News
Labor/Employment
Aug. 16, 2002
Use Planning to Terminate Downsizing Troubles
Employment Column - By Daniel Weisberg and Mark A. Romeo - The bubble-burst in the technology market and the resultant downturn in the capital markets have taken their toll on businesses of all kinds. After that, it was only a matter of time before work force reductions had to be implemented as companies aligned themselves with reduced or stagnant revenue.
Employment Column
By Daniel Weisberg and Mark A. Romeo
The bubble-burst in the technology market and the resultant downturn in the capital markets have taken their toll on businesses of all kinds. After that, it was only a matter of time before work force reductions had to be implemented as companies aligned themselves with reduced or stagnant revenue. Coming to power during the 1990s, many firm managers lack experience in downsizing, yet are pressured to quickly cut costs. In this rush to reduce head count, many managers are unaware that the savings realized by reduction in labor costs can quickly be eaten up by the costs of defending and settling claims by unhappy downsized employees.
While reductions in force are often done under time pressure, a modest investment of time in planning for such reductions can mean the difference between a smooth transition and a disastrous bloodletting that results in lawsuits, bad publicity and miserable morale among the remaining employees.
Here's a list of eight of the most common errors made by companies when they downsize.
• Using staff reductions to get rid of problem employees. Very often, when undertaking a reduction in force, executive managers believe the layoffs will provide a strong defense to any wrongful termination claims. This creates the temptation to use the reduction as an opportunity to get rid of "problem" employees, such as the older employee, the employee with a medical condition that causes frequent absences or the employee on maternity leave. That these employees were terminated in a work force reduction will not reduce the risk of liability if there is not a clear business reason for selecting them.
To avoid this mistake, the list of employees being terminated must be examined both to see whether there are statistical disparities between the group being terminated and the one that remains regarding age, sex, race, religion, disability, national origin, sexual orientation, etc., and to see whether such disparities exist on a departmental level.
The list should also be examined to determine whether each one can be justified with concrete, nondiscriminatory business reasons.
• Giving wrong reasons for termination. Managers can do a lot of damage by, for example, telling terminated employees that they oppose their terminations or by giving different reasons for them other than those given by upper management. Managers who communicate reduction decisions to employees should be instructed what to say and what not to say.
It is a good idea to provide managers with a suggested script for termination meetings and a list of suggested answers to frequently asked questions. It may also be advisable to have a human resources representative present for each termination meeting.
• Giving differing levels of severance pay. Companies generally give employees a standard amount of severance pay according to their length of employment. There is a temptation, however, to give favored employees more than the standard formula. This can be risky, however. Staying with a formula based on an objective measure will insulate a firm from most charges of discrimination in the administration of the severance program.
• Using old form releases. No company wants to pay severance money to an employee who will use it to finance litigation against the firm. To avoid this situation, a general release should be made a condition of receiving any severance payments beyond what may be required by company policy or contract. (It is also a good idea for employment contracts to specify that severance pay is conditioned upon a general release.) Also, make sure the release is updated to account for recent changes in the law.
• Continuing benefits during the severance period. The problem with this structure is that certain benefits cannot, by law or by the terms of the benefit plans, be provided to nonemployees. For example, ex-employees can't continue to participate in 401(k) or employee stock purchase plans. And group medical and other group insurance benefits are usually restricted to active employees.
• Giving employees notice of the layoff. There is a common misperception that employers are required to give employees two weeks' notice of termination. In fact, no such requirement exists. Although it seems cruel to force terminated employees to pack up their belongings and leave the building immediately after giving them the bad news, advance notice can have adverse consequences. First, embittered employees will have the opportunity to disrupt operations or commit acts of sabotage, such as introducing computer viruses into the employer's network. Second, having terminated employees in the workplace could have a bad affect on firm morale.
These concerns don't mean that employers need to be heavy-handed. Hiring armed guards to stand over employees while they pack their belongings is ordinarily not necessary. To avoid these problems, consider allowing terminated employees who need to retrieve personal data from computers to come back after hours to go through the process while monitored by a company representative.
• Waiting to retrieve firm property. Terminated employees are not usually motivated to return laptop computers, pagers, cell phones, etc. There is no easy way around this problem, but retrieving firm property, particularly confidential and proprietary information, is obviously critical. It should thus be stated in the release and any severance policy or plan that any severance pay or benefits is conditioned upon a return of all company property. To the extent possible, company property should be retrieved from terminated employees on the date the reduction is announced. Employers should not, however, hold up payment of wages or even expense reimbursements without first checking with their counsel.
• Using armed guards. Notwithstanding all of the publicity about disgruntled ex-employees returning to their workplaces to take vengeance on their former bosses, such incidents are rare. The odds are that no terminated employee will react violently. And although some managers seek the comfort of security officers, their presence can actually provoke violent reactions in some individuals and will create an oppressive atmosphere that may have a devastating impact on both terminated and remaining employees. So, unless specific threats of violence have been received, any officers present should be in plain clothes so that they can remain unobtrusively in the background unless needed.
