Chapter 19 Downsizing & Post-termination Issues

Downsizing “Downsizing” is not a legal term, but a euphemism to describe the involuntary termination of many employees where the employees’ performance is not at issue. Downsizing or Reduction in Force (RIF) refer to terminations that are based on employers’ judgments that the number of employees, positions or facilities must be reduced. Employers regularly decide to go out of business, close facilities, relocate, subcontract, outsource, and reduce staffing to save money.

Decision to Downsize 1 Challenges come primarily from the National Labor Relations Act (NLRA) in two ways: Downsizing might be an unfair labor practice (ULP) if it interferes with employees’ NLRA rights or is used to discriminate based on union activities. Downsizing might be a mandatory topic of bargaining, requiring negotiation with union representatives prior to taking action.

Decision to Downsize 2 Employers can choose to go out of business entirely, but must not selectively close facilities to inhibit unionization at their remaining facilities. To the extent that downsizing decisions are mandatory topics of bargaining, unionized employers must negotiate in good faith before finalizing such decisions. Employers must negotiate with unions over the effects of downsizing decisions on employees (transfer rights, retraining, severance pay, and extended benefits). Successor employers must bargain with unions that represent employees at acquired companies, although they are generally not bound by the terms of existing labor agreements.

The WARN Act 1 Although employers may have the right to decide to downsize, the implementation of that decision may be affected by the Worker Adjustment and Retraining Notification Act (WARN). Employers covered by the WARN Act are prohibited from ordering plant closings or mass layoffs until the end of a 60-day period that follows the provision of written notice to affected employees (or to union representatives) and to state and local government officials. Details and definitions under the Act are exacting.

The WARN Act 2 The WARN Act applies to employers with 100 or more full-time employees or 100 or more full- and part-time employees working at least 4,000 hours per week. “Plant closing” is defined by the Act as a permanent or temporary shutdown of a single employment site when that shutdown results in employment loss during any 30-day period for at least 50 full-time employees. A “mass layoff” is a reduction in force not caused by a plant closing, but that results in employment loss at a single work site during any 30-day period for at least 500 full-time employees. (or at least 50 full-time employees when these comprise at least 33 percent of total employment at the work site)

The WARN Act 3 Counting employees to determine whether WARN applies is problematic because downward fluctuation in employment levels is inherent in the circumstances under which the Act is applied. The relevant point in time for determining coverage is the date that first notice of a closing or mass layoff is required to be given (60 days before downsizing). There may be “waves” of layoffs, none of which is large enough to require notice, but employment losses over a 90-day period can be combined to prove a mass layoff. Multiple notifications may be required.

Roquet v. Arthur Andersen Facts: The accounting firm Arthur Andersen was the auditor of Enron’s financial records. It came to light that Andersen employees had destroyed Enron documents prior to receiving a subpoena from the SEC. Negotiations with the Dept. of Justice failed and the firm was indicted on March 14, 2002. On April 8, 2002, the firm gave notices of termination to 560 employees. None of them received 60 days advance notice of the mass layoff. Issue: Whether Andersen’s failure to provide full notice was caused by “business circumstances that were not reasonably foreseeable at the time notice would have been required” so that notice was excused. Held: Yes. The court found that the mass layoff was caused by the firm’s indictment on March 14, 2002, but it was the adverse publicity that was the real cause of the firm’s downfall. It was reasonable for them to wait to see what the public reaction would be.

Selecting Employees for Downsizing Rule: The means of selecting individuals for downsizing must not be discriminatory. Of particular concern is age discrimination Age discrimination plaintiffs must show that they were treated less favorably than employees who were “substantially younger” even if not under 40. A genuine reduction in force results in the discharged employee’s work being taken over by other existing employees, not by a new employee hired to replace the employee. If an employer uses “reduction in force” to explain a discharge, the employer must explain why certain employees were selected.

Elements of a Claim – Reduction in Force (Age) 1 Plaintiff’s prima facie case must show: 1. The downsized employee was age 40 or over; 2. He was selected for termination from a larger group of candidates; 3. He was performing at a level at least substantially equivalent to the lowest level among the group of employees retained; 4. The group of employees retained included some persons who were substantially younger than the terminated employee and who were performing at a lower level than that at which he was performing; OR

Elements of a Claim – Reduction in Force (Age) 2 1. The downsized employee was age 40 or over; 2. He was performing his job to his employer’s reasonable expectations; 3. He was terminated (or suffered another adverse employment action); 4. Other similarly situated employees (with similar skills, etc.) who were substantially younger were treated more favorably. If a prima facie case is shown, the employer must provide a lawful reason for the termination. If the employer provides a lawful reason, Plaintiff may show that the reason is pretext and it is more likely that the decision was based on the employee’s age.

Just the Facts A 52 year-old employee with 34 years on the job was terminated by Boeing during a RIF. Under the “Redeployment Selection Process (RSP)” used by the company, the supervisor compared the performance of employees on nine criteria, rating them on each criterion with a 1-5 scale. The 52 year-old was given a cumulative score of 17, while a 36 year-old co-worker was scored 39. The younger co-worker was retained. In a regular performance appraisal conducted earlier that year by the same supervisor, the older worker was described as “doing a great job.” Complaints about the older worker’s performance in her filing duties that had been mentioned previously but never adversely affected her performance ratings, were highlighted in the RSP. There was also evidence that the supervisor unilaterally decided to eliminate from the final scores the one criterion on which the older worker had received a perfect score. The older worker sued, challenging her termination in this RIF. Was her firing in violation of the ADEA? Cotter v. Boeing, 2007 U.S. Dist. LEXIS 45995 (E.D. Pa.).

