EMPLOYER REDUCTION IN FORCE CONSIDERATIONS DURING THE COVID-19 PANDEMIC

By SHLC on April 9, 2020 in Uncategorized
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Despite emergency legislation passed last month to support businesses dealing with the effects of COVID-19, the pandemic continues to force many employers to reduce payrolls.  Employers considering significant reductions to their workforce must be mindful of requirements under the federal Worker Adjustment and Retraining Notification (“WARN”) Act and similar laws in some states, including California.

First Things First: Considering Alternatives to a Reduction in Force

For some employers, the current economic conditions regrettably will make a mass layoff necessary. However, before taking this significant step, employers are encouraged to explore potential alternatives. Many states and the federal government have implemented emergency relief programs to help employees and employers alike avoid widespread job loss.

For example, small businesses (i.e., generally those with 500 or fewer employees) may benefit from the federal Paycheck Protection Program (“PPP”), which offers loans designed to incentivize employers to keep employees on their payroll.  The loans will cover payroll costs, as well as mortgage interest, rent, and utilities for up to eight weeks, so long as the employer maintains certain employee and compensation levels.  Under the current terms of the PPP at the time this article is posted, the loans are also eligible for complete forgiveness if no more than 25% of the loan proceeds are used to cover non-payroll expenses.  For more information on the PPP, click here.

California employers also may take advantage of the state’s “Work Sharing Program,” which allows employers to reduce employee hours and wages and makes unemployment benefits available to those employees while they keep their current jobs. There are several requirements an employer must meet to participate in the program, which can be found here. Generally, however, an employer may be eligible if it reduces hours and wages by at least 10 percent but not more than 60 percent, for at least 10 percent of the employer’s regular workforce or a unit of that workforce.  The purpose of the program is to provide an alternative to layoffs.

Navigating a Mass Layoff

For employers who must layoff, the WARN Act requires covered employers to provide affected employees and state and local government officials at least 60 days’ written notice in the event of a “plant closing” or “mass layoff.”   The obvious difficulty with WARN Act compliance in light of COVID-19 is the unprecedented drop in economic activity, which has made lengthy notice periods impracticable.  While California already has relaxed state law notice requirements to provide employers additional flexibility, as of the writing of this article, the U.S. Department of Labor (“DOL”) has not yet provided any guidance on how to meet WARN Act obligations in these uncertain times, although the WARN Act does contain exceptions, discussed below, that might apply during the current pandemic.  This blog post provides information about the federal WARN Act and California’s corresponding “mini-WARN” Act, Labor Code § 1400 et seq.  The State of Nevada has no separate law, so employers there need only comply with federal requirements.

Federal WARN Act

In general, employers with 100 or more employees must provide 60 days’ notice when there is an “employment loss” due to a qualifying “plant closing” or “mass layoff.”  Under the Act, an “employment loss” means:

  • A termination, other than a discharge for cause, voluntary departure, or retirement;
  • A layoff exceeding 6 months; or
  • A reduction in hours of work of more than 50 percent during each month of any 6-month period.

A “plant closing” means the permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment, if the shutdown results in an employment loss for 50 or more employees during any 30-day period.  Finally, “mass layoff” is a reduction in force, other than one due to a “plant closing,” which results in an employment loss at a single site of employment during any 30-day period for:

  • At least 50 employees, who make up 33 percent of the employees at the site; OR
  • At least 500 employees.

Under the above definitions, only full time employees count toward the totals (with one exception—in meeting the 100 employee threshold, an employer alternatively qualifies if it has 100 or more employees, including part-time employees, who in the aggregate work at least 4,000 hours per week, exclusive of hours of overtime).

Furthermore, WARN Act notice is required for permanent and temporary reductions in force (e.g., temporary closures and furloughs).  There are, however, exceptions to providing notice, which include:

  • Faltering Company (plant closings only)—where (1) the employer is actively seeking capital or business which, if obtained, would have enabled the employer to avoid or postpone the shutdown; and (2) the employer reasonably and in good faith believed that giving the required notice would have precluded the employer obtaining the needed capital or business.
  • Unforeseeable Business Circumstances—where the plant closing or mass layoff is caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required.
  • Natural Disaster—where the plant closing or mass layoff is due a natural disaster, “such as a flood, earthquake . . . or drought.”

Even without specific DOL guidance on how the WARN Act applies for COVID-19 employment loss, it is probable that the “unforeseeable business circumstances” exception would apply for many business.  The federal regulations implementing the WARN Act specifically include “some sudden, dramatic, and unexpected action or condition outside the employer’s control” such as an “unanticipated and dramatic major economic downturn” or “a government ordered closing of an employment site.”  It is unclear whether the “natural disaster” exception would apply, but the unprecedented and historic shock to the U.S. economy seems to fit squarely in the “unforeseeable business circumstances” carve-out.

