Downsizing your workforce: Legal, strategic and practical issues

As businesses struggle to stay afloat amidst the COVID-19 crisis, many CEOs are facing tough decisions about how to manage their workforce costs. For some, downsizing employees isn’t optional; it’s necessary to keep the business functioning in some form.

If you’re facing this reality, you may be wrestling with the best course of action — especially in light of new legislation, such as the CARES Act. Is it better to reduce your employees’ hours or reduce their pay? Is it better to furlough your staff or lay them off? Should you offer severance packages and, if so, who should receive them?

Each of these options has different legal, strategic and practical implications, says Joel J. Greenwald, managing partner at Greenwald Doherty LLP, who specializes in employment and labor law. “How you navigate these employment issues is crucial for your financial survival as a business,” he says.

Together with partners Zev Singer and Kevin Doherty, Greenwald recently delivered a webinar to help business owners understand their options for managing employees in a crisis. Here, a summary of some key points discussed in their presentation.*

If you’re considering reducing your employees’ pay or hours:

• Put it in writing. Before you reduce your employees’ pay or hours, you need to clearly communicate those changes in writing. Outline what you will pay your employees, when they will work, how much they will work and what your expectations are for the work.
• Stay above the minimum wage and salary thresholds. If you are reducing the pay of hourly workers, you cannot go below minimum wage. If you are reducing the pay of salaried workers who are exempt from overtime because of their duties, you cannot go below the federal and state salary thresholds. For salaries, the federal threshold is $684/week, but many states have a much higher threshold (e.g., in New York, the threshold is $1,125/week). Remember that “nonexempt” employees are still entitled to overtime, even if they are paid a salary.
• Know the rules for union workers. If you have union workers, you must consult the collective bargaining agreement before reducing anyone’s pay or hours.
• Review your state’s laws for unemployment insurance. If you reduce an employee’s hours, they may be entitled to unemployment insurance. Laws differ state by state.

If you’re considering switching employees from exempt to nonexempt status (or vice versa):

• Give legal notice. You must provide legal notice when you change someone’s status from exempt to nonexempt, or from nonexempt to exempt.
• Consider creative solutions. If you need to reduce the salary of an exempt worker, changing their status from exempt to nonexempt may help mitigate their financial loss by making them eligible for overtime.
• Establish a process for daily time-tracking. If you’re moving employees to nonexempt status, establish a clear process for how they should submit their timesheets or invest in a software for time tracking.
• Communicate your reasons for the change. If you change an employee’s status from exempt to nonexempt, they may feel like they are being demoted. They may also find it degrading to track time if they haven’t done it before. “It’s important to set up a system for them and communicate that the change may be temporary,” says Greenwald.

If you’re considering furloughs or layoffs:

• Make decisions objectively. Base any decisions about furloughs or layoffs on objective, nondiscriminatory criteria. For example, you might decide to lay off a specific department, let go of employees who cannot perform their job remotely or furlough new employees hired in the last six months. If you want to lay off your lowest performers, make sure your decisions are carefully documented and nondiscriminatory. If someone does accuse you of discrimination, you will need to demonstrate that was not the case.
• Review collective bargaining agreements. Again, if you are dealing with union employees, review your collective bargaining agreement for layoff selection criteria.
• Understand the implications for unemployment benefits. Employees who are completely furloughed are likely to receive the same unemployment benefits as employees who are laid off. However, some companies prefer to lay off employees because unemployment benefits may be potentially clearer and/or easier to access.
• Check your company’s PTO policy before making layoffs. If your company has a policy of paying Paid Time Off (PTO) when employees leave, laying off a group of employees may trigger this requirement — unless your company has an explicit policy or state law that says otherwise. “This is really important,” says Singer. “If the whole point of laying people off is because of business concerns and cash flow issues, be careful you don’t incur a huge pay out of PTO. This is why some companies are deciding to furlough versus lay off employees.”
• Talk to your health insurance company about eligibility policies. Due to COVID-19, some insurance companies are temporarily changing their rules about eligibility for employees who are furloughed or laid off. Talk to your insurance company before making any decisions about furloughs or layoffs so you can make a decision that will benefit your employees the most.
• Meet your state’s paperwork requirements. Many states require companies to meet specific paperwork requirements when terminating employees. This paperwork includes information about health insurance options, such as through COBRA. States also have different laws about PTO pay outs in the case of furloughs and layoffs.
• Consider whether layoffs will trigger the WARN Act. Companies that fall under the federal or state-specific Worker Adjustment and Retraining Notification (WARN) Acts must give employees 60 days’ notice of termination (or more, depending on the state) if they terminate a certain number of employees in a certain period of time (e.g., under federal law, 50 or more employees for six months or more). An exception is made for “Unforeseeable Business Circumstances,” but it is unclear whether and when this applies to COVID-19. “WARN is one of the most complicated employment law issues,” says Singer. “I would be careful there.”

If you’re dealing with unemployment insurance:

• Understand what constitutes a qualifying event. Any work reduction may be a qualifying event for unemployment benefits. So, if you transition a full-time employee to part-time employment, they may qualify for unemployment. Layoffs and furloughs may both be considered qualifying events.
• Don’t promise any unemployment benefits. Although you should encourage employees to apply for unemployment, you should not promise them any specific benefits. Remember: It’s up to the states to decide what benefits they will grant. Also, because the U.S. is currently dealing with an unprecedented number of unemployment applications, it is unclear how long it will take for employees to actually receive their first unemployment check. “I can’t emphasize this enough: Don’t promise your employees when they’re going to get their unemployment check and how much they’re going to get,” warns Singer.

If you’re considering offering severance:

• Review your state’s requirements. In most states, severance packages are not required. However, there are some exceptions. New Jersey, for example, has a new law coming into effect this summer that requires severance be paid to employees in some mass layoff situations.
• Understand the potential legal ramifications. In general, severance is an exchange of money for releasing any claims against a company. However, putting conditions on a legal agreement can invite lawyers to get involved.
• Use severance strategically. If you have problematic employees who might try to sue you in the future, severance might be a way to “get a clean slate,” says Singer.

When considering each of these options, leaders should “prioritize safety,” says Greenwald. “The law is just a part of the picture. The safety of your workforce and the safety of society is of paramount importance. In other words, your decisions should be made through the prism of what feels most safe, as long as you’re complying with the law. It’s very important to think about the long play.”

Joel Greenwald is a Vistage Speaker and managing partner at Greenwald Doherty LLP.

* Disclaimer: This summary, and the webinar, are a summary of the laws discussed above for the purpose of providing a general overview of these laws. These materials are not meant, nor should they be construed, to provide information that is specific to any law(s). You should be aware that these laws are changing rapidly and may have even changed since the time of this webinar. The above is not legal advice and you should consult with counsel concerning the applicability of any law to your particular situation.

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