The continuing struggle to improve the economy leaves many financial institutions of all sizes still looking for ways to improve  efficiency and profitability. Often the resulting business strategy includes cut backs in personnel.  But a reduction in the workforce that is not carefully planned and documented can result in costly and sometimes difficult to defend lawsuits and other legal challenges that can off-set the intended economic benefit. It is very common after a reduction-in-force for legal claims to be pursued by terminated employees, sometimes as multiple-plaintiff lawsuits. Possible claims include allegations that the reason for selection of a person to be terminated was illegal (i.e., age, race, sex, medical condition, use of FMLA, whistleblower, etc.). A successful defense requires showing not just that there were legitimate reasons to reduce the workforce but also the specific legitimate reason that the complaining employee was selected for termination. Not having a carefully planned and documented approach to the decision-making can result in time-consuming and expensive litigation. Also, a well-planned and documented approach to the reduction-in-force will promote reasoned, careful, and sound business decisions, which support the Company’s overall objective for reducing costs and improving efficiency.

 Here is a brief outline of steps that should be included in any plan for implementation of a reduction-in-force:

Documenting the Preliminary Steps

There should be a written explanation of the primary reason for reducing the workforce, including a summary of those areas of the business that will be examined for possible reduction (i.e., an entire business unit, specific departments, multiple locations, a single location, certain cost codes, etc.)

Documenting the Methods and the Decision-Making

Document the steps to be followed in the reduction. The approach to a reduction-in-force that is best designed for successful defense begins with identifying job functions that are redundant and that can be eliminated and job functions that can be combined with other jobs. Document the specific methods for selection of employees to be retained. Determine a method for ranking employees based on job-related, non-discriminatory criteria. 

Determine whether employees whose jobs are eliminated will be considered for reassignment to different positions and whether incumbent employees will be “bumped” from jobs by persons being reassigned. If employees are given consideration for transfer to other positions, the procedure and criteria for doing so should be documented and applied consistently.

Develop and document a procedure for instructing decision-makers on the proper steps and criteria for the reduction-in-force. Finally, develop a procedure for oversight and review by upper management and human resource professionals as well as review by legal counsel of decisions that could result in legal challenge and of the statistical impact of the reduction.

Implementing the Reduction

There are key decisions to consider at the early planning stages about the method and timing for implementation. Will the company offer severance pay and, in exchange, obtain a release of all potential claims?  When will employees be made aware of the impending reduction, and what will be the timetable for carrying out the reduction?  In addition, determine any obligations for prior notice to employees under the federal WARN Act or similar state laws.  If any of the affected employees are represented by a union, determine if there are any applicable labor contract provisions and evaluate the duty to bargain with the union before implementing the reduction.  Also consider whether employees will be offered any rights to recall and develop a plan for determining post-termination benefits, including accrued paid time off, and for COBRA notices.  Finally, determine if notice to the state unemployment insurance agency is required.

Good planning, implementation, and documentation can lessen the risks of litigation that often accompany tough business decisions.