April 01, 2001

Managing Change: Conducting;RIFs, Reorganizations and Retirements

19 min

Lay-offs are on the rise. In January 2001, there were 1,522 lay-off actions involving the termination of 50 or more persons from a single establishment. These layoffs resulted in a total of 200,343 newly unemployed individuals. See March 2, 2001 Bureau of Labor Statistics Report on Mass Lay-offs in January 2001. Moreover, current economic trends suggest that lay-offs and restructurings will continue and possibly multiple. In this economic climate, an understanding of the legal principles involved in separations is critical for employers.

In the world of employee relations, there is no more sensitive and complex task than planning and implementing a reduction in force ("RIF"), reorganization, or early retirement program. Instead of saving a company money by reducing its labor costs, a poorly planned program can be a legal boomerang - causing the company to incur costs and damages which far exceed the wages saved. The importance of adequate preparation cannot be overstated.


In deciding what selection standards to use in the RIF, strive for objectivity. Obviously, you must avoid any consideration of race, sex, age or other forbidden criteria. In this connection, the supervisors making this selection decision should be specifically instructed in writing that they cannot consider such factors. A structured selection process is generally preferable.

A. Use Appropriate Criteria

The standards which most frequently are used in a RIF are as follows:

1. Seniority

The use of seniority has pluses and minuses. The pluses are that seniority is strictly protected by Title VII and ADEA as a selection device. Furthermore, it is obviously objective and favors older workers. However, on the down side, it may not be practical to use seniority because the company may lose some of its better performers. Moreover, it may be counterproductive from an EEO standpoint if it results in the reduction of newly hired minority workers.

2. Past Employment Appraisals

This basis for selection should result in the layoff of employees who have the lowest employment evaluations. For this system to be legally effective, however, the evaluation system should have the following elements: (1) formal, systematic and periodic reviews; (2) written guidelines for evaluation; (3) identifiable, work related criteria; (4) an opportunity for employees to comment on their evaluations; and (5) a final review by a higher level of management. Although subjective standards should be avoided, subjective standards for evaluating employees are not per se illegal -- particularly in the case of higher level managerial and professional employees.

3. Present Employment Appraisals

This system for layoffs calls for the employer to evaluate its present work force to determine who are the poorest performers. To safely use this method for layoff, the company should establish specific criteria for evaluating its present work force, and the supervisors applying these criteria should be carefully trained. The employees evaluated also should have an opportunity for comment, and the evaluation should be subject to review by higher management.

4. Combination of Past Performance and Present Potential

One court has held that an employer legally could use the following general criteria in determining who should be laid off: (1) ability; (2) performance; (3) potential; (4) length of employment; and (5) needs of the business.

5. Quality of Production.

This can be an objective standard that can be used to determine who would be laid off. For example, one court has upheld an employer's use of "words per minute" in determining which keypunch operators should be laid off.

While the above standards have been approved in various forms by the courts, the following selection standards are to be considered very dangerous and likely to subject an employer to liability:

1. Pension or Retirement Eligibility

Both the EEOC and several courts have held that the use of pension or retirement eligibility as a standard for deciding layoffs has an adverse impact on older workers and violates the ADEA.

2. Amount of Compensation

The EEOC and the courts also take a jaundiced view of layoff decisions based on the compensation of its employees. The use of compensation as an overall selection standard could have an adverse impact on the company's older workers.

3. Potential Alone

The use of potential again can have an adverse impact on older workers. For this reason, companies should avoid using this standard as a sole and exclusive selection consideration.

B. Establish a Management Committee

As a part of any reduction in force, a management committee should be established to review all aspects of the reduction in force. The Chairman of the Committee should be a high and responsible company official who commands respect and, as a potential witness, can articulate both the legitimate reasons for the RIF as well as legitimate means by which it was implemented. The Committee preferably should include diverse representation, including minority, female, and older representation.

