This past week's slump in global markets, plus Friday's U.S. credit downgrade by Standard & Poor's, has business leaders asking: Will this "recovery" last? The rebound in hiring expected six months ago has fallen short of expectations. Last week's U.S. jobs report (117,000 jobs added in July) buoyed Wall Street a bit on Friday. Over the week, however, the S & P 500 experienced its worst weekly drop since November 2008. That was before the U.S. lost its AAA credit rating. Most analysts still project a strong U.S. finish for 2011, which makes some wonder whether the analysts themselves could use some analysis. Further afield, Europe's debt contagion threatens, China appears to be slowing, and rebellion and uncertainty continue across much of the Middle East. Closer to home for our U.S.-based clients, another question looms: Are we headed back to widespread workforce retrenchment and reductions?

Some Industries Are Almost Certain To Keep Cutting Jobs

While nobody knows the answer, a few things are certain. First, current levels of U.S. government and EU nations' debt are not sustainable. Second, given the scope of the problem and the politics of potential solutions, this world-wide sovereign debt problem is not going away soon. Third, as for U.S. national debt, federal spending cuts will themselves come at substantial cost ? to more than just the federal bureaucracy.

It has become increasingly clear that, as non-entitlements spending is greatly reduced, some U.S. sectors will suffer much more than others. This holds, no matter what happens with the financial markets and overall jobs figures. Defense contractors for one depend mainly on federal spending to keep production lines operating. If real cuts are to be made in U.S. government debt, more than a few of those lines will have to close. State and local governments likewise look to Washington for substantial funding. Public sector jobs are sure to be cut deeper for a long while. Back in the financial arena, many big banks, while reportedly flush with cash, remain saddled with the bad loans that helped drag down the economy in 2008, and are bridled by capital requirements that further constrain new loans.

Is It Safe For Employers To Downsize After Dukes v. Wal-Mart?

Employment class action lawsuits have been another factor hindering recent U.S. jobs growth. The current Supreme Court understands this, as reflected in this year's Dukes v. Wal Mart decision. There, the Court held inter alia that private plaintiffs cannot properly use federal Rule 23(b)(2) to threaten large employers with nationwide monetary exposure. The plaintiffs' bar will not likely fold its tent and leave the field, however it will instead bring different cases: litigation on behalf of smaller classes; litigation challenging discrete but large-scale actions (like reductions-in-force).

Post-Dukes, whatever reductions-in-force do occur will remain a target for plaintiffs' class action attorneys. For starters, older workers continue to be disparately impacted by reductions. Federal Age Discrimination in Employment Act (ADEA) cases need not be certified as Rule 23 class actions. Rather, they are governed by looser "collective action" requirements under the Fair Labor Standards Act. To date, defense counsel has had some success arguing that collective actions must be scrutinized by courts early on ? just like Title VII and other class actions under Rule 23. Results have been mixed, however, and it could be years before the post-Dukes Supreme Court addresses similarities between Rule 23 class cases and collective actions. Thus, employers cutting headcount incur litigation (and consequent financial) risk, Dukes notwithstanding. As detailed below, the key is managing that legal risk.

Federal Enforcement Agencies Are Watching

Labor Secretary Hilda Solis last month announced that the Office of Federal Contract Compliance Programs (OFCCP) will continue providing class-wide recourse to employment discrimination claimants, helping to fill any void created by Dukes v. Wal-Mart. Historically, the agency has focused mainly on alleged hiring discrimination against women and minorities. More recently, pay equity has moved to the top of OFCCP's agenda. Should the economy turn markedly downward, however, one would expect some of that focus to shift towards scrutiny of contractor reductions. The OFCCP is not bound by Rule 23 constraints. Although that agency rarely sues federal contractors in court, that's because it does not have to. Most contractors choose to settle during the administrative phase, being loathe to fight a substantial source of revenue. The EEOC, by contrast, routinely files "pattern or practice" (class-type) cases in federal court, which likewise need not satisfy Rule 23 requirements. Whether these agencies can pursue cases anywhere near the magnitude of Dukes will depend largely on their funding levels in years to come.