Daniel Weisberg is a partner in the New York office of Brobeck, Phleger & Harrison. Mark A. Romeo is an associate in the firm's Irvine office.
By Daniel Weisberg and Mark A. Romeo
The bubble-burst in the technology market and the resultant downturn in the capital markets have taken their toll on businesses of all kinds. After that, it was only a matter of time before work force reductions had to be implemented as companies aligned themselves with reduced or stagnant revenue. Coming to power during the 1990s, many firm managers lack experience in downsizing, yet are pressured to quickly cut costs. In this rush to reduce head count, many managers are unaware that the savings realized by reduction in labor costs can quickly be eaten up by the costs of defending and settling claims by unhappy downsized employees.
While reductions in force are often done under time pressure, a modest investment of time in planning for such reductions can mean the difference between a smooth transition and a disastrous bloodletting that results in lawsuits, bad publicity and miserable morale among the remaining employees.
Here's a list of eight of the most common errors made by companies when they downsize.
• Using staff reductions to get rid of problem employees. Very often, when undertaking a reduction in force, executive managers believe the layoffs will provide a strong defense to any wrongful termination claims. This creates the temptation to use the reduction as an opportunity to get rid of "problem" employees, such as the older employee, the employee with a medical condition that causes frequent absences or the employee on maternity leave. That these employees were terminated in a work force reduction will not reduce the risk of liability if there is not a clear business reason for selecting them.
To avoid this mistake, the list of employees being terminated must be examined both to see whether there are statistical disparities between the group being terminated and the one that remains regarding age, sex, race, religion, disability, national origin, sexual orientation, etc., and to see whether such disparities exist on a departmental level.
The list should also be examined to determine whether each one can be justified with concrete, nondiscriminatory business reasons.
• Giving wrong reasons for termination. Managers can do a lot of damage by, for example, telling terminated employees that they oppose their terminations or by giving different reasons for them other than those given by upper management. Managers who communicate reduction decisions to employees should be instructed what to say and what not to say.
It is a good idea to provide managers with a suggested script for termination meetings and a list of suggested answers to frequently asked questions. It may also be advisable to have a human resources representative present for each termination meeting.
• Giving differing levels of severance pay. Companies generally give employees a standard amount of severance pay according to their length of employment. There is a temptation, however, to give favored employees more than the standard formula. This can be risky, however. Staying with a formula based on an objective measure will insulate a firm from most charges of discrimination in the administration of the severance program.
• Using old form releases. No company wants to pay severance money to an employee who will use it to finance litigation against the firm. To avoid this situation, a general release should be made a condition of receiving any severance payments beyond what may be required by company policy or contract. (It is also a good idea for employment contracts to specify that severance pay is conditioned upon a general release.) Also, make sure the release is updated to account for recent changes in the law.
• Continuing benefits during the severance period. The problem with this structure is that certain benefits cannot, by law or by the terms of the benefit plans, be provided to nonemployees. For example, ex-employees can't continue to participate in 401(k) or employee stock purchase plans. And group medical and other group insurance benefits are usually restricted to active employees.
• Giving employees notice of the layoff. There is a common misperception that employers are required to give employees two weeks' notice of termination. In fact, no such requirement exists. Although it seems cruel to force terminated employees to pack up their belongings and leave the building immediately after giving them the bad news, advance notice can have adverse consequences. First, embittered employees will have the opportunity to disrupt operations or commit acts of sabotage, such as introducing computer viruses into the employer's network. Second, having terminated employees in the workplace could have a bad affect on firm morale.
These concerns don't mean that employers need to be heavy-handed. Hiring armed guards to stand over employees while they pack their belongings is ordinarily not necessary. To avoid these problems, consider allowing terminated employees who need to retrieve personal data from computers to come back after hours to go through the process while monitored by a company representative.
• Waiting to retrieve firm property. Terminated employees are not usually motivated to return laptop computers, pagers, cell phones, etc. There is no easy way around this problem, but retrieving firm property, particularly confidential and proprietary information, is obviously critical. It should thus be stated in the release and any severance policy or plan that any severance pay or benefits is conditioned upon a return of all company property. To the extent possible, company property should be retrieved from terminated employees on the date the reduction is announced. Employers should not, however, hold up payment of wages or even expense reimbursements without first checking with their counsel.
• Using armed guards. Notwithstanding all of the publicity about disgruntled ex-employees returning to their workplaces to take vengeance on their former bosses, such incidents are rare. The odds are that no terminated employee will react violently. And although some managers seek the comfort of security officers, their presence can actually provoke violent reactions in some individuals and will create an oppressive atmosphere that may have a devastating impact on both terminated and remaining employees. So, unless specific threats of violence have been received, any officers present should be in plain clothes so that they can remain unobtrusively in the background unless needed.
Daniel Weisberg is a partner in the New York office of Brobeck, Phleger & Harrison. Mark A. Romeo is an associate in the firm's Irvine office.
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