C. Define the Reason for the RIF

One of the most important questions a business faced with a RIF can ask has only one word: "Why?" Courts will ask that same question. Courts want to know why it was necessary to reduce the work force; why the total number of jobs reduced was selected; why the particular jobs were selected; and why any particular departments were selected. In planning the RIF, a company must have legitimate, non-discriminatory answers to these questions. Therefore, the second step in planning your RIF is to express clearly in writing the economic and business reasons for the RIF, the number of jobs that need to be reduced to satisfy the company's legitimate business needs, the types of jobs that will be subject to the RIF, and the departments or areas from which the jobs will come.

D. Analyze Work Force Composition Prior to RIF for Adverse Impact

Once the management committee members have compiled the workforce data discussed above, and after preliminary separation decisions have been made, the employer should undertake a careful adverse impact review. It is important to be mindful that laid off workers can sue the company not only for intentional discrimination but also if the company uses selection standards which are not job-related and have an adverse impact on a protected group. For this reason, it is important for the company to prepare a statistical impact analysis in advance of final RIF decisions.

Consistent with the Uniform Guidelines on Selection Procedures, committee members should analyze the work force based upon all protected categories under these statutes. Specifically, committee members should account for all employees by race, sex and age. Notably, a recent district court decision in the Fourth Circuit has suggested that, under some factual scenarios, an employee may even be able to raise a disparate impact disability claim with respect to an employer's workplace reduction. See Hoops v. Elk Run Coal Company, Inc., 95 F. Supp.2d 612 (S.D. W.Va. 2000) .

In addition to analyzing the protected or non-protected status of the entire workforce, the employer's management committee should also perform an overall analysis of the entire company or the portion of the company involved in the RIF. As a rule of thumb, if protected employees are laid off in percentages that exceed the Uniform Guideline's 4/5th Rule, the company must assure that the selection standards are job related. The disparate impact review should be applied by job title, department, division, and/or salary grade, as appropriate. Members of the management committee should compile this information with respect to both the pre-reduction and post-reduction workforces.

If, based upon the employer's review, a disparate impact is identified, the employer should revisit the selection criteria being utilized as well as the personnel involved in the termination selection process to insure that bias was not a factor in the decision-making process. Specifically, the employer should review the selection criteria to be certain that they are both job-related and consistent with business necessity. Employers that are not able to meet this standard should adjust the criteria and/or termination decisions accordingly.


Employers should strive to treat laid off employees equitably. This should include adequate notice. As outlined below, in some cases, employers have federal statutory notification obligations which must be satisfied. In addition, certain states, including Maryland, have notification requirements.

In 1998 the U. S. Congress enacted The Worker Adjustment Retraining Notification Act ("WARN"). See 29 U.S.C. &#sect;&#sect;2101-2109. As the name implies, the purpose of the Act is to "warn" employees of impending plant closures and mass lay-offs at least 60 days prior to their occurrence and thereby provide a measure of economic protection to workers and their families.

The WARN statute and regulations contain some universal provisions intended to guide employers through the difficult process of workforce reductions. What follows is a checklist of the key provisions of the WARN statute and regulations that employers must understand prior to undertaking any reduction-in-force. It must be stressed, however, that these provisions cannot substitute for fact-specific legal advice obtained at the outset of any workforce reduction.

A. Who Must Give Notice Under the Warn Act?

The WARN notice requirements are applicable to all profit and non-profit commercial enterprises and all governmental agencies that employ 100 or more employees (excluding part-time employees) or 100 or more employees who, in the aggregate, work a total of 4,000 hours per week.

Unless a statutory exception is applicable, the number of employees is to be measured as of the date the notice is required to be given, i.e. 60 days prior to the mass lay-off.

B. When Must Notice Be Given?

Unless one of the statutory exceptions apply, employers must give notice 60-days prior to a plant closing or mass lay-off.

C. Who Must Receive Notice?

An employer must give notice to (1) the authorized union representative of the affected employees; (2) if there is no union representative, each affected employee; (3) the state dislocated worker unit; and (4) the chief elected official of the unit of local government within which the plant closing or mass lay-off is to occur.

