Let’s face it, layoffs are inevitable in these hard economic times. We are constantly bombarded with media reports of massive layoffs. While laying off employees may be necessary for your company to survive in this economic climate, the lawsuits that may follow from a poorly executed layoff plan can financially cripple your company. Even worse, the costs of the lawsuit can be greater than the laid-off employee’s salary and benefits.
Some employment laws permit the employee to recover punitive damages—among other things—against your company, and impose personal liability against management. Some laws may require your company to pay not only your own legal fees, but the legal fees of the employee as well. Here are some measures you can take to help avoid this from happening to you and your company:
1. Don’t lie to your employees.
If you are laying off employees because of financial reasons (as opposed to their job performance), tell them so. It is best to admit the company has been hit by hard economic times and, as a result, the company must lay off one or more employees.
2. Obtain a waiver or release from the employees.
Always ask the employees who are being laid off to sign a waiver or release form. A waiver or release is a written agreement from the employee stating that the employee will not sue you or
your company. Without a release or waiver, upset employees may sue you, your company and management for employment discrimination, contending the real reason for termination was related to their age, gender, religion or race. Even taking the least painful approach to layoffs, such as terminating someone who is very close to retirement or a woman who you know is not the primary breadwinner in the family, can lead to lawsuits for age and sex discrimination, respectively.
When preparing waivers or releases, it is critical to comply with federal and state employment laws. For example, under certain laws, a waiver or release is only effective if it contains specific language. That language is set forth in the applicable statutes (or laws). Furthermore, the release or waiver must be easily understood so the employee may waive his or her claims knowingly and voluntarily.
In addition, be careful when giving the employee a deadline for signing the waiver or release. For instance, certain laws provide that, if an employee is older than 40, he or she must have a minimum of 21 days–and 45 days if more than one employee is being laid off–to consider signing the release. If the employee signs, he or she also gets seven additional days to change his or her mind. Also, if more than 50 employees at a time are being laid off, the law may require 60-days notice be provided to employees, labor unions and governmental authorities. If these (and other) laws are not complied with, the release or waiver is not enforceable and the company may be liable for damages.
3. Consider severance payments. Employees are not likely to sign a waiver or release, in which they give up their right to sue, and a waiver is not likely to be enforceable, unless they are given a severance payment or similar benefits. Check your company’s severance payment policy and be sure to abide by its terms.
If your company does not have a written severance policy, prepare one and limit its application to the layoff at hand. Include standardized criteria for determining which employees are to be let go. For example, layoffs typically involve employees in the same job classification. Utilize objective criteria, including length of service and title, when setting the layoff policy.
Also, the severance policy should state that the payment is conditioned on the employee signing a waiver or release. Do not give a severance payment to an employee unless, and until, he or she executes a waiver or release.
4. Give employees a separation letter. Your company should provide a separation letter to each affected employee. Be sure to at least address the following points in the letter:
• Notify the employee that the company regrets having to terminate employment because of current economic conditions.
• Inform the employee of his or her entitlement to COBRA benefits. Include an explanation of those benefits.
• Let the employee know he or she is eligible for severance benefits, if applicable. Include a proposed waiver or release for the employee to sign and return. Let him or her know the severance payment will be paid after the company’s receipt of the executed waiver or release.
• Include a statement reminding the employee of any ongoing duties under any confidentiality or non-compete (or other) agreement with the company, if applicable.
5. Don’t breach employment contracts. The guidelines above apply only to at-will employees (i.e., employees who do not have contracts limiting when or how their employment can be terminated). Wherever employees are subject to employment agreements or collective bargaining agreements through unions, the terms of those agreements must be adhered to. Otherwise, the employees may be able to sue your company for breach of contract.
6. Check your insurance policies. If you get sued for employment discrimination or wrongful termination of the employee, check your company’s general commercial liability insurance policy to see if the claim is covered. In addition, check your insurance policy before laying off any employee to see if employment-related claims are covered. If they aren’t, look into getting this coverage.
Finally, because many exceptions apply to employment laws, it is best to consult with an attorney before laying off employees and preparing any of the above-mentioned items. While consulting with an attorney may cost a few dollars now, don’t be penny-wise and dollar foolish, especially in this economic climate. Consulting with an experienced attorney beforehand can help avoid the greater costs associated with defending a lawsuit.
Lisa A. Lori, Esq., is a partner in the litigation department at Klehr, Harrison, Harvey, Branzburg & Ellers, LLP. Lori represents clients in a full range of complex commercial litigation matters, including employment, intellectual property and general business torts. She also counsels clients on a variety of issues, including advertising, marketing, branding and regulatory compliance.
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