Other Litigation Risks Abound

The federal Worker Adjustment and Retraining Notification (WARN) Act entitles affected employees to at least 60 days' advance notice of covered mass employment separations. Failure to provide such notice exposes employers to liability for back pay, lost benefits, and out of pocket medical expenses ? for each day notice is not given ? plus a possible civil fine. Additionally, over 20 states, including California, New York, New Jersey, and Illinois, have their own WARN-type statutes, many with different requirements and/or penalties for non-compliance. This area has increasingly attracted plaintiffs' class action counsel; because they usually involve a common lack of notice, WARN-type lawsuits are rarely denied class status. Moreover, because these notice mandates require dozens of employment losses to be triggered, the liability can be substantial. More state WARN-type laws are on the way. As states remain subject to intense budgetary pressures, such laws help states shift unemployment costs onto private employers.

Prepare Before You Cut

Employers contemplating reductions must effectively manage legal risk, so that preventable risks are avoided and unavoidable risks are mitigated. That means:

  • Cost savings and other business objectives should be achieved through a selection process that helps ensure the correct employees exit the organization, while those vital to its ongoing success remain.
  • Employees who leave or remain need to believe that the Employer acted in a fair, honest and humane way in accomplishing the RIF.
  • The Employer must comply with all relevant laws.
  • The Employer should go beyond compliance to avoid adverse impact against older employees, women, and minorities, or to make certain that any unavoidable adverse impact can be defended under the highest legal standard arguably applicable.
  • Third parties, such as customers, vendors, the media, politicians, and the larger community should know that the Employer acted appropriately and responsibly in conducting the RIF.
  • The RIF should get completed within the Employer's budget and time frame.
  • The RIF should be accomplished with no unforeseeable adverse legal consequences to the Employer.
  • As to inevitable adverse consequences, the Employer is prepared to successfully defend its actions.

The employer who meets all or most of these goals will be well-prepared to conduct and, if need be, defend a reduction. Experienced employment counsel can help employers meet these objectives, first by assessing possible alternatives to a RIF and next in planning and executing reductions absent alternatives.

We are helping clients every day in the finance, defense, retail, public service, and other sectors to:

  1. Consider alternatives to downsizing and document steps taken to avoid RIF and/or reasons alternatives are not viable.
    • Freeze hiring/allow natural attrition
    • Lower hour
    • Eliminate overtime
    • Reduce pay
    • Institute furloughs
    • Implement temporary layoffs
    • Introduce a voluntary separation program using an ERISA voluntary separation pay plan.
  2. Focus on identifying job functions to be eliminated, reduced or merged.
    • Do not focus on particular individuals
    • Avoid using salary level as direct reason for job eliminatio
  3. Document reasons that some departments/functions are exempt from RIF.
  4. Develop/update an ERISA involuntary separation pay plan.
  5. Determine WARN applicability.
  6. Develop communication/notification plans and materials.
    • Decide when and how to communicate information
    • Prepare materials for employees to be selected that explain reasons for RIF, functions affected, timetable and severance pay/benefits; Q&As
    • Prepare communications to remaining employees and third parties such as customers, vendors, media and local politicians
  7. Develop RIF selection criteria.
    • Use objective criteria first
    • Use work-related criteria only
    • Give credit for service
  8. Prepare OWBPA-compliant group termination release agreement.
  9. Create RIF Committee review procedure.
    • Make final decisions on individual terminations
    • Achieve uniform, objective, thorough review
    • Ensure uniform application of selection criteria
    • Should only see relevant data
  10. Prepare privileged adverse impact analyses for protected groups.
  11. Prepare OWBPA-required employee disclosure list.
    • List job titles (not names) and numeric ages (not dates of birth) of all eligible/selected employees and non-eligible/non-selected employees in the same job classification or organizational unit
    • Ascertain the correct decisional unit
    • Include information on eligibility/selection criteria and time limits

Don't Let Your Guard Down

Employers conducting reductions or restructurings in 2011 cannot afford to exit employees hurriedly, without deliberation. The financial pressures to slash payroll costs can be great, for labor remains the number one cost for most employers doing business in the U.S. Cost savings from a substantial reduction, however, can be easily consumed by a single class action lawsuit (or by half a dozen individual cases). Despite federal budgetary constraints, EEO enforcement agencies are operating with greater zeal than ever before. Reduced funding may increase agency backlog, or cause investigations to drag on; it will not in the near-term materially reduce federal oversight of private employment decisions, particularly those adversely affecting hundreds or thousands of individuals. If those decisions involve downsizing, they may well be amenable to class action litigation, unlike the promotion and pay decisions challenged in Dukes. For all of these reasons, if the current business climate is driving you to consider reductions in force, the time to start planning is now. If those turn out to be unused contingency plans, consider yourself fortunate. Those who fail to plan now and then must reduce hastily will not be so lucky.