To claim an exception to normal WARN Act notice requirements, the employer bears the burden of proof that conditions have been met.  Employers must provide as much notice as is practicable, and a brief statement of the reason for reducing the notice period.

California WARN Act

The California WARN Act is broader in scope that its federal counterpart while containing fewer exceptions.  Fortunately for California employers, Governor Gavin Newsome issued Executive Order N-31-20 on March 17, 2020, which suspends many of the key requirements.  Under normal circumstances, the California WARN Act requires 60 days’ written notice to affected employees, the Employment Development Department (“EDD”), and local officials for a “mass layoff, relocation, or termination.”  Under the statute, these terms mean:

  • “Mass layoff”—a layoff during any 30-day period of 50 or more employees at a covered establishment. “Layoff,” in this context, means a separation from a position for lack of funds or lack of work.
  • “Relocation”—the removal of all or substantially all of the industrial or commercial operations in a covered establishment to a different location 100 miles or more away.
  • “Termination”—the cessation or substantial cessation of industrial or commercial operations in a covered establishment.

Covered employers are those that have employed 75 or more persons in the preceding 12 months (note, this is a smaller threshold than under federal law and includes both full- and part-time workers).  The California WARN Act has an exception similar to the federal “faltering company” rule, as well as an exception for when the layoff is caused by a “physical calamity” or “act of war.”  Importantly, California does not have an “unforeseeable business circumstances” analogue, which is the most likely exception that applies with COVID-19 currently.

With the issuance of Executive Order N-31-20, however, employer obligations have been suspended in part, relieving employers of obligations that are impossible for some employers to fulfill due to the pandemic.  Under the Executive Order, the 60-day notice requirement is suspended, as well as statutory damages and penalties under the Act.  For employers who must lay off or furlough workers, they must provide as much notice as is practicable, along with a brief statement of the basis for reducing the notification period.

Avoiding Discrimination Claims

Separate and apart from federal and state WARN Act concerns, employers implementing a reduction in force must carefully analyze how it adversely impacts employees according to race, gender, or age, or other prohibited factors.  If a reduction in force has a “disparate impact” on certain groups, an employer faces exposure to discrimination claims under federal and state law.  The cost of such litigation may quickly erase any savings gained from a reduction in force.

Because of this, employers should carefully determine the factors that will determine which positions are eliminated and which will remain.  To the extent possible, employers should rely on objective criteria in the decision-making process, such as years of service, attendance, and performance ratings.  While subjective criteria may also be used (e.g., softs skills, work quality, etc.), employers must be very careful in determining them to avoid later claims of prohibited bias.  Once elimination decisions have been made, employers should carefully review the results to catch disparities among groups of employees (e.g., older and younger workers).  Statistical analysis may be necessary, and it is preferable when possible to have the disparate impact review performed by someone other than the person determining which positions to eliminate.  Consultation with qualified employment law counsel is advised.

Another concern specific to age discrimination claims is ensuring compliance with the Older Workers Benefit Protection Act (OWBPA).  With a reduction in force, employers often seek a release of employee claims through separation agreements in order to insulate against future litigation.  The OWBPA mandates certain requirements for the waiver of rights under the Age Discrimination in Employment Act (ADEA), and while OWBPA concerns must be addressed in any agreement releasing ADEA claims, there are additional requirements for reductions in force.

First, qualifying employees have 45 days within which to consider the separation agreement before signing (far longer than the 21-day time limit in non-reduction in force termination settings).  Moreover, where the waiver of ADEA rights is requested as part of a voluntary “exit-incentive” or involuntary employment termination program offered to a group or class of employees, the employer must disclose the following information to all affected employees: (1) the “decisional unit” covered by the program; (2) eligibility factors; (3) any applicable time limits; (4) the job titles and ages of all individuals eligible or selected for the program; and (5) the ages of all individuals in the same “job classification” or “organizational unit” who are not eligible or selected for the program.  In this context, “decisional unit” means the “portion of the employer’s organizational structure from which the employer chose the persons who would be offered consideration for the signing of a waiver and those who would not be offered consideration for the signing of a waiver.”  Carefully defining the “decisional unit” is a critical issue, as this is often the subject of litigation, and regulations and case law are not always helpful.  These additional requirements highlight the need for careful consideration with qualified employment law counsel in properly implementing a reduction in force.

Further general information from the U.S. DOL on reductions in force and WARN Act requirements is available here.  The California EDD’s WARN Act webpage is available here, and the agency has also released a COVID-19: WARN FAQ to assist employers with compliance.

SHLC attorneys are available to be retained for private consultation and advice.  You can also find information on other COVID-19 employment issues at the SHLC Coronavirus Pandemic Employer Resources page, at https://www.suttonhague.com/coronavirus/.  For a schedule of our upcoming webinars, visit https://www.suttonhague.com/events.  We also have downloadable webinars on this and related topics at our Calnevalaw.com website.  Regarding any tax issues, including payroll taxes, employers are strongly advised to consult with a qualified tax CPA.

 

 

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