Align RIFs with Anti-Discrimination Laws

The clock is ticking with most reductions in force (RIFs), but employers should still make time to ensure compliance with anti-discrimination laws, including the Age Discrimination in Employment Act (ADEA) and Title VII of the Civil Rights Act of 1964.

With RIFs, employers will often have to choose between workers whose performance ratings are essentially the same, noted David Baffa, an attorney with Seyfarth in Chicago. “In those situations, it is usually necessary to develop a more precise way to evaluate relative performance—that is, how one person’s specific skills, performance, or attributes compare to a colleague, when both have generally good performance,” Baffa said.

Employers may use a methodology that makes the most sense for their business so long as it is reasonable and applied fairly, he noted.

“What employers should avoid is: 1) making a fine distinction in performance comparison that is not documented or justified, or 2) making a fine distinction in performance comparison that is contradicted or unsupported by the most recent formal review,” Baffa said.

Selection Criteria

Employers should take several steps to reduce their potential legal exposure due to a RIF, said Joe Schmitt, an attorney with Nilan Johnson Lewis in Minneapolis.

First, companies should develop criteria for making selections—ideally based on objective data—in advance of making any selections. Schmitt said examples include performance review scores, time in role, and tenure with the organization.

“Generally, when employers have to pick and choose for a RIF, they first select anyone who has active disciplinary action, or at least active disciplinary action at a certain level—for example, an active final warning,” said Robin Shea, an attorney with Constangy, Brooks, Smith & Prophete in Winston-Salem, N.C. If more reductions are needed, employers typically choose a reasonable time period to consider performance evaluations—generally, the last one to three years before the RIF, she said. “I think this is a much fairer method than forced ranking.”

Forced ranking requires managers to rank their employees during each evaluation period and consider terminating the people at the bottom of the ranking, Shea noted.

“This may work in some circumstances, but what if a manager has an excellent team?” she asked. “Then the forced ranking becomes very artificial and could possibly force a manager to terminate an excellent person who happens to come out at the bottom only because the manager was forced to choose someone to be the worst.”
Forced ranking can also increase stress and bring out the worst in employees, leading to one-upmanship and unnecessary rivalries among employees, Shea added.

But she said that if an employer is relying on performance reviews rather than forced ranking, managers must be diligent about addressing performance issues when they occur and documenting any actions taken. Otherwise, a manager may want to include a poor performer in the RIF but won’t be able to without documentation to support that employee’s selection, Shea cautioned.

Business Case

An employer conducting a RIF should prepare a business case document explaining the reason for the RIF and the selections, and it should have a third party review that business case to identify risks, Schmitt said. The third party should ideally be a senior HR professional or an attorney specializing in employment law, he added.

A rationale for the RIF may be, for example, the elimination of a function or specific positions within a unit, Shea noted.

“Sometimes an employer is discontinuing a department or operation or contracting out work that its own employees previously performed,” she said. In either case, “performance may be irrelevant because the entire function is going away. From a legal defense standpoint, these are relatively uncomplicated.”

In many hourly jobs, even without a collective bargaining agreement, employers make the reductions based on relative seniority—retaining the more senior employees and terminating the most recently hired, Shea said. “Legally, that is usually a clean way to make selections and unlikely to result in age discrimination or any other unlawful termination claim.”

“But in the event of a RIF that is not going to affect everyone in a division or department or job classification, and where relative performance is going to be important, it’s not that easy,” she added. When the employer must use more judgment, Shea recommended that the company create RIF criteria that are “as fair to the affected employees as possible while still meeting the legitimate business needs of the organization. This could include prior disciplinary action and/or most recent performance evaluations over a consistent period of time.”

Adverse-Impact Analysis

An employer conducting a RIF should perform an adverse impact analysis to identify and remediate any statistical evidence of age bias, Schmitt said.

A disparate impact analysis should be a core component of any large-scale workforce reduction, said Larry Peikes, an attorney with Wiggin and Dana in Stamford, Conn., and New York City. The analysis involves a comparison of the percentage of employees in a particular protected class with the percentage of protected employees in that same workgroup or workforce selected for layoff, he said.