D. What Is A Plant Closing?

WARN defines a plant closing as a permanent or temporary shutdown of all or part of a single site of employment that results in an employment loss at such site for 50 or more employees during any 30 day period, not including part-time employees. This definition includes an "effective cessation" of production at such a site.

E. What Is A Mass Lay-off?

WARN defines a mass lay-off as a reduction in force, not due to a plant closing, that results in an employment loss at a single site of employment of: (1) at least one-third of the employees employed at the site (amounting to at least 50 employees); or (2) at least 500 employees (even if that number is less than one-third of the employees employed at the site).

F. What Is An Employment Loss?

WARN defines an employment loss as: (1) an involuntary termination not for cause; (2) a lay-off of more than six months; and (3) a reduction in hours of more than one-half during each month of any 6 month period.

G. What Information Must Be Set Forth In The WARN Notice?

The information to be provided in the notice varies depending upon the entity entitled to receive the notice. However, the notice requirements may be summarized to include: (1) the name and address of the site of the plant closing or mass lay-off; (2) the nature of the planned action, i.e. plant closing or mass lay-off, and whether it is expected to be permanent or temporary; (3) the effective date of the first lay-off and the anticipated schedule for subsequent lay-offs; (4) the job titles of the positions affected, the number of employees in each job classification, and the incumbents in those jobs; (5) a description of bumping rights, if applicable; (6) identification of union representatives, if any, of the affected employees; and (7) the name, address and telephone number of a company official who may be contacted for additional information.

H. What Are The Penalties For Violation of the Act?

WARN requires the payment of lost wages and benefits to the affected employees of employers who violate the Act. These lost wages and benefits may accrue up to 60-days.

Employers who violate the Act may also incur a civil penalty of up to $500 per day for failure to give the appropriate local government agency 60-day's notice of a plant closing or mass lay-off. WARN also provides for private civil actions in federal court and attorneys' fees to the prevailing party.

As noted above, full coverage of the WARN Act provisions is well beyond the scope of this summary and the information set forth above constitutes a mere checklist of the Act's key provisions. Employers are, therefore, cautioned to seek the advice of counsel prior to undertaking a reduction-in-force that might trigger WARN obligations.


Complex and costly benefit decisions need to be made as part of any RIF or internal reorganization (Reorg). This checklist identifies many of the issues involved in these decisions.

A. Structural Decisions

  • What is the philosophical basis for the severance package?
  • Should you be ERISA-fying the severance program?
  • Will terminations be voluntary, involuntary or both?
  • Will you use releases?
  • Money, money, money: how much do you want to spend?
  • Can you unilaterally set the agenda? B. Implementation Decisions

  • Decide what you want to do.
  • Decide what kind of help - inside and outside - you need.
  • Determine your implementation time line.
  • Do it. C. Benefits Decisions

    1)  RIFs

    Severance pay
    One or two tier?
    Will amounts vary?
    Installment payments, lump sum payment or both? 
    When will entitlement end?

    Career transition services
    Level of services? 

    Retirement plans
    Window inside plan? 
    Window outside plan? 
    Serious consideration? 
    401(k) distributions available?
    Partial or complete termination of plan?

    Health, life and accident benefits
    Company-provided period? 
    COBRA continuation coverage? 
    Conversion rights?

    2) Reorgs

    Retention bonuses
    Will amounts vary?
    Installment payments, lump sum payment or both? 
    Period covered


    Retirement plans
    Reduction or freezing of contributions to 401(k) and other retirement plans? 
    Partial or complete termination of plan? 
    Spinoff of plan? 
    New designs?

    Welfare plans 
    Continuity of leave benefits? Seniority? 
    Continuity of insurance programs? 
    New designs?

    Other benefits to address 
    Flexible spending accounts (health, dependent care). 
    Employee assistance plan. 
    Educational assistance benefits. 
    Group legal services plan. 
    Car lease or allowance programs. 
    Short term disability coverage.
    Long term disability coverage. 
    Workers compensation coverage. 
    Business travel and accident insurance. 
    Any other company-provided benefits?


