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Uncertain economic conditions and recessionary concerns often force senior leaders to consider layoffs as a method of market survival. Signaling a potential trend of widespread workforce reductions, numerous large employers (e.g., Google, Disney, Meta) have recently made significant cuts to their labor force. While this strategy may initially save your company money, there is an inherent risk of claims and fines that can’t be ignored.

Common Workforce Reduction Exposures

Employers should always consult with legal counsel prior to conducting layoffs or furloughs to ensure compliance with all applicable state and federal laws. Along with legal and financial implications, missteps can also have negative impacts on your business’ and leadership’s reputation.

Legal Regulations & Potential Fines

Title VII of the Civil Rights Act

This law offers workers protection against employment discrimination. The Equal Employment Opportunity Commission (EEOC) warns employers to review all processes and procedures before implementing a workforce reduction. Once a roster of affected employees is established, you should meticulously evaluate for any disproportion of federally protected groups (e.g., age, disability, sex). This can save your company from potential EEOC investigations and employment practices liability (EPL) claims.

The Worker Adjustment and Retraining Notification (WARN) Act

The WARN Act entitles workers to a 60-day advance notice of imminent layoffs. Employees must be informed whether the layoff is permanent or, in the case of a furlough, when they can expect to return. Many states also require employers to provide advanced notice to local government officials or other applicable parties. Violations can not only bring about government fines, but some states allow officers and directors to be held personally accountable for breaches of these fiduciary duties. 

The Fair Labor Standards Act (FLSA)

The FLSA distinguishes the categorization of employees by either exempt or nonexempt status. It is important to note that the FLSA requires exempt employees to be compensated their full salaries. This is required if any work is performed within the workweek, regardless of if their hours are reduced.

Potential Exposures from Labor Reductions

When there is a significant decrease in staffing, responsibilities often get added to the workloads of the remaining employees. This can substantially influence employee health, safety, productivity and ultimately revenue.

Workplace Stress & Mental Health Fatigue

Left behinds are more likely to feel anxious about their future, guilty for surviving and stressed with expectations. Burnout is one of the biggest contributing factors to deteriorating employee mental health. Chronic workplace stress can contribute to increased employee fatigue, irritability and health problems. In addition, workplace stress costs U.S. employers approximately $300 billion in lost productivity annually.

Workers’ Compensation Concerns

Businesses in all sectors risk several liability exposures because of widespread labor shortages. Overworking current employees can increase the risk of workplace accidents as they’re more likely to cut safety corners or make careless errors during their daily tasks. These incidents could lead to major liability concerns from harm or injuries to both employees and customers.

Errors & Omissions

Overextended employees are more likely to miss important project deadlines and cause service delays, contribute to disgruntled customers and increase associated liability problems.

Tips to Protect Your Business Against Layoff Exposures

Strategies to safeguard your organization against potential lawsuits and penalties include:

• Retaining legal counsel as a source of guidance for layoffs and to protect against lawsuits.
• Working with your broker to make sure you have the right coverage (e.g., EPL, directors and officers) in place and offering risk mitigation strategies for layoffs.
• Ensuring that your company has written policies and procedures for employee discipline and termination.
• Creating a probationary period for all hired employees where they can be laid off for any reason without severance.
• Documenting employee performance reviews and actions as the best defense against future claims and lawsuits.
• Creating a workforce reduction business plan that outlines:
• Analyzing a layoff’s influence on your organization and its potential to unlawfully impact a protected class of employees.
• Establishing objective layoff criteria to evaluate employees (e.g., seniority, field experience, job performance, disciplinary history). Weighing each area to ascertain an employee rank that can be implemented as a decision-making tool for a massive layoff.
• Providing workers adequate notice before their position will be terminated.
• Avoiding apologies when communicating the layoff news to employees.
• Remaining calm and ignoring threats or accusations. Don’t retaliate against employees who become angry or aggressive when laid off.

We’re Here to Help Protect Against Recessionary Risks

A recession can have serious impacts on your business. Leaders are forced to make difficult decisions to keep their companies afloat and survive the economic downturn. Unfortunately, these choices can also put your business at risk of potential claims and lawsuits. Your broker can offer risk-prevention strategies and protection that can lower your overall exposures and help you stay afloat. If you have questions about layoff risks or other recession exposures, connect with a member of our team.