Layoffs Without Lawsuits: Avoiding Litigation When Terminating Employees
Managers who approach their employees carefully in the wake of economic job eliminations may avoid legal problems later.
Phillip M. Perry (Apr/May 09)
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.
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 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.