5 Legal Steps for Companies to Prepare for Workforce Reductions

By: Practical Guidance

The Federal Reserve continues to pull its available levers in order to achieve a “soft landing” of the U.S. economy, but in the meantime a number of American employers have already taken action this year to reduce their payrolls.

The Wall Street Journal chronicled the layoffs trend of 2024 in a recent story that identified more than 50 major American companies that have announced workforce reductions this year. “Companies are cutting staff and focusing on efficiency amid a commitment to do more with less following a year of widespread layoffs,” reported the Journal.

Meanwhile, workers are clearly under the impression that more layoffs will be coming in the months ahead. A survey by MarketWatch found that 70% of employees are bracing for layoffs in some way, with roughly 40% savings up for a possible income cut and 32% regularly browsing job listings.

The course of business cycles necessitates that employers embark on layoffs and other workforce reductions from time to time. These decisions are inevitable but they also come with serious and important legal responsibilities that must be carefully managed.

Key Legal Steps

Lexis Practical Guidance published the “Reduction in Force and Layoff Checklist” to provide employers and their legal counsel with best practices for how companies should prepare for possible workforce reductions. Here are five steps to consider:

Step 1: Plan the Reduction in Force

Employers should not lightly undertake a workforce reduction. They must first develop relevant criteria and assemble relevant personnel to evaluate, execute and oversee the plans. This should include creating a committee to oversee the reduction, including representatives from upper management, human resources, finance, legal, operations and other key departments. Then create and document a layoff plan, develop selection criteria for layoff candidates, determine the number of positions to be eliminated, select the workforce reduction decision-makers, form a review committee and institute a hiring freeze until well after the plan has been implemented.

Step 2: Assess the Impact

The employer should assess the impact of the workforce reduction by conducting a “disparate impact analysis” of the tentative layoff list and then carefully reviewing the tentative layoff selections for potential legal claims. Next, you should review the Worker Adjustment and Retraining Notification (WARN) Act and any corresponding state laws to assess whether they may apply to your plan. If the reduction involves employees who are age 40 or older, you will also need to follow special requirements under the Older Workers’ Benefit Protection Act. And since some employees may respond to the layoffs in a dangerous fashion, employers should make sure to take security precautions when the decisions are announced.

Step 3: Communicate with Employees

Employee communication is essential before, during and after an announcement of layoffs. This starts with disseminating timely and credible information before the announcement in order to reduce anxiety and rumors. When the time comes to communicate the layoff decision, notify the employees selected for the workforce reduction in-person during meetings with two trained company officials who can explain the business rationale behind the action, being sure to deliver and discuss their individual separation packages as clearly as possible. Then monitor those departing employees so you are able to collect the return of all company property and avoid their inappropriate use of company computers or sensitive data. Finally, address all remaining employees to try to minimize negative effects on company morale.

Step 4: Consider ERISA Issues

Employers should consider key potential ERISA issues resulting from layoffs. First, determine if the severance plan must comply with ERISA, which may be the case depending on the employer’s discretion to determine eligibility for the plan and administer the plan, as well as the duration of the plan. Second, if applicable, comply with ERISA requirements by providing for a plan administrator to ensure the proper payment of benefits, an administrative claims procedure for employees and an appeals procedure for employees if the employer denies benefits.

Step 5: Consider Tax Issues

Finally, keep in mind that workforce reduction severance payments could have tax implications. For example, lump-sum severance payments are taxable for both employers and employees. Employers can avoid FICA taxes by funding a trust to provide employees weekly payments tied to the receipt of state unemployment benefits; however, this alternative may be onerous on the employer.

More Legal Resources

The Lexis Practical Guidance team has released the Departing Employees Resource Kit, a comprehensive collection of practical guidance resources on topics related to all sorts of legal issues implicated by workforce reductions of any kind. The resource kit includes links to practice notes, checklists and templates, including:

• Reductions in Force and WARN Compliance Practice Note
• WARN Act Compliance Checklist
• WARN Notice to Affected Non-Union Employees Template

For a video discussing the legal considerations employers should keep in mind when conducting a reduction in force, see this five-minute practice video.

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