Navigating the Downsizing Minefield

In the wake of Sept. 11, a slumping economy and ongoing military action in the Middle East, rental car companies operate in an unprecedented climate of uncertainty. Air carriers are filing for bankruptcy with troubling regularity, leaving rental car companies wedded to airport traffic in grim straits. Wildly fluctuating fuel costs also threaten the industry.

The good news is that the car rental industry remains somewhat flexible. Companies can mothball portions of their fleet to stay lean. The bad news is that such retrenchments usually result in significant staffing cuts. Even modest downsizing can spell trouble, especially when disgruntled former employees face few reemployment opportunities. Media-covered mass layoffs and greater communication between displaced employees only fuel the litigation fire.

Despite the pitfalls associated with major reductions in workforce, car rental operators can take steps to avoid lawsuits — or at least make them easier to defend.

The “Big Three” Statutes
Most jurisdictions in the United States have an “employment-at-will-policy,” meaning an employer may — theoretically — terminate a worker for a good reason, bad reason or no reason at all. That said, there are certain characteristics, defined by statute, which cannot form the basis for termination. An alphabet soup of laws passed and refined over the past 40 years prohibits employers from making employment decisions based on such taboo reasons as race, gender, age and disability.

The Age Discrimination in Employment Act (ADEA) (29 U.S.C. §§ 621 to 634) Historically, the group most affected by downsizing is older workers. The ADEA, however, makes it unlawful for an employer to discriminate against employees on this basis. The ADEA covers employers with 20 or more employees, and protects those age 40 and over. Some state and local statutes have even lower age thresholds. ADEA cases are initially processed by the Equal Employment Opportunity Commission (EEOC) or an equivalent state agency, and can later mature into federal court lawsuits. In addition to allowing recovery of lost wages and benefits, attorneys’ fees and even reinstatement or front pay, the ADEA provides for double damages in cases involving “willful violations.” [PAGEBREAK] Title VII of the Civil Rights Act of 1964 (Title VII) (42 U.S.C. § 2000 et seq.) Title VII of the Civil Rights Act of 1964 prohibits employment discrimination based on race, color, religion, sex and national origin and applies to employers with 15 or more employees. Like the ADEA, Title VII claims must first be pursued with an administrative agency like the EEOC. Title VII claimants may be entitled to back pay, reinstatement or front pay, attorneys’ fees and compensatory damages. Plaintiffs can also seek hefty punitive damages for “intentional violations” of the statute.

Americans With Disabilities Act (ADA) (42 U.S.C. § 12101 et seq.) The ADA prohibits discrimination against individuals with disabilities, and also applies to employers with 15 or more employees. Successful ADA plaintiffs may be awarded back pay, compensatory damages, and in some cases front pay. Individuals may also be entitled to lost benefits, attorneys’ fees and injunctive relief (i.e., reinstatement or required accommodation). Punitive damages are also available under the ADA.

Other Claims
In additional to the “Big Three,” a multitude of other statutes can come into play in the context of a reduction in workforce. For example, state and local anti-discrimination statutes, the Family Medical Leave Act (FMLA), the National Labor Relations Act (NLRA) the Fair Labor Standards Act (FLSA), the Occupational Safety and Health Act (OSHA), the Employee Retirement Income and Security Act (ERISA), the Worker Adjustment Retraining and Notification Act (WARN) and the Older Workers Benefit Protection Act (OWBPA) all offer downsized employees an avenue to sue their former employers.

Imaginative litigants may also bring common law (i.e., non-statutory) actions like breach of contract, interference with business relationships and intentional infliction of emotional distress. While some federal statutes cap damages a plaintiff can be awarded, these common-law actions, often tried before sympathetic state court juries, have almost no limit on damages .

The Danger Areas — Mistakes Employers Make
Today’s court dockets are littered with cases where unwary employers have been sued based on any combination of these statutory and common law claims. How can an employer avoid being a member of this unenviable group? For starters, the following “danger areas” should be avoided:

• Not recognizing that workforce reductions may result in multiple plaintiff lawsuits.
While it may seem elementary, employers must recognize that large-scale reductions can result in large-scale litigation with potentially catastrophic results. Employers should be aware that courts can and often do join individual suits together or even bless expansive class actions, increasing the exposure and cost of litigation geometrically.

