Risk Management

Layoffs Mean Lawsuits

With potentially costly legal claims by dismissed employees soaring, CFOs should make sure job-elimination plans are airtight.
Kate PlourdJanuary 22, 2009

Nothing in life is free. While companies are reducing head count to save money as the economy sinks, they should be prepared for the possibility of legal actions by laid-off workers, and for the accompanying costs.

The number of such actions is rising in tandem with the pace of job eliminations. “These cases are booming,” says Ted Olsen, an employer defense attorney with Sherman & Howard. Agrees Fern Singer of Baker, Donelson, Bearman, Caldwell & Berkowitz, “We’re seeing a major spike that doesn’t appear will abate anytime soon.”

The main categories of lawsuits are those in which employees claim their dismissal was discriminatory, usually based on age, and those pertaining to the federal Worker Adjustment and Retraining Notification (WARN) Act, which requires 60 days’ advance notice for mass layoffs and plant closings.

Attorneys advise that cautious planning when making layoffs will help avoid a trip to court. “When you do a layoff of any size, take enough time to make sure it’s done right,” says Singer.

CFOs may not be directly involved in executing layoff plans, but the risk of a sizable legal judgment gives them plenty of reason to satisfy themselves that a plan is legally sound.

The first step should be creating a business plan that explains the need for the layoffs, what facilities or businesses will be affected, the number of positions affected, when the layoffs will occur, and how they will be announced, before any actions are taken. “There have certainly been some times where I’ve had to tell management to either come up with a more defendable reason for the layoff or rethink the decision,” says Olsen.

Juries often side with employees when the employer doesn’t have adequate documentation of those things. “Everyone is in such a crisis mode when they’re involved in workforce reductions that things they may think are obvious to the world are not so obvious,” observes Olsen.

The potential for discrimination lawsuits makes it essential that employers create an objective selection process for deciding which employees to let go. If 25 workers are dismissed and 20 of them, say, are over age 50, the chances of a lawsuit rise dramatically.

Lawyers suggest that executives create a list of criteria for evaluating employees, which may include years of service, experience in the field, job performance, and disciplinary history. A weighting should be assigned to each criterion, and each employee should receive a numerical rating in each category, advises Olsen.

It may prove difficult to avoid exceptions to the process. For example, a job-performance measure may take into account employees’ past three annual reviews, but some people will have been hired more recently. Diligently document and explain in detail any reason for breaking from the official process, Olsen urges.

But even a thoroughly objective selection process, while defensible in court, is no guarantee a lawsuit won’t be filed. As a further safeguard, Singer says, companies should conduct an impact analysis of how layoff decisions will affect the makeup of each protected class of employees. If a protected group is disproportionately affected, the company may want to alter the plan.

Further, companies should consider hiring a statistician to evaluate the layoff selection criteria and ensure that none of them is itself discriminatory.

A company’s legal concerns don’t end with the selection process. Executives who deliver the bad news must tread carefully with their word choices so as not to across as apologetic or sugar-coat the real reason the employee is being dismissed.

“By saying something like, ‘This isn’t your fault, this is our fault,’ you may be falling on your own sword,” says Olsen. The employee easily could use such a statement against the company in court.

Meanwhile, labor lawyers expect to see a continuing rise in lawsuits related to the WARN Act as more mass layoffs are implemented. While most employers are familiar with federal WARN requirements, many state and local municipalities have more stringent notice requirements, according to Singer. “Companies must check with their local entities about the requirements well ahead of making layoffs,” she says.  

Lawyers also report that laid-off workers increasingly are filing suits relating to the Family Medical Leave Act, the Fair Labor Standards Act, and wage and overtime disputes. Many people never would have asserted these claim had they not been let go, according to attorney Steven Adler of Cole, Schotz, Meisel, Forman & Leonard.

Adler adds that he also is watching for a rise in whistleblower cases from former employees. “As more and more people get terminated, there’s going to be more and more litigation,” he says.



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