Early Retirement Offers The Age Discrimination in Employment Act (ADEA) prohibits mandatory retirement except for certain persons in bona fide executive and high policy-making positions. Rule: Employers must not force employees to retire when they reach a certain age. Under the Older Workers Benefit Protection Act (OWBPA), it is legal for employers to offer incentives to retire early, even though the minimum age or service requirements might exclude younger employees. However, early retirement offers cannot be extended to one age group (employees between 52 and 56), but denied to older employees.

Effects of Bankruptcy on Employee Rights Employees are not secured creditors, but wages earned after a Chapter 11 filing have high priority. Claims for wages and benefits earned prior to bankruptcy are weaker and limited. Nonunion employers may cancel expected raises or bonuses, cut wages, or reduce benefits. Union employers may ask the union for concessions, but filing for bankruptcy does not necessarily absolve an employer of its obligations under a labor agreement. Firms must present union representatives with proposals based on the most complete and reliable information available, provide the union with all relevant supporting information, and bargain in good faith.

Unemployment Insurance Employees who involuntarily become unemployed and are able to work, available for work, and actively looking for it are eligible to receive unemployment insurance. Employees who are discharged for misconduct or who voluntarily leave are not eligible for unemployment insurance. To be eligible, employees must show an attachment to the workforce and be able and willing to accept suitable work. Employers should not routinely contest unemployment insurance claims, but should examine the former employee’s stated reason for termination for accuracy. Employers must provide clear statements of the reasons for terminations and supporting evidence to the state agencies that decide unemployment insurance claims.

Restrictive Covenants Restrictive covenants are contractual agreements that aim to protect employer interests by limiting the ability of former employees to do such things as: going to work for competitors disclosing trade secrets or other sensitive information soliciting clients or former coworkers to do business with or join other firms making disparaging comments about their former employers The increasing use of restrictive covenants to constrain the activities of former employees raises important legal and public policy questions.

Noncompetition Agreements Noncompetition agreements are designed to prohibit former employees from working for competitors. The extent to which such agreements are enforceable varies considerably from state to state. Courts recognize such agreements as restraints on trade and will enforce them only to the extent that the restraint is necessary to protect legitimate business interests. Rule: Employers should use noncompetition agreements only if important business interests are at stake, and should craft the agreements to be no broader than necessary to protect those important business interests.

Covenants not to compete Limited as to duration or geographic area Based on some good consideration Reasonable and not interfere with interests of the public Rule: Employers should use noncompetition agreements only if important business interests are at stake, and should craft the agreements to be no broader than necessary to protect those important business interests.

Other Provisions 1 Nonsolicitation agreements prevent former employees from soliciting the firm’s clients after the employee leaves. Some courts give employers more leeway in using these agreements because they impose a lesser restriction on the employee’s ability to earn a living. Trade secret refers to information that has actual or potential economic value because it is not generally known to others and the owner makes reasonable efforts to keep this information secret. Courts have traditionally recognized a duty of employees under common law not to divulge such information.

Georgia Trade Secrets Act O.C.G.A. § § 10-1-760 through 10-1-767 Theft of Trade Secrets Any form of information Owner works to keep secret Economic value derived from secrecy Examples: customer lists, marketing plans, research results, formulas & designs Uniform Trade Secrets Act

Camp Creek Hospitality v. Sheraton Franchise Corp. Hotel’s occupancy levels, average daily room rate, discounting policies, long-term contracts, & operating expenses.

Leo Publications, Inc. v. Reid A publication’s list of advertisers, which included the size & frequency of their advertisements.

Reasonable Efforts to Maintain Secrecy Limit access to those who need to know Keep sensitive information under lock and key Password protect electronic files regularly remind employees that information is secret Stamp information as “Secret” or “Confidential.” Prohibit or limit copying of confidential information.

Remedies Injunction Damages Punitive damages & attorney’s fees for ”willful and malicious” misappropriation.

Confidentiality Agreements Confidential information (broader than trade secrets) Employer’s property & peculiar to employer’s property Disclosure or use must cause injury Information must possess an element of secrecy peculiar to the employer Must be limited to reasonable time

Other Provisions 2 Nondisparagement clauses prevent employer and employee from saying negative or critical things about one another Nondisparagement clauses are now commonly included in severance agreements.

A concluding thought… Terminated employees will begin the search for new work and their former employers will seek to fill at least some of the vacated positions. This discussion brings us full circle in our tour of legal issues in employment. You should now have a better idea of how to meet both the spirit and the letter of the law—and to keep your employer’s name out of any future editions of this book.

What Would You Do? You are a regional sales manager for a technology firm, and have just received notice under the WARN Act that you are about to be laid off, along with about 230 other employees who work for your employer. You have been with the firm for about 12 years. What would you do?