance notice of termination or resignation is required in most

situations (exceptions include express employment agreements, union situations, and WARN)

• In general, an employer does not have to explain why it is letting an employee go - an employer can say as little or as much as it deems appropriate

• Texas law does not require written notice of termination or layoff, but a clear written notice of work separation can help prevent employees from later claiming that they are owed additional pay beyond the work separation date, since they did not know they had been laid off or discharged, and they allegedly continued to "work from home", call on customers, or engage in e-mail correspondence with various parties as part of their supposed duties

EFTE, p. 199-201

When Notice Is Required• WARN Act (federal law) - this law covers employers with 100 or

more employees if the company has a:– shutdown of an employment site that affects 50 or more full-time

employees– mass layoff of 50-499 full-time employees if that constitutes at least

33% of the workforce– mass layoff involving 500 or more full-time employees for at least 30

days– 50% or more reduction in hours for 50 or more full-time employees

for each month of a six-month or longer period• under WARN, employer must give at least 60 days' advance notice

of layoff, or else must make a payment of wages in lieu of notice corresponding to the notice not given

• TWC is the state reporting agency for mass layoffs and plant closings in Texas: http://www.twc.state.tx.us/svcs/jtpa/dislocat.html

EFTE, p. 201

COBRA (Federal)• 20 or more employees (be careful not to promise COBRA rights that

do not exist, since the company could be forced to extend such continuation coverage anyway if the conditions for equitable estoppel are met)

• Does not apply if the employee was terminated for "gross misconduct"

• COBRA rights accrue once a "qualifying event" occurs - basically, a qualifying event is any change in the employment relationship that results in loss of health plan benefits

• In the case of an employee with a spouse (see your state's definition of "spouse"), both must receive notice

• DOL guide: www.dol.gov/ebsa/pdf/cobraemployer.pdf• 65% premium subsidy is only for those who were laid off or fired for

simple cause up through May 31, 2010• The official DOL help line for COBRA questions is 1-866-444-3272

EFTE, p. 201

COBRA (State)• Small Employer Health Insurance Availability Act requires

health benefit continuation rights for employees (and their beneficiaries) of company health plans if the company has two to 50 employees

• The state law is very similar to the federal law, but with a shorter benefit continuation period (up to six months following the qualifying event)

• If the employee had federal COBRA coverage as well, the six months under Texas law begins after the federal COBRA period expires

• More information is available from the Texas Department of Insurance at www.tdi.state.tx.us/pubs/consumer/cb040.html

EFTE, p. 201

Early Retirement and Leave Incentives

• Voluntary program - employees not targeted for layoff or otherwise threatened, such as a threat to abolish or rescind vested benefits

• Offer not specifically aimed at older workers - not conditioned upon age, but rather tenure or other theoretically neutral criteria

• RIF should be based upon skill level, prior evaluations, willingness to accept new assignments or training, and other neutral, non-age-related criteria (i.e., try not to use seniority as a criterion that would give an older worker a higher chance of being laid off)

• Employees accepting such an incentive should sign releases explaining their rights under federal law

• Give at least 21 days for employees to have a chance to seek legal advice (45 days in the case of group RIFs)

• Give employees 7 days to rescind their acceptance of an early retirement incentive

• Avoid appearance of trying to push someone toward retirement - try not to bring the subject up, but be ready to respond in a purely informational manner if an employee asks about it

EFTE, p. 201-202

Pre-Decision Work Separation Checklist

• Layoff/RIF: is the company using neutral criteria, unrelated to minority characteristics, to select those who will be laid off?

• If for cause:– Was there a specific incident close in time to the discharge?– Can the employer show that the employee violated a known policy or law?– Are witnesses available?– Does the employer have documentation to support its reasons for

termination?– Did the employee progress all the way through the disciplinary system?– Was the employee confronted with the problem and given a chance to

explain?– Disparate treatment for minorities?– Was the employee involved in a protected activity (for example, involvement

in a claim over wages, workers' compensation, or discrimination; jury or military duty; voting; refusal to commit an illegal act; "whistleblowing")?

EFTE, p. 199

• Notice to employees• COBRA rights notice• Notice to state (WARN TWC; support orders

AG’s Office)• Exit interviews / exit paperwork• Return of company property• Disclosure of user IDs/passwords if not already in

company’s possession• Final pay

Post-Decision Work Separation Checklist

EFTE, p. 199-200

Notice to AG’s Office

• Pertains to those under support orders (child, spouse, health maintenance)

• Notify AG’s Office within seven calendar days of the work separation

• Remember that support orders apply not only to final pay, but also to lump-sum payments such as severance pay, accrued vacation, and leave incentives

Exit Interviews / Exit Paperwork

• Optional, but can help document mutual satisfaction of respective obligations

• Last clear chance to obtain things like non-disclosure agreements; written authorization for pay deductions and job references; disclosure of user IDs/passwords; and agreements concerning return of company property

Return of Company Property

• Deductions for non-return of company property must be authorized by the employee in writing

• Minimum wage will usually be an issue• Special wage agreement is needed for pay

rate reductions for the final pay period• Better to utilize a property return security

deposit procedure

EFTE, p. 139-140, 288

Disclosure of User IDs/Passwords

• Vital in case the employee had access to or control over computer files

• Can be a condition for receiving leave incentives or other post-separation benefits

• Can be a condition for receiving final pay without adjustments, but this requires a carefully-drafted wage agreement

• Best practice: have IT staff configure network to make automatic backups of certain data and to record all user IDs and passwords

