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Navigating the Treacherous Waters of Corporate Reorganization

December 31, 2001

Continuing pressures on the global economy, exacerbated by the tragic events of September 11, have forced many employers to reduce expenses in an effort to enhance their prospects for long-term profitability. In some instances, such cost-cutting measures have necessarily included corporate reorganizations, resulting in large-scale job losses in the U.S. in 2001. This past year, a number of companies have announced that they would layoff literally tens of thousands of employees. For example:

Unfortunately, more than a few employers have conducted sweeping reorganizations without first considering carefully the legal implications of their actions. Workforce restructuring is fraught with legal peril for even the most sophisticated and well-intentioned employers, particularly in cases where such restructuring results in employment terminations. Decisions regarding which employees will be retained (and in which restructured positions), and which employees will be discharged necessarily involve some degree of subjectivity, and may be influenced by unconscious biases against certain types of employees (e.g., older workers, working mothers, etc.). Moreover, even restructuring decisions made without bias may be perceived as unfair and may lead to litigation.

However, there are steps employers can take to reduce or avoid litigation which might otherwise arise from workforce restructuring. This article addresses the most important legal considerations in two critical stages of the restructuring process: first, the planning and implementation of the restructuring, and second, the exchange of severance benefits for enforceable releases by terminated employees. Lastly, this article briefly discusses the related issues of WARN Act notice and the potential for partial employee benefit plan terminations arising from significant reductions in force.

Planning and implementing a workforce restructuring

Establish and communicate business goals

Before any personnel decisions are made, the purpose of the workforce restructuring should be clearly established and communicated to employees. For example, if the goals of the restructuring are to streamline operations, reduce corporate expenses, and deliver higher-quality service to clients more efficiently and cost-effectively, these goals should be explained to employees to enable them to understand why the restructuring is necessary and appropriate.

Review all termination and transfer decisions

Regardless of whether any employees are expected to be discharged as part of the restructuring, it is imperative that business decisions regarding employee reassignment be subjected to legal/human resources review before those decisions are finalized. Obviously, the need for such review is even more compelling when employees are to be terminated in connection with the restructuring: in that case, the review must include all decisions regarding which employees will be retained and which employees will be discharged following the restructuring.

This review should include an analysis of the basis on which reassignment and/or termination decisions are to be made. To the extent possible, decisions should be made on the basis of uniform and objective criteria. Examples of such criteria include employees' past performance ratings; seniority; and employees' educational background and relevant job experience. Whatever criteria are used to make termination decisions, managers should be trained with respect to what those criteria are and how they are to be applied. Simply allowing each manager to make his or her own decisions without any uniformity or guidance of this sort will likely result in arbitrary decisions which may, in turn, strike some employees as discriminatory.

Assuming the employer plans to make staffing decisions on the basis of performance, the following guidelines will help to determine which employees are best suited for specific jobs post-restructuring:

Scrutinize personnel records

The managers making the retention/termination or reassignment decisions should meet one-on-one with a designated human resources representative or an attorney to explain how those managers arrived at each individual decision. The HR representative or attorney should also review the relevant personnel files to ensure that personnel decisions are consistent with those employment records. For example, if a manager explains that one of two incumbents was selected for retention because of his comparatively superior performance, a review of the two incumbents' personnel files should clearly reflect this disparate performance history. Personnel files should also be reviewed to determine whether employees to be terminated are close to vesting with respect to any employee benefits (e.g., pension benefits or the employer match on 401(k) plan contributions), and to determine whether any individual agreements with the employees would be violated by the contemplated terminations.

Analyze demographics

Human resources should perform a statistical analysis comparing the employees being retained with those being discharged, and comparing those who are being promoted and demoted, and those who are being reassigned laterally, in terms of age, gender, race, and other legally-protected personal characteristics. In a typical restructuring, this review should be done both narrowly and broadly; i.e., individual incumbents in a particular position should be compared, and the broader group of employees to be retained within a department and/or facility, and throughout the entire workforce should likewise be compared against the group of employees to be terminated.