So, for example, if 50% of employees in a division are women and 75% of the employees within that unit selected for a RIF are women, that might potentially give rise to a disparate impact discrimination claim, Peikes noted.

“Where such disparities exist, the employer should drill down to determine whether the reason for each individual selection comports with the operative selection criteria and is otherwise defensible,” he said. “If not, it may be necessary to modify the selections.”

Common Errors

When conducting RIFs, employers sometimes apply selection criteria inconsistently, fail to perform an adverse impact analysis, or let managers revise criteria to ensure that particular employees are selected for elimination or retention, Schmitt cautioned.

Employers should think twice before making high compensation a selection factor. “Technically, this is not age discrimination” under the ADEA, Shea said. “Rather, it’s compensation discrimination, which is generally not illegal. But I would still recommend that employers be very careful about terminating employees based on their compensation, since that often does have more of an impact on older workers who may be able to claim that the reductions were actually based on age, not compensation.”

Employers may even be unlawfully biased against older workers, assuming incorrectly that they are unfamiliar with current technology or use “old-school” management styles or techniques.

But what if older employees are poor at using technology or resist adapting to a company’s new processes, methods, or strategies?

“If so, the issues should have been addressed in performance documentation before the RIF was even considered,” Shea said. “It should not be coming up for the first time when the company decides to carry out a RIF.”

Older Workers Benefit Protection Act

Employers often offer severance to workers impacted by a RIF, given that most are losing their jobs without fault. “However, almost all workforce reductions are fueled by economic considerations, so the cost of providing severance benefits must be considered,” Peikes said.

The Older Workers Benefit Protection Act (OWBPA), which amended the ADEA, imposed specific requirements for releases of ADEA claims.

When more than one employee is being laid off and asked to sign a release of ADEA claims, employers sometimes erroneously use the 21-day and no-disclosure OWBPA provisions that apply to single terminations of individuals 40 or older, Shea noted. With single terminations, each affected person who is 40 or older has 21 days to consider the agreement before signing.

“If more than one employee is being terminated as a result of the same event, the employer has to give each affected individual who is 40 or older 45 days to consider the agreement before signing,” she said. In addition, the employer must provide written disclosures about the separation program and list the individuals—by job title and age only—who are being offered a package and those who are not, Shea said.

Some OWBPA disclosures fail to identify the criteria for selection or don’t include accurate job titles, Schmitt cautioned.

Shea said she sees “a lot of very understandable confusion among employers about the OWBPA requirements.” For example, some employers have “difficulty keeping straight the consideration period of 21 or 45 days depending on whether it is a single or group termination, versus the seven-day revocation period that applies after the employee signs,” she said.

Identifying the relevant decisional unit—as required by the OWBPA in connection with a group termination—can also be difficult. Employers usually defer to their attorneys on that, Shea noted.

Counsel’s Involvement

Seeking an attorney’s advice when planning for a RIF will likely slow the layoff process and may be more expensive in the short term, but it can help employers avoid RIF mistakes and significant liability.

Employers should involve a lawyer early, said Sara Tomezsko, an attorney with Paul Hastings in New York City. “It will be necessary to have nonprivileged documents produced in litigation to help tell the story of why the RIF occurred and why a plaintiff was selected for legitimate business reasons,” she acknowledged.
But it’s also important to have self-critical analysis with strong attorney-client privilege protocols in place, Tomezsko emphasized. An attorney can help set those protocols and ensure they are followed throughout the RIF.

Shea said that if the plan for the RIF changes after an initial consultation with an attorney, the employer should provide the attorney with updated information.

“Any restructuring should take place in as dignified and respectful a way as possible, with employees feeling like the process was handled fairly and professionally,” Baffa said. “Haste usually has the opposite impact and results in frayed emotions, more mistakes, and a heightened chance of employee unrest and adverse claims.”