    A. The Fundamental Requirements for Waiver

    As indicated above, many employers strive to provide severance pay to terminated workers, particularly those with lengthy seniority. Nevertheless, the specter of being sued by the same employee who recently received a generous severance payment has prompted many businesses to require that employees sign a release in order to receive such payments. These employers reason that an enhanced payment is a small price to pay for the protection from future lawsuits that a valid release provides.

    Yet, even with a signed release -- and a generous severance package -- some disgruntled former employees file suit under the Age Discrimination in Employment Act ("ADEA"). Employers have argued that such lawsuits are barred by the release signed by the employee at the time of his or her termination. As explained below, the EEOC has recently adopted regulations that impose significant new restrictions on employers seeking waivers of age discrimination claims and more easily permit employees to sue seeking to invalidate such waivers.

    In 1990, Congress passed the Older Workers Benefit Protection Act (OWBPA) as an amendment to the ADEA. The OWBPA established certain minimum requirements that must be met in order for an ADEA waiver to be valid. Specifically, the OWBPA provides that an individual waiver agreement: 

  • Must be written in plain language; 
  • Must specifically refer to waiver of claims under the ADEA by name; 
  • May not seek to waive rights or claims arising after the date the waiver is executed; 
  • In exchange for the waiver, must provide a benefit to the employee beyond the compensation to which the employee is already entitled; 
  • Must advise the employee to consult with an attorney before signing the agreement;
  • Must be accepted by the employee "in the absence of fraud, duress, coercion, or mistake of material fact;" and 
  • Must inform the employee that he or she has twenty-one (21) days to consider the agreement and seven (7) days to revoke it.
  • Additional requirements apply to waivers sought in connection with an "exit incentive program" or "other employment termination program."

    B. Exit Incentive or Other Termination Programs

    An "exit incentive program" is one that offers something of value to a group of employees in exchange for their agreement to voluntarily resign. In contrast, the phrase "other employment termination program" usually refers to situations where an employer offers such consideration to a group or class of employees who were involuntarily terminated. An exit incentive or other termination "program" exists whenever an employer offers additional consideration for the execution of a waiver to a group of two (2) or more employees.

    In an exit incentive or other termination program, the employees must be given forty-five (45), rather than twenty-one (21), days to consider the agreement. In addition, the employer must disclose specified information concerning the program to the employees from whom they seek the waivers. Specifically, the employer must disclose: (1) any group of employees covered by the termination program; (2) the eligibility factors and any time limitations applicable to that program; (3) the job titles and ages of everyone eligible or selected for the termination program; and (4) the ages of everyone in the same job classification or organizational unit who is not eligible or selected for the program.

    C. Tender Back Under OWBPA

    Under the traditional contract law, an individual who believes that a waiver or other legal agreement is invalid must return the payment received for the waiver before challenging it in court. This return of such payment is known as "tender back." An individual who fails to tender back the payment received is said to have approved of, or "ratified," the waiver. Under contract law, ratification prevents an individual from challenging a defective waiver in court.
    In Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998), the Supreme Court addressed the question of whether an older worker is required to tender back to the employer severance or other benefit payments received in exchange for an ADEA waiver before filing a lawsuit to challenge the waiver. In that case, the waiver signed by the employee violated the OWBPA's requirements in several regards because it: (1) did not give the employee sufficient time to consider the waiver; (2) did not afford her a seven day revocation period; and (3) did not identify the waiver of ADEA rights in the release. Relying on contract principles of tender back and ratification, the employer argued that the employee could not challenge the waiver's validity because she failed to tender back the employer's payments for the waiver when she discovered that it was defective, and thus, ratified the waiver.

