Treating people well can be good business in a downturn

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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 Littler Mendelson, the nation's largest employment law firm representing management.

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, especially in a recession because many layoffs present the appearance of bias against protected groups, even if 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 found to be in the wrong can be hit with huge punitive damages.

You can avoid this trap by defining the goal of your workforce reduction, then assuring your terminations support that goal.

"Probably the most important thing is to set an objective," says Harkins. "Do you need to reduce head count and control costs? 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 merchandise 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."

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

That mixed objective 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 former employees that your real goal was discrimination, that 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, Sunnyvale, Calif. "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 workforce 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 people with protected characteristics than your surviving workforce? 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 workforce," 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 Them Right

Respectful treatment during termination is the right thing to. It's also smart legally. Fact is, people 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 Myers, chair of the labor and employment law department at Eckert Seamans Cherin & Mellott, in Pittsburgh. "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 it, 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 over what happened.

Use Severance Agreements

One way to help assure 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 package.

"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. "Even a day's pay can justify a release of any discrimination or other wrongful discharge claims."

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 store, you want to maintain a reputation as a good place to work," says Jacobsen. "When your business survives a recession and is hiring again, you want to be able to recruit the best people. And the best people will remember how you conducted your layoffs."

Reducing The Pain Of A Layoff

When it becomes necessary to cut staff, how you conduct yourself is as important as whom you let go.

"Layoffs are inherently stressful both for the people conducting them and the people who suffer their consequences," says Ian Jacobsen, president of Jacobsen Consulting Group, Sunnyvale, Calif. "The stress can be lessened and morale enhanced when layoffs are done ethically and professionally."

Jacobsen suggests preparing your workforce for the expected terminations with something like this: "We have seen our business fall off over the past months and have taken several actions to combat the decline. What we have done has not been enough to eliminate the need for a layoff. We are now at a point where we need to cut staff. This is painful for all of us, and we hate to do it, but it is necessary for the survival of our business.

"We have done a careful study of the future for our business and the talent we need now and into the future. It is within this context that we have decided whom to keep and whom to let go."

Nobody likes being laid off, but they can accept it better when they understand that it is the result of a careful process and plan for the future, according to Jacobsen.

Meet individually with each employee to explain why the person is being kept or let go. This one-on-one communication is critical for morale and credibility.

Jacobsen suggests an approach like this: "John, in view of the cutbacks we are having to make, we need the remaining staff to be as flexible as possible. You are very competent in area A, but we need someone who is also competent in areas B and C."

"John may not like the decision, but he'll respect you for your thought and honesty," says Jacobsen.

Get It In Writing

When you meet with each individual being laid off, present a letter confirming the layoff and related arrangements. Here are some areas to cover:

  • reason for the termination
  • last day of work
  • check-out procedure
  • severance pay
  • conditions upon which severance pay is based
  • pay for unused vacation and sick leave, if applicable
  • outplacement assistance, if applicable
  • continuation of insured benefits and COBRA, as applicable
  • where to apply for unemployment insurance
  • reference letter, if you're providing one
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