How to Make Do with Less: Layoffs, Reductions in Hours, and Reductions in Force

Posted: March 17, 2020

The laws are changing rapidly in the current pandemic/crisis. Therefore, the legal issues discussed here are subject to constant change. It is best to consult with your counsel concerning any specific legal advice you may have.

Considering the rapidly changing economic and social landscape caused by COVID-19, many employers find themselves wondering what might happen if they are unable to maintain their current workforce at its current level.  Clients have reached out to ask important and pressing question such as: Can I reduce employee hours? Can I reduce pay across the board? What can I do to avoid a layoff? What if I have to lay off?  Can it be temporary? I have heard the term “WARN” notice; what is it?  These are all good questions. We will address these, and more, below.

First, we’ll discuss some key things you need to know to put these questions in context.  And below that, you’ll find answers to some of these timely questions.

Key Big-Picture Considerations

  • Notice to Employees and Government of Terminations/Reductions in Force: The federal Worker Adjustment and Retraining Notification Act (WARN) and state equivalents require certain larger companies to give advance written notice to employees of certain large-scale terminations and reductions in force (such as mass layoffs and plant closings, among others) and, potentially pay to employees if notice is not provided. Exceptions may exist for unforeseen business reasons – but not always.
  • Overtime Exemption Status May Govern Employee Treatment: As a reminder, with regard to pay structure and overtime requirements, both federal law and the laws of states that address it, require that all employees be paid overtime wages (1 ½ times their regular hourly rate) for all hours worked over 40 in a workweek, unless that employee falls into an exemption