    The Supreme Court rejected the employer's arguments, ruling that the employee was not required to tender back the consideration that she received for the waiver in order to challenge it as defective. The Court reasoned that the validity of an ADEA waiver should be determined solely with reference to the OWBPA because "the OWBPA sets up its own regime for assessing the effect of ADEA waivers, separate and apart from contract law." The Court explained that:

    Congress imposed specific duties on employers who seek releases of certain claims created by statute. Congress delineated these duties with precision and without qualification: An employee 'may not waive' an ADEA claim unless the employer complies with the statute. Courts cannot with ease presume ratification of that which Congress forbids. The Court reasoned that, because many discharged employees lack the resources to return the funds that they received for the release, "[t]hese realities might tempt employers to risk noncompliance with OWBPA's waiver provisions . . . . We ought not to open the door to an evasion of the statute by this device."

    The New EEOC Regulations

    Effective January 10, 2001, the EEOC amended its regulations to address the Oubre decision and related issues dealing with ADEA waivers. Consistent with the Oubre decision, the regulations provide that an employer may not require an employee to tender back severance pay or other benefits in order to challenge the waiver as inconsistent with the OWBPA. Thus, an older worker may retain such severance or other benefits, even if he or she subsequently challenges the validity of the ADEA waiver agreement in a lawsuit.

    According to the EEOC, if the waiver agreement even includes a "tender back" provision, such provision may invalidate the entire waiver. In addition, the regulations prohibit employers from penalizing an older worker for challenging a waiver agreement. For example, this means that an employer may not require older workers to agree to pay damages to the employer or pay the employer's attorneys' fees simply for filing suit. The regulations do, however, permit an employer to recover attorneys' fees if a challenge is filed in bad faith.

    If the waiver is challenged in court, the employer has the burden of proving that the waiver complies with the OWBPA's requirements, including that the waiver was "knowing and voluntary." If the employer can prove the waiver's validity, the older worker's lawsuit will be dismissed.

    The EEOC regulations also address "covenants not to sue." In some agreements, commonly called "covenants not to sue," the older worker's receipt of early retirement, severance pay or other benefits depends on the worker agreeing that: (1) he or she will not bring a lawsuit; and (2) if a lawsuit is brought, that the older worker will pay attorneys' fees and damages to the employer. The EEOC regulations indicate that covenants not to sue are, functionally, the same as waivers, because such covenants require older workers to give up the ADEA right to sue for age discrimination. As a result, ADEA covenants not to sue, and similar agreements, are subject to the requirements and restrictions of the OWBPA just like any other ADEA waiver provision, according to the EEOC regulations.

    Some waiver agreements contain clauses providing that the employee agrees to keep the agreement confidential or that the employee agrees not to disparage the employer, and typically provide for monetary penalties in the event that the employee violates such clauses. The EEOC regulations do not prohibit employers from continuing to include such clauses within an ADEA waiver. The EEOC noted, however, that the ADEA waiver must be clearly written so that a reasonable employee can determine that any penalty provisions for violation of confidentiality or non-disparagement clauses do not prevent the employee from bringing an ADEA charge or lawsuit challenging the validity of the waiver.

    The EEOC regulations also address the issue of what happens if an older worker successfully challenges the waiver, proves age discrimination, and wins a monetary award. In such event, the courts have the discretion to determine whether an employer is entitled to reduction in the employee's monetary award for amounts already paid to the employee under the waiver agreement. For example, if the employer paid the employee $5,000 in exchange for the waiver and the employee successfully challenged the validity of the waiver, proved age discrimination, was awarded $15,000 by a jury, the court could reduce the employee's award to $10,000 to reflect the amount already paid. However, the reduction of the employee's award may not exceed the amount the employer paid for the waiver in the first place. In addition, the reduction may not exceed the amount of the award if it is less than the amount paid for the waiver. EEOC also takes the position that an employer who prevails on the merits of an ADEA discrimination claim, but who used an invalid OWBPA waiver, should not receive any refund of the amount paid for the waiver.

    The new EEOC regulations impose significant new restrictions on ADEA waivers. Employers and their counsel should ensure that they modify their existing form waiver documents to comply with these new requirements. In the event that a waiver does not comply with these regulatory requirements, it may be subject to challenge and invalidated by the courts, undermining the purpose of seeking a waiver in the first place.