Thus, when facing a reduction in workforce, employers must keep an eye on the big picture. They cannot simply focus on individual displacement decisions with the assumption that by doing so, the rest “will work itself out.” This approach can unwittingly lead to what appear to be unlawful trends in layoffs. This may come back to haunt an employer in subsequent litigation. [PAGEBREAK]

• Not monitoring the impact of workforce reductions on protected groups. Relatedly, the use of statistics is one method of arguing that a workforce reduction was discriminatory. The U.S. Supreme Court has observed that suspicious statistical disparities can provide the “tell-tale sign of purposeful discrimination in a downsizing, and may alone constitute persuasive evidence of a claim of discrimination.” Employers should monitor the statistical impact of its downsizing on protected groups and be prepared to address and explain such disparities.

• Using subjective, arbitrary and undocumented criteria for terminations.
Selecting particular individuals for displacement in a reduction in workforce can be excruciating. Playing fast and loose with selection criteria to reduce this stress, however, is dangerous.

Many employers believe that as long as they know that they aren’t purposely discriminating, then they are protected. This is a mistake. Courts and juries are skeptical of illogical or undocumented termination decisions, and can attribute unreasoned choices to an unlawful motive.

Applying selection criteria inconsistently is equally dangerous. Under the heading of “no good deed goes unpunished,” an employer making special arrangements for favorite employees or “hard luck cases” may unwittingly create the impression of discriminatory favoritism.

• Using or expressing stereotypes.
Employers must avoid referring to a person’s age or other protected characteristics during a reduction in workforce. Failure to do so, even if done inadvertently or in jest, can snowball into a discrimination suit where one otherwise would not have survived. Courts have routinely held that a supervisor’s reference to an employee’s protected characteristics alone may support a circumstantial case of discrimination.

• Failure to base workforce reduction decisions on economic necessity.
A downsizing is typically prompted by economic concerns. Employers with clear, documented evidence of a workforce reduction’s economic necessity are at a significant advantage in litigation. However, as discussed above, courts and juries will closely scrutinize an employer’s justifications for a layoff. If an employer cannot back up the proffered reason for a downsizing, terminated employees can argue that the economic reason they were given was simply a cover-up for discrimination. [PAGEBREAK] • Destroying or losing documentation of the workforce reduction.
In light of recent corporate scandals, losing or shredding important documents supporting an employer’s termination decisions can be an express ticket to a hefty jury verdict. Courts can instruct juries that they may infer that an employer’s otherwise innocent loss of documents was motivated by fear that their contents would be harmful in litigation. The resulting damage to an employer’s case is limited only by a jury’s imagination. This includes documents in electronic form, including e-mails, electronic memos, etc. An employer must take steps to retain any relevant electronic materials.

• Failure to give adequate notice of a downsizing.
The Worker Adjustment and Retraining Notification Act (WARN) was enacted to give employees and their communities time to prepare for large-scale employment losses. WARN requires employers ordering a “plant closing” or “mass layoff” (terms defined by the statute) to provide 60 days’ written notice to displaced employees, union officials and/or government representatives.

WARN affects businesses with 100 or more full-time employees or at least 100 employees (full- and part-time) working a combined 4,000 hours per week. If an employer is contemplating a large-scale reduction (e.g. 50 or more employees) or plans to close a particular facility or operating unit within a site, the company should carefully consider whether WARN applies. WARN lawsuits can result in back pay and benefits awards along with administrative penalties assessed by the Department of Labor.

• Not giving all employees equal internal transfer options.
Consistency is critical in a workforce reduction. Employers internally transferring employees during a layoff must give all similarly situated employees equal transfer opportunities. Failure to do so can create an inference that the employer intended to discriminate against those excluded from these opportunities.

• Using a reduction in workforce to terminate problem employees.
Employers should not use a reduction in workforce to justify employee terminations when the true reason for discharge is poor performance and disciplinary problems. In other words, employers should not use a downsizing as an excuse to “clean house.”

Employers should follow established policies, including counseling and written warnings, to address individual performance problems outside of the workforce reduction framework. While a workforce reduction may seem like the best time to clear out problem employees, such decisions may not match up with the stated goals of the downsizing and would therefore be vulnerable to attack. [PAGEBREAK]

• Replacing a terminated employee soon after a layoff.
An employer can redistribute job duties as part of a downsizing, but a legitimate reduction in workforce should result in the actual phase-out of certain positions. Employers find it difficult to justify layoffs when the eliminated positions are quickly filled.

• Failure to follow ERISA and COBRA requirements.
If any distributions are made from ERISA retirement plans (e.g., pension funds, stock ownership plans, profit-sharing plans, etc.) the employer must be careful to follow the plan requirements and give employees written notice of the tax consequences of these distributions. Employers must also comply with benefits laws, including the Consolidated Omnibus Benefits Reconciliation Act (COBRA). COBRA requires that employers give terminated employees the opportunity to stay on the employer’s health plan for 18 months after termination.

