Reductions in Force (RIFs)

A RIF is a difficult task for employers, both in terms of potential legal costs and with respect to morale, productivity, and loyalty in the workplace.

Adequate planning and preparation are crucial to minimize your legal risks. Perhaps the best way to minimize legal exposure when implementing a RIF is to create a record of your decisionmaking and implementation processes. Doing that will help you withstand legal challenges later.

Key Legal Issues

A number of critical legal issues loom on the horizon of every potential or planned RIF, including:

  • Worker Adjustment and Retraining Notification Act (WARN Act). WARN is a federal law requiring employers of more than 100 employees to give written notice at least 60 days before any plant closing or "mass layoff." Some states may also have "mini-WARN" laws that apply to smaller employers.
  • Discrimination statutes. Federal and state discrimination laws, such as the Age Discrimination in Employment Act (ADEA), protect against RIFs having an unlawfully differential impact on members of protected classifications.
  • Family and Medical Leave Act (FMLA). Employees on FMLA leave may be protected against a RIF unless it can be shown that they would have lost their positions even if the leave hadn't been taken.
  • Uniformed Services Employment and Reemployment Rights Act (USERRA). USERRA requires employers to reinstate returning members of military services to the jobs they would have held had they not been serving. The law also might protect an employee from layoff unless you can show that "circumstances have so changed as to make such reemployment impossible or unreasonable . . . or such employment would impose an undue hardship on the employer."
  • COBRA. This federal law requires most employers that sponsor group helath plans for their employees to allow certain employees and their dependents who would otherwise lose coverage under the plan due to termination of employment or certain other events—such as a layoffto pay to continue that coverage for a specified period of time.

ERISA Interference

For reasons that are quite similar to age discrimination, another common legal issue to watch out for involves the Employee Retirement Income Security Act (ERISA). A common legal complaint is that employers chose to lay off employees to prevent the employees from getting benefits under an employee benefit plan, which is illegal under ERISA. This issue is raised most often when the employees you let go happen to be the ones with the highest benefit costs.

It's pretty clear that ERISA is violated when employers choose to terminate employees in order to prevent them from becoming vested in an ERISA plan. But other improper motivations under ERISA are not so clearly defined. The whole point of downsizing is to reduce costs, including benefit costs. The question is—at what point does the desire to reduce benefit costs turn into an improper motivation under ERISA?

Most courts say that ERISA is violated only if it can be proved that depriving employees of their benefits is an employer's principal motivation. Although courts differ in their approaches, employers generally will be in the clear if they avoid making layoff decisions that appear to be based primarily on benefit costs. Make sure that your analysis of reduced benefit costs is merely one part of your overall analysis of costs that can be reduced with a RIF.

The bottom line is that employers face a difficult choice when contemplating a RIF. The use of objective criteria may be the best legal protection, but it isn't necessarily an effective means of preserving the most productive employees. Subjective criteria focuses more on the quality of the remaining workers but leaves you more vulnerable to claims of favoritism and discrimination. Either way, careful planning is critical to a successful RIF.