Layoffs Without Lawsuits: Avoiding Litigation When Terminating Employees

With the recession wreaking havoc on revenues, business owners from coast to coast are reducing employment rolls to control operating costs. Too often, though, terminations are carried out in ways that spark costly litigation.

"Given the increasing number of layoffs in recent months, there is bound to be an uptick in wrongful discharge lawsuits," says Joseph P. Harkins, a partner in the Washington, D.C., office of San Francisco-based Littler Mendelson, the nation's largest employment law firm representing management.

Lawsuits increase during economic downturns for three reasons. First, the fact that more people are being let go increases the pool of possible litigants. Second, a growing array of federal and state laws protects workers from discrimination during termination, providing the grounds for lawsuits. Third, many attorneys are themselves looking for more business, and thus are willing to represent plaintiffs on a contingency basis. That encourages litigation by terminated workers who see courtroom awards as valid replacements for lost paychecks.

Avoid Litigation
Discharged employees may bring two types of lawsuits. The first alleges a straightforward legal failure: Perhaps the employer has ignored a written or oral employment contract, or violated public policy in firing people for undertaking jury duty or some other federal or state mandate.

Discrimination lawsuits are more common in a recession, because many layoffs present the appearance of bias against protected groups even when no such unfairness was intended. The plaintiffs assert that terminations were influenced by age, sex, race, religion, national origin, or disability. Such cases require more time and cost to defend - and employers can be hit with huge punitive damages. You can avoid this trap by defining the goal of your work force reduction, then assuring your terminations support that goal.

"Probably the most important thing is to set an objective," says Harkins. Perhaps your goal is a straight forward downsizing: "Do you need to reduce head count and control costs?" he says. "In that case, you need to do a ranking of all of your employees, keeping the best and laying off the worst."

Or your goal might be more strategic. "Perhaps you decide you are not going to provide a certain service or line anymore, and focus instead on your core business," says Harkins. "In this case, you can decide who you must let go because they do not have the skills to support your new strategy."

Probably the most common mistake is to mix the two objectives or not have any goal beyond some panicky cost control, according to Harkins. In such cases, it's too easy to terminate individuals without sufficient thought and without adequate documentation supporting the criteria used.

That carries strategic and legal risks: Six months down the road, you may realize you let the wrong people go. And it opens the door to charges by discharged individuals that your real goal was discrimination: You wanted to rid your workplace of individuals with characteristics protected by federal and state law.

It's wise, then, to spend some time defining where you want to be in a year or two. "Do a strategic assessment of your business to determine longer-term opportunities you want to develop," says Ian Jacobsen, president of Jacobsen Consulting Group in Sunnyvale, California. "Let's say that you see a potential market for additional avenues of business when conditions improve. You will probably want to keep the people who are best for helping you grow your business in those areas as you ride out the recession."

Keep Records
Keep careful records that show how your terminations support your goal. "You definitely want to document your reasons at the time of discharge," says Harkins. "If you do get hit with a wrongful discharge suit, you can say `Employee A had a better set of skills than Employee B for the service we were planning to focus on in the future.' Or, `I needed people who had two skills and Employee B was less versatile.' Documenting this thought process at the time will make your case more credible later."

If your goal in reducing your work force was an overall savings, this should also be documented. "What is important is your decision process at the time of the layoff," says Harkins. "Documenting your good faith reason will help assure it remains the focus in any lawsuit."

Once you have decided whom to let go, assess the makeup of the departing group. Does it have a higher proportion of individuals with protected characteristics than your surviving work force? If so, your layoff would seem to have what attorneys call a "disparate impact" and that can be evidence of discrimination. "If there's no disparate impact and no appearance of discrimination, your group being laid off should look like the group in the work force," says Harkins. Disparate impact can be harmful not only in terms of costly litigation but also in the diminished morale of people left behind and even in tarnished customer relations following news reports of discrimination lawsuits.

Treat People Well
Treating people well during termination is the right thing to do from the human point of view. It's also smart legally. Fact is, people who are angry about how they were treated on the way out the door often sue their ex-employers.

"Discharged employees often go to lawyers because something in the circumstances of their termination made them angry or seemed unfair," says John J. Myers, chair of the labor and employment law department at Eckert Seamans Cherin & Mellott in Pittsburgh, Pennsylvania. "Treat the departing employees with dignity. I also counsel to give employees complete explanations as to why you are terminating, as opposed to staying vague and elusive. Hopefully they will then understand why you are doing what you have done, and that reduces the likelihood of going to court."

Indeed, attorneys suggest going the extra mile and taking a proactive stance in helping employees move on. Consider arranging for outplacement to get people focused on the future and getting on with their lives. People left unassisted are more likely to file a lawsuit as they brood on what happened.

Offer Severance Agreements
One way to help ensure you do not become the target of wrongful discharge lawsuits is to ask departing employees to sign documents that release your firm of any liability in exchange for a severance packages.

"Many times RIFs (reductions in force) are done without severance packages and corresponding releases," says Harkins. "This is usually a mistake because most people are not looking for huge packages. They just want some transition money to take care of their families until they come up with something in a few months. Provide some transition pay and you are less likely to be the target of litigation."

One approach is to offer "notice pay," a week or two until the next payroll date, with no need for the employee to report to work. "If an employer can afford it, and even for a small amount of money, it is usually worthwhile to obtain a general release of legal claims," says Harkins. "Legal consideration to support a valid release is anything of value that the employer is not otherwise required to provide. So even a day's pay can justify a release of any discrimination or other wrongful discharge claims."

After the Layoffs
If you're facing the necessity of downsizing your own work force, you're probably feeling a good deal of stress. No one wants to make a decision that will disrupt the lives of so many people, especially in today's environment where jobs are hard to come by.

Layoffs can also affect the morale of people left behind. "Employees retained in a layoff are apt to feel `survivor guilt,' especially if they don't know why they were retained when their colleagues were let go," says Jacobsen. "That's why it is so important to explain to them the reasons that they were kept, and what they will be doing in the new, `pruned' organization. In all probability, their jobs will change some to cover part of the work of the people who were let go. They need to understand that not all of the work that was done prior to the layoff will be done in the post-layoff business."

To manage survivor guilt, meet weekly with the retained employees for the first month or more to find out how things are going for them. What's working and what's not? By solving or helping them solve problems they are experiencing post-layoff, you will ease their stress and build your relationship and credibility with them.

"One way to reduce survivor guilt is to get the remaining employees involved in the mission of cost cutting, or thinking of more efficient ways to do things," says Harkins. "People often work off stress by feeling they are getting the business back in order."

Also, try to stay in touch with the group that has departed. "The knee-jerk reaction is to not have your employees stay in contact with laid off people," says Harkins. "That can be counterproductive because some of those people might reapply or they might be able to recommend someone when business picks up. You never want to burn a bridge in anything that deals with human resources."

Stay Safe
Recessions happen. They are a fact of business life. Fortunately, they don't last forever. You want to respond to the recession in a way that builds bridges to the future. That means conducting a layoff ethically and professionally. "Unless you plan to close your business, you want to maintain a reputation as a good place to work," says Jacobsen. "When you survive a recession and start hiring again you want to be able to recruit the best people. And the best people will remember how you conducted your layoff."