From the October 2009 issue of Investment Advisor • Subscribe!

October 1, 2009

Expert's Corner: Look Before You Lay Off

If you're looking to reduce your payroll, make sure you do it legally

In these tough economic times, many employers need to significantly cut costs and overhead to continue to survive. Some are considering layoffs, while others are increasingly seeking alternatives to layoffs. This month we will explore three of the most common options available to employers--layoffs, reductions in workweeks or salary, and furloughs--and address some of the legal pitfalls that can be associated with each.

To assist me with the discussion, I have called upon the expertise of my colleague, Amy Beth Dambeck, who has assisted investment advisory firms throughout the country with various employment-related issues for several years.

Issue #1: Layoffs

Layoffs (also known as "reductions in force") are often necessary and certainly a reality in a bad economy. Decreased morale and productivity, and unintended, further loss of personnel (as remaining employees often begin to search for and accept other employment believing that their own positions are not secure) may result. Employers could also potentially incur legal costs as a result of layoffs, as the selection of employees for layoffs may give rise to a variety of wrongful termination claims. The current state of the economy makes such lawsuits more prevalent, as job prospects are often bleak.

As Dambeck's experience has shown, it is not uncommon for terminated employees to assert claims of discrimination alleging that they were selected for a layoff due to their race, gender, age, disability, or some other protected status, while others may claim that they were laid off in retaliation for complaining about wrongful conduct. Regardless of the resolution of such allegations, the costs in defending or settling a charge of discrimination can be significant.

This does not mean that layoffs should be avoided, but they should be carefully planned and executed to minimize costs and exposure to legal liability. In selecting employees for a layoff, several items warrant examination and consideration. The obvious first step is determining whether positions are essential, may be consolidated, or should be eliminated. You should also take a careful look at your company policies, handbooks, manuals, and any employment agreements to determine what, if any, post-employment obligations may be owed to employees being considered for layoff (i.e., notice, payment of accrued paid time off ("PTO"), severance pay, or benefits).

As with any other decision that has legal or financial consequences, be sure to accurately and carefully document the basis of any layoff, the objective reasons for the selection of each employee, and be aware of special circumstances as to any employee selected for layoff, e.g., the employee just returned from a maternity or disability leave, has previously complained about harassment or improper conduct, has requested an accommodation for a disability, etc. When such circumstances exist, it is all the more important to carefully document the decision to lay off and, of course, base the selection for layoff on lawful criteria. It is prudent to consult with legal counsel on such issues, as well.

Issue #2: Use of Separation/Severance Agreements, or Releases

If facing layoffs, the utilization of severance/separation agreements and releases can serve to reduce or eliminate exposure to wrongful termination and other claims.

While it may seem a bit counter-intuitive to offer severance benefits--i.e., payment of salary continuation or a lump sum amount, benefits continuation, or a combination of both--it truly is not. Laid-off employees will face financial hardship and uncertainty. They are often hurt that they were selected for termination over others and worried about their financial future and the costs of continued healthcare benefits. Such circumstances understandably increase their propensity to assert legal claims against their former employers. Accordingly, it is often prudent to offer a reasonable severance package that, in exchange of a full release of claims against the company, will confer continued salary or benefits for a defined period of time. Please note that strict compliance with legal requirements is critical to the effectiveness of any release and, often, specific language and notice requirements must be present to effectuate a valid release of certain legal claims (for example, age discrimination). Through the use of well-drafted separation/severance agreements, employers can insulate themselves against most claims. Accordingly, Amy Beth highly recommends the use of severance/separation agreements in conjunction with any layoffs.

Issue #3: Reduced Workweeks and Wage and Hour Laws

More and more, employers are contemplating the reduction of hours, reductions in salary and, in some instances, the use of furloughs to avoid the necessity of having to lay off employees. Such decisions, however, even well-intended ones, can be fraught with legal consequences if not properly executed.

Employers may want to reduce the workweek and corresponding pay across the board for all employees, including exempt employees. The term "exempt employees," by the way, refers to employees who are exempt from certain wage and hour laws, and usually applies to administrative, executive, or professional employees who receive a regular, annual salary. While not all salaried employees are exempt (the determination has more to with an employee's level of responsibility or status as a professional), in practice, hourly employees are never deemed "exempt."

Take, for example, an employer who wishes to reduce the workweek and salaries by 20%. Such a pay reduction, however, will threaten exempt status if the 20% cut brings an employee's salary below the required, statutory minimum amount--currently set at $455 per week under federal law (and higher in many states).

To reduce the risk of running afoul of federal and state laws, it is recommended that employers reduce the salary of exempt employees without dictating the hours they work. Any such cuts or reductions must be made only after the provision of appropriate, advance written notice and never during a current pay period.

Issue #4: Furloughs

Some employers may want to reduce overhead by discontinuing part of the firm's operations during slow times, such as for a few days or one or two weeks around holidays. For many employers, mandatory furloughs may be a viable (and much appreciated) alternative to layoffs. So make sure you consider these issues that surround furloughs:

Risk of Loss of Exempt Employee Status. Exempt employees must be paid the same minimum salary for each pay period. If an exempt employee performs any work during a workweek, that exempt employee must receive his or her entire salary for that week. Failure to compensate an exempt employee for a week where any work is performed will jeopardize that employee's exempt status. However, if an employer furloughs an exempt employee for an entire week, then no salary is owed for that full week and the employee's exempt status will not be affected.

When employees are furloughed, employers should insist that they not work (see sidebar, No Work Allowed!). Given the myriad of remote access devices that we all have these days, it is likely that some exempt employees will be inclined to check e-mail, return phone messages, or otherwise "work" while on furlough. However, as exempt employees are entitled to pay for any week in which work is performed, employers should clearly advise that work is not authorized during any furlough without advance written approval.

Use of Vacation/PTO During Furloughs. While ideally an employer would want to mandate the use of PTO/vacation time during furloughs to save resources by having employees deplete paid time off, this may run afoul of applicable state laws. Mandatory vacation use also raises issues when some employees do not have sufficient vacation accrued to cover the entire furlough. Further, if an exempt employee does not use vacation/PTO days for an entire week and does some work during that week, the employer could end up having to pay the employee for the entire workweek to avoid the loss of his or her exempt status.

Required Notice to Employees of Furloughs or Reduced Workweeks. Employees must be provided with advance, written notice of any mandatory furlough or implementation of a reduced workweek. Unless state law requires greater notice, best practices suggest providing at least 30 days' written notice.

Further, to the extent applicable, be sure to review your firm's employment handbooks, policies, or agreements that may mandate notice requirements for any change in salary or terms of employment.

Put It in Writing

With a minimal amount of advance review and consideration of available options, employers can minimize their risk of exposure to liability while optimizing the benefits provided by these employment decisions.

These troubled economic times have brought considerable change to the employment landscape. Accordingly, it is wise to seek the advice of legal counsel prior to making decisions to layoff employees or implementing alternative work policies to ensure compliance with relevant--and often changing--laws.


Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York, and Philadelphia that represents investment advisors, financial planners, broker/dealers, CPA firms, registered reps, and investment companies, and a regular contributor to Investment Advisor. He can be reached at tgiachetti@stark-stark.com.
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