In times of economic uncertainty, businesses often face challenging decisions regarding their workforce reduction strategies. Recent trends show that even large, established companies have had to implement significant downsizing measures. While this approach may initially improve your company’s financial position, it comes with inherent risks if not managed properly. Explore key considerations and employee layoff best practices for employers contemplating or implementing workforce reductions.

Understanding Workforce Reduction Exposures

Employers should always consult with legal counsel before conducting layoffs or furloughs to ensure compliance with all applicable state and federal laws. Missteps can lead to severe consequences including legal claims, financial penalties and reputational damage.

Key Legal Considerations for Downsizing

Title VII of the Civil Rights Act

This law protects workers from employment discrimination. The Equal Employment Opportunity Commission (EEOC) advises employers to carefully review their processes before implementing workforce reductions. It's essential to evaluate the roster of affected employees for any disproportionate impact on federally protected groups (e.g., age, disability, sex) to avoid potential EEOC investigations and employment practices liability (EPL) claims.

The Worker Adjustment and Retraining Notification (WARN) Act

This act requires employers to provide workers 60 days’ advance notice of imminent layoffs. Employees must be informed whether the layoff is permanent or temporary. Many states have additional requirements for notifying local government officials or other parties. Violations can result in government fines, and some states, officers and directors may be held personally accountable.

The Fair Labor Standards Act (FLSA)

This regulation distinguishes between exempt or nonexempt employees. Employers should be cautious when altering work schedules as exempt employees must receive their full salaries for any workweek in which they perform any week, regardless of hour reductions. 

Protect your organization from expensive employment claims such as wrongful termination, layoffs and discrimination. Download our EmploymentPractices Liability Scorecard now to ensure you have the right protections in place. 

Potential Impacts on Remaining Employees

Workforce reductions often lead to increased responsibilities for remaining employees. This can have significant effects on employee health, safety, productivity and ultimately revenue.

• Workplace Stress & Mental Health: Remaining employees may experience anxiety about their future, survivor’s guilt and stress from heightened expectations. This can lead to burnout fatigue, irritability and health problems.

• Workers’ Compensation Risks: Overworked employees are more likely to cut safety corners or make errors, increasing the risk of workplace accidents and potential harm to employees and customers.

• Errors & Omissions: Overextended employees may miss deadlines, cause service delays or neglect crucial safety procedures, potentially leading to customer dissatisfaction and liability claims.

Strategies to Mitigate Layoff Risks

To safeguard your organization against potential lawsuits and penalties, consider the following workforce reduction strategies:

• Consult legal counsel for guidance on layoffs and lawsuit prevention
• Work with your insurance advisor to ensure appropriate coverage (e.g., EPL, directors and officers) and risk mitigation strategies.
• Develop clear policies and procedures for employee discipline and termination.
• Implement probationary periods for new hires to allow for more flexible layoff options.
• Consistently document employee performance to defend against future claims.
• Create a comprehensive workforce reduction plan that outlines:
  • Analyzing the impact on your organization and ensuring compliance with legal protections for protected employee classes.
  • Establishing objective layoff criteria (e.g., seniority, field experience, job performance, disciplinary history).
  • Providing adequate notice to affected employees.
  • Communicating layoffs clearly and professionally.

We’re Here to Help You Navigate Through Economic Uncertainty

Economic challenges can have serious impacts on your business, forcing difficult decisions to maintain operations. The choices can also expose your organization to potential claims and lawsuits. Working with your trusted risk advisor can help develop risk-prevention strategies and secure appropriate protection to lower your overall exposures. Connect with a member of our team to help prevent employment risks and unnecessary claims.