EFTE, p. 139-140

Final Pay

• Texas Payday Law governs final pay matters• Voluntary work separation: next regularly-

scheduled payday• Involuntary (layoff, RIF, termination, mutual

agreement, resignation in lieu of discharge): six calendar days following date of work separation

EFTE, p. 200

What Goes Into Final Pay?• Regular compensation as determined by the

wage agreement that was in effect when the work was performed

• Special payments such as bonuses, commissions, and severance pay may be paid according to the schedule in the policy or agreement upon which the payment is based

• Recommendation: use written wage agreements signed by each employee, and bonus/commission agreements should always be in writing

EFTE, p. 200

Deductions from Final Pay

• Three types of legal wage deductions:– Ordered by a court (support orders, bankruptcy

garnishment)– Required or specifically authorized by a law– Made for a lawful purpose and authorized by the

employee in writing

• Use a standard written wage deduction authorization agreement

Post-Termination Payments

• Severance pay – pre-existing obligation to pay – usually based on a set formula such as length of prior service– Does not affect unemployment benefits

• Wages in lieu of notice – no prior obligation to pay – no prior notice of layoff or termination – not based on any particular formula– Delays unemployment benefits until the WILN period runs

out• Report both types of payment to TWC as wages• Release incentives/liquidated damages – not wages, and no

effect on UI benefits

EFTE, p. 200-201

Post-Termination Claims and Lawsuits

• UI claims are by far the most common type of post-termination legal action

• Wage claims• EEOC / Civil Rights Division claims• Common law causes of action

Unemployment Insurance Basics

• System is based on fault, not need• UI benefits are for those who are unemployed

through no fault of their own• Financed entirely by employers• More UI claims than all other employment-

related claims and lawsuits combined• All 50 states have similar systems under federal

guidelines from DOL

Hurdles for Claimants

• Monetary qualification• Out of work through no fault of their own• Continuing eligibility requirements• Any of these can prevent payment of UI benefits

Monetary Eligibility

• Claimant must have earned at least 37 times the weekly benefit amount during the base period

• “base period” is the first four of the last five completed calendar quarters prior to the date of the initial claim

EFTE, p. 222-223

Base Period

• weekly benefit amount is the high quarter wage amount divided by 25

• min. WBA = $59; max. WBA = $406• will likely go up by $1/$14 per week effective 10-

01-10

Benefit Amount

Base Period

Quarter 1

Base Period

Quarter 2

Base Period

Quarter 3

Base Period

Quarter 4

Lag Quarter

Quarter In Progress

When Claim Is

Filed X X

Eligibility Conditions

• medically able to work

• actively searching for full-time work

• authorized to work in the U.S. (clmt has to be able to fulfill I-9 requirements)

• file claim forms on time

• engage in reemployment activities as directed

EFTE, p. 222-226

Qualification

• the claimant must be out of work through no fault of his or her own

• the burden of proof is on the party who initiates the work separation– if the claimant quit, the claimant must prove good

cause connected with the work for quitting– if the claimant was fired or laid off, the employer

must prove that the work separation resulted from misconduct connected with the work on the claimant's part

EFTE, p. 235-239

UI Benefits for Employees in RIFs

• Voluntary leave incentive: disqualification is likely unless the employee was under duress or targeted for layoff or faced a reduction in vested benefits

• Involuntary work separation - laid-off / RIF’d employees will qualify for benefits if otherwise eligible

• Partial unemployment:– Shared work plan – 10% - 40% cuts in hours– Partial unemployment – cut in hours and pay below 125% of

the weekly benefit amount – earnings are deducted from the 125% amount

EFTE, p. 224, 247

Wage Claims

• Texas Payday Law goes back up to 180 days before the claim was filed– Claim and appeal process is similar to that for UI

benefits– TWC enforces the FLSA via this law

• FLSA wage claims can go back two or three years

EFTE, p. 258-259

EEOC/CRD Discrimination Claims• A response to an EEOC charge is serious and must be

carefully prepared, since it can tie an employer’s hands if the case goes to court

• Main defense in a discriminatory treatment or discharge case: the charging party was treated the same as anyone else would have been treated under the same circumstances

• Main defense in a RIF case: the charging party was considered fairly on an equal basis with all other employees in the department being reduced, and the layoff choices were made without regard to protected characteristics – show appropriate diversity statistics in the response and invite interviews with current or former employees

RIF-Related Post-Termination Actions• Breach of contract – n/a in at-will employment cases• Constructive discharge – intolerable conditions forced

the employee to resign• Estoppel – adverse reliance on an employer’s promise• Fraud – defendant made an untrue representation that

was intended to be relied upon and which caused the employee some kind of harm

• Wrongful discharge – not very successful by itself in Texas due to employment at will rule

EFTE, p. 214-216

Other Post-Termination Actions 2• Defamation – requires an untrue statement• Intentional infliction of emotional distress – requires proof of intentional

or reckless conduct that was “extreme and outrageous” and which caused the employee severe emotional distress

• Invasion of privacy – searches and drug tests• Malicious prosecution – wrongful charge filed against an innocent

employee• Negligent investigation of employees – no cause of action for this kind of

thing in Texas, but a “railroaded” investigation would be a different matter!

• Tortious interference with employment – inducing an employer to fire or adversely treat an employee

• All of these types of lawsuits require legal counselEFTE, p. 214-216

Thanks for your attendanceand

Good Luck!

Remember the toll-free number:1-800-832-9394

tommy.simmons@twc.state.tx.us