In case you’ve been hiding under a rock somewhere, doing your personal version of Thoreau’s hermit-like lifestyle or are otherwise oblivious to the world around you, I have an announcement for you: The economy is tanking.1 The Dow is declining as if it’s fallen into a bottomless pit, the credit markets are completely seized, consumer confidence is in the toilet, and it’s readily apparent from every interview of every presidential and vice-presidential candidate that no one has a clue about how to actually fix the problem.2 And based on what the current president said last night (October 6, 2008), the biggest bailout in the history of pork-barrel spending will take months and months to actually trickle its way, in the words of the overused cliché, “from Wall Street to Main Street.”3
At this point, you’d probably like to know why a labor and employment lawyer is writing about the horrid state of the economy. A good question, especially considering my self-directed 401(k) is performing almost as poorly as my self-managed fantasy football team.4
The answer is somewhat logical (a statement that doesn’t ordinarily apply to employment law matters in California). Couple the “credit crunch” with lower consumer spending, and you end up with a perfect cash flow storm that can lead to the decline or outright sinking of many businesses. When this happens, companies find they can’t make payroll, employees lose jobs and have a difficult time finding alternative employment, and an increase in employment-related litigation can ensue. While some of that litigation is the result of employees who would have sued even in the best of economic times, other parts can result because managers and owners feel pressure to try and “right the ship” immediately. In doing so, the planning that’s necessary to avoid employment-related claims can be overlooked.
Over the next six months, California businesses will undergo a drastic increase in layoffs, closures and insolvencies. These will result from failed businesses as well as from redundancies caused by businesses that sell to investors as a means of potentially salvaging the entity. But there are a number of significant alternatives that, if implemented early on, can ease financial concerns. These include wage cuts, cutback of hours for non-exempt employees (be careful about exempt employees—hours cutbacks with commensurate pay reductions can destroy the exemption) and offering voluntary separation packages to employees.
If those measures aren’t enough to stave off a layoff or closure, you need to be aware that a number of different laws can affect how you go about conducting the layoff. The first two are the federal and state Worker Adjustment and Retraining Notification (WARN) Acts. These laws require 60 days notice to affected employees and governmental entities of certain layoffs and plant closures for businesses with 100 or 75 employees, respectively.5 A failure to comply with the notice provisions can result in payment of 60 days pay to the employees, as well as significant penalties.
Under the federal WARN Act, there is an exception for the notice provisions for a dramatic economic downturn. That exception isn’t available in California’s version, although the state version allows delay in notice for businesses making attempts to obtain financing.
In conducting a layoff or reduction, your business should establish criteria for determining who’ll be included. The more objective the criteria (seniority, cost, redundancy, individuals currently on performance plans and so forth), the less likely you’ll be sued for the decision to include any particular individual in the reduction. On the flip side, the more subjective the criteria, the greater the risk of suit by any particular individual who, for instance, recently told you of their medical condition or reported your company to the EPA for dumping toxic goo in the river.6
Many businesses attempt to minimize the potential for lawsuits by offering “severance and release” agreements. But keep in mind that, in the context of a group termination, to obtain a release of federal age discrimination claims, employees over the age of 40 must be given 45 days to review the agreement, a seven-day period to revoke the agreement, written notices and disclosures, and specific “demographic data” detailing the ages and job titles of all individuals considered and selected for layoff. Putting this information together—and analyzing it to ensure no intentional or “accidental” discrimination has occurred—isn’t an “I need it by tomorrow” endeavor.
For all businesses, regardless of size, when employees are terminated from employment (including a layoff), final wages are due and owing on that day. There’s no exception for a failing business, and it’s not a defense that the business has insufficient funds to make payroll. In the event your organization could be seeing a major reduction in its workforce, plan to set aside sufficient funds for final paychecks, including accrued but unused vacation or “PTO.”
Hopefully, your organization is well prepared to weather this economic downturn. But if you notice the corporate ship is taking on a lot of water, give yourself adequate time to prepare if bailout efforts are insufficient or work too slowly to keep the company from sinking.
1 I had a more colorful phrase than “tanking,” but those funny censorship types wouldn’t let me
write it!
2 By the time you read this, the seemingly longest presidential campaign in the history of mankind
will be over. And the winner is…?
3 I wish every reporter who ever used that term would spontaneously combust.
4 The only thing on Earth further down the tubes than the economy!
5 What constitutes an “employee” can be a complicated issue and differs between the federal and state laws. If you’re close to either threshold, contact counsel.
6 In case you’re wondering, the rest of us would prefer you not dump toxic goo into the river.