Insulating a Layoff from Discrimination Claims
In light of the foregoing, employers can take certain steps to guard against costly lawsuits related to downsizing:

• Develop criteria for employee selection.
Develop and document non-discriminatory criteria to be uniformly used when determining which employees will be affected by the layoff.

•Review documents for discriminatory content.
Review bulletins and other documents before issuing them to ensure there are no inadvertent references to age or other protected characteristics. Historical personnel documents of affected employees should also be reviewed for any such content. This is not an excuse to start a shredding campaign immediately before a downsizing.

Rather, if questionable content is found in personnel or policy documents, the employer should take remedial steps to correct the problem content. This includes addressing those employees responsible for any potentially inappropriate references. If the employer is nevertheless committed to a particular displacement, the company should be prepared to explain questionable references in later litigation. [PAGEBREAK]

• Always involve management.
Two or more management officials should be involved at every level of layoff decision-making and during the actual employee termination meetings. This not only helps prevent questionable decisions, it also minimizes “he said/she said” conflicts about statements made in a given meeting.

• Properly characterize downsizing goals.
If possible, state workforce reduction goals in numbers of employees to be reduced, rather than a specific number of dollars to be saved. The reason is simple: If, for example, an employer says that a workforce reduction is necessary to cut $300,000 from its bottom line, displaced employees can later argue that this money could have been better saved by other means (e.g., operational efficiencies, executive salary reductions, etc.) and that the layoff is actually just a front for unlawful discrimination.

Moreover, if the employer does not ultimately save the projected $300,000, former employees could further argue that the workforce reduction was motivated by something more nefarious than cutting costs.

• Document selection criteria concerning particular employees..
Document the reasons for particular downsizing selections. Don’t rely on a decision-maker’s memory to explain why one employee was displaced while another was not. Memories fade, and turnover can affect witness availability and reliability.

• Don’t insulate younger workers.
Recent college graduates or other categories of mostly younger employees should not be insulated from reduction decisions, regardless of how noble an employer’s motives.

• Don’t disfavor highly compensated workers.
Be careful when making termination decisions based on employee salaries. Cutting highly compensated employees may have a statistically greater impact on older workers and therefore may be cast as a proxy for age discrimination. [PAGEBREAK]

• Review handbooks and job applications for contract language.
Guard against claims based on informal, implied or oral “contracts” of continued employment by reviewing all company benefit programs, handbooks, employment applications and so forth before the workforce reduction. Unless there’s a clear disclaimer that the policies/handbooks are not contracts, employees can argue that the employer is bound to follow these policies (e.g., progressive discipline, termination notice, etc.) before terminating them.

• Prepare to explain reasoning for termination.
Know the answer to “why me?” An affected employee’s supervisor and other decision-makers should be prepared to accurately explain why each employee was selected for the layoff, who made the relevant decisions, what benefits are available, and so on. Inconsistencies at this stage can reappear as damaging testimony in later litigation.

Of course, the foregoing cannot address every issue arising in a downsizing; no two workforce reductions are exactly alike. What is typically true is that these issues arise in incredibly high-stress and time-sensitive situations. As difficult as it may be, both strategic and employee-specific decisions must be approached with care and an eye to how these decisions will be perceived by the employee, a plaintiff’s attorney, a judge, and ultimately by a potentially employer-hostile jury.

Sufficient planning and attention to detail, along with sensitivity to general principles of fairness and worker dignity, can go a long way to avoiding litigation or minimizing its impact.

Common Mistakes Employers Make.
• Not recognizing that workforce reductions may result in multiple plaintiff lawsuits.
• Not monitoring the impact of workforce reductions on protected groups.
• Using subjective, arbitrary and undocumented criteria for terminations.
• Using or expressing stereotypes.
• Failure to base workforce reduction decisions on economic necessity.
• Destroying or losing documentation of the workforce reduction.
• Not giving all employees equal internal transfer options.
• Using a reduction in workforce to terminate problem employees.
• Replacing a terminated employee soon after a layoff.
• Failure to follow ERISA and COBRA requirements.

Christopher DeGroff is an associate practicing labor and employment law at Seyfarth Shaw’s Chicago office (www.seyfarth.com). DeGroff practices as part of the Business Restructuring and Transactional Employment (“BRTE”) Group, which addresses a wide variety of labor and employment law issues implicated in mergers, sales, workforce reduction and other business restructuring situations. He can be contacted at cdegroff@seyfarth.com.