Reductions in force (RIF) have become a necessary — although unpopular — tool for companies that must cut their costs to improve profitability. Coming to grips with laying people off is stressful for any business owner, but even more traumatic is the realization that downsizing can expose your company to claims of discrimination.
“While the long-term benefits of a reduction in force may be clear, they present potential problems involving the added costs and distraction of employment litigation,” says Bruce A. Truex, senior partner at Secrest Wardle. “Taking certain steps and following certain procedures before the layoff may help a company avoid such lawsuits.”
Smart Business spoke with Truex about how to strategically plan for downsizing now to avoid litigation later.
How can layoffs prompt litigation?
Age discrimination is the most common source of layoff-related lawsuits because the highest-paid workers are often the oldest and a target for employers reducing costs. The EEOC reported a 30 percent increase in age discrimination and retaliation claims in 2008 and predicts a record number of new claims in 2009. Laid-off workers may also allege they were targeted because of race or gender.
Reduction in force for bona fide economic reasons is a termination for just cause and, therefore, a defense to a claim of discrimination. However, it does not operate as a complete defense to a discrimination claim where there is sufficient evidence for a jury to conclude that the employer unlawfully selected the employee for discharge for impermissible reasons. Because the discriminatory element needs only be proved to be a determining factor, rather than the sole or primary factor for discharge, an employer’s financial need to reduce its labor costs does not insulate the employer from liability for violating an individual’s civil rights. The employer must be able to persuasively explain the economic reason for selecting particular employees for layoffs.
How can discrimination litigation be avoided?
The employer might consider alternatives to layoffs, such as reducing benefits, eliminating overtime, reducing work hours, freezing or reducing wages, and cutting dividends. If a hiring freeze in all areas is not possible, freeze those positions that are similar or identical to the positions of employees who will be laid off. Such a freeze tends to reassure the employee that the employer is fair.
Incentives such as early retirement and buyouts can also reduce the risk of legal liability. Although these alternatives often cannot prevent layoffs, the real value is that they can minimize the argument that the employer could have avoided the reduction by other cost-cutting measures. This argument is often advanced at trial to support a claim that an RIF was a pretext for unlawful termination.
