Tamsin Kaplan is an employment lawyer and business litigator at Boston-based law firm Davis Malm. Michelle Cassorla is an employment lawyer at the firm. This article does not constitute legal advice.
From the recent bankruptcy of Steward Health Care, a large hospital system in Massachusetts, to Bristol Myers Squibb’s recent announcement that it would be laying off approximately 2,000 employees, to numerous biotech startups around the country, reductions in force and employee layoffs have become all too common.
Employers should be aware of their rights and obligations in these difficult situations and plan carefully.
Reductions in force: selection for layoff
Employers generally have broad discretion as to which employees to include in a layoff. Employee selection will likely depend on the circumstances that have led to the need for a reduction in force. For example, a company with a department that is no longer needed could choose to lay off the entire department, while a company looking to reduce the size of its workforce could choose to lay off a certain number of employees across multiple departments.
While employers have significant discretion in determining which employees to terminate, that discretion is not unfettered. Federal laws prohibit selecting employees based on protected characteristics such as age, disability, race/ethnicity, religion, gender (including sexual orientation and gender identity) and national origin.
Employers are also prohibited from selecting employees in response to their protected activity, including, for example, complaints about unlawful discrimination or harassment or certain wage violations. Many states have additional protected classes. Keep in mind that any employee who believes they were terminated based on an unlawful reason may pursue a legal claim against the employer.
Contractual obligations
Importantly, before moving forward with a layoff plan, all pertinent employment agreements must be reviewed to determine if there are any contractual requirements associated with termination of any employee who may be affected by the layoff. Individual employment agreements or collective bargaining agreements may contain any number of requirements related to termination including, for example, notice, bumping rights, rehire eligibility, final pay, severance pay, benefits, etc.
Pre-existing employment agreements may also contain any number of provisions that govern employees during the termination process and/or post-employment, including, for example, return of property, confidentiality, trade secrets, intellectual property, nonsolicitation, noncompetition and other restrictive covenants and employee obligations. It is best practice to communicate clearly with employees impacted by a layoff about their obligations at termination and going forward.
Severance agreements
Assuming the employer has no contractual obligation to provide severance pay, there is no legal obligation to provide severance pay. Nonetheless, it is generally best practice to offer every affected employee severance pay and/or benefits in exchange for a release of claims.
In the absence of a severance plan, or an individual or collective contract governing severance, the amount of the severance is entirely at the employer’s discretion; it could be a set amount for all employees, it could be calculated as a certain amount per year of service, or it could be a different amount for different job titles. In exchange for this severance payment, employers should require employees to sign a release, in which the employees waive their rights to sue the employer to the extent allowed by law.
Severance agreements often include a requirement that prevents employees from disclosing the terms of the severance agreement (generally known as a “confidentiality provision”) or a provision forbidding employees from making statements that could be seen as harmful to the employer (generally referred to as a “nondisparagement clause”).
The National Labor Relations Board has recently determined, however, that only very narrowly tailored confidentiality and nondisparagement provisions are lawful. It is best practice to be clear that such provisions are not intended to interfere with employees’ rights under the National Labor Relations Act.
Older Workers
Employees who are 40 years of age or older are entitled to some additional protections in a layoff.
First, such workers must be given at least 45 days to review and sign the severance agreement, plus an additional seven days to revoke their signature. (Notably, there is no requirement of any particular length of time for review and no revocation period required for workers under 40.)
Also, the employer must provide laid-off workers who are 40 or older with the ages and job titles of all employees in the relevant unit or units who are impacted by the layoff and those not impacted. The purpose of this disclosure is to enable employees to evaluate whether they might have a claim of age discrimination.
There are also specific notifications that must be included in severance agreements for the employees in this age group, including with respect to such employees’ rights to consult with counsel. If any of these requirements are not met, any purported release of age discrimination claims could be invalid.
WARN Act
The Worker Adjustment and Retraining Notification Act is a federal law generally requiring that employers with 100 or more full-time employees provide written notice at least 60 days in advance of: closing a worksite with at least 50 employees; a mass layoff affecting at least 50 employees and one-third of the company’s total workforce; or a mass layoff of at least 500 or more employees at a single site of employment during a 90-day period.
If 60 days of advance notice is not provided, the employer must provide 60 days of pay.
With the rising prevalence of remote work, the applicability of the WARN Act to remote workers is evolving. Termination of large numbers of employees, some or all of whom are remote workers, may trigger the WARN Act.
Payment for wages owed
Regardless of whether the employer offers severance payments to its employees, employers are legally obligated to pay employees any wages they are owed through their last day of employment.
Depending on the situation and the state, outstanding wages could also include commissions, bonuses, vacation pay, etc. Many employers pay all outstanding wages owed on the employee’s last day. Legal requirements with respect to the timing of this payment are generally governed by state law, and penalties for late payment may be significant.
Health coverage
Under the Consolidated Omnibus Budget Reconciliation Act, most employees are entitled to elect to continue participation in employer-sponsored health insurance plans for a period of time post-employment at their own expense.
There are many aspects of a layoff that require thoughtful planning to reduce the employer’s risk of liability. Employment counsel should be consulted to ensure that any layoff is planned and executed carefully, and in full compliance with all applicable laws.