In the event that the legal/HR review of the intended reassignments and terminations reveals any potential issues (e.g., the restructuring appears to have an adverse impact on employees in a protected group, or certain individual managerial decisions are inconsistent with employment records), the decisions should be reviewed more closely and modifications to the planned restructuring should be made as appropriate. This is why it is absolutely crucial that the HR/legal review take place before the reassignment/discharge decisions are finalized; some of the decisions may change as a natural and appropriate result of that review.

Verify job eliminations

The bona fide nature of position eliminations should be verified. If the work previously performed by the employees whose positions are slated for elimination will be performed by existing personnel in future, the eliminations will appear to be bona fide. If, on the other hand, new personnel will be hired to perform functions previously assigned to terminated employees, those terminations are not bona fide job eliminations (although, if properly classified, the terminations may well be legitimate for other reasons, e.g., performance).

Attend to wage and hour compliance

Human resources ensure that each restructured job is properly classified as exempt or non-exempt for purposes of the federal Fair Labor Standards Act ("FLSA"). To the extent the employer restructures positions which are currently classified as exempt from the overtime provisions of the FLSA, the employer must be sure to structure the new position to preserve this exemption, or it must reclassify the position as non-exempt (and therefore subject to the overtime provisions of the FLSA).

Coach the managers

Managers must be coached thoroughly by HR/legal staff before they conduct meetings with their subordinates to discuss the impact of the restructuring on each subordinate's employment. The following topics are among those that should be covered in the managers' coaching session:

Obtaining enforceable releases in exchange for severance benefits

Even employers who follow all of the steps outlined above in implementing workforce restructuring may be exposed to lawsuits from terminated employees who feel they have been discriminated against or otherwise treated unfairly. To avoid these lawsuits, many employers provide severance benefits to terminated employees in exchange for a release of legal claims against the employer. To ensure that these releases are legally enforceable, however, several issues must be addressed:

WARN Act implications of reductions in force

The federal Worker Adjustment Retraining and Notification Act ("WARN") requires employers with 100 or more employees to give at least 60 days' advance written notice of a "plant closing" or "mass layoff" to each individual employee affected (or to the relevant labor union if the employees are represented), as well as to the applicable State Dislocated Worker Unit, and to the chief elected official of the unit of local government in which the plant closing or mass layoff will occur (e.g., mayor or county executive).

"Plant closing" is defined under WARN as a permanent or temporary shutdown of a site of employment or a facility or operating unit within a larger site of employment, where 50 or more full-time employees lose their jobs within a rolling 30- to 90-day period. "Mass layoff" is defined as a reduction in force where, within a rolling 30- to 90-day period, (i) at least 33% of the full-time employees lose their jobs, provided that the total number of full-time employees who lose their jobs exceeds 50; or (ii) at least 500 full-time employees lose their jobs.

Employers who fail to provide advance notice as required by WARN may be liable to each terminated employee for back wages and benefits for each day in which the notice was not given (up to a maximum of 60 days), plus a fine of $500 for each day of noncompliance, plus attorney's fees.

While WARN is a federal statute, some states have their own plant closing laws, and employers planning plant closings or mass layoffs must comply both with WARN and with any applicable state laws.

Partial plan terminations

A "partial plan termination" occurs when a significant percentage of employees who participate in an employee benefit plan – such as a 401(k) retirement savings plan – are excluded from coverage (including where their employment is terminated during a reduction in force). In the event of a partial plan termination, the terminated plan participants immediately become fully vested in their accrued plan benefit (i.e., the rights of all affected employees to amounts credited to their 401(k) plan account, including any employer contribution, become nonforfeitable). For example, if a significant percentage of the participants in the employer's 401(k) plan are discharged in a reduction in force, they immediately become vested in their accrued 401(k) plan benefit, even if, by virtue of their short service with the employer, they may not yet have met the plan's vesting requirements with respect to employer contributions.

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Workforce restructuring raises a number of significant legal issues, particularly where such restructuring results in employee terminations. By proceeding deliberately, systematically and with input from human resources professionals and attorneys, employers can avoid many of the pitfalls they might otherwise encounter. These pitfalls can be costly – in fact, employment litigation brought by terminated employees can obliterate the very savings most employers expect to realize as the result of a reduction in force. When it comes to workforce restructuring, devoting the necessary time and attention to "doing it right" is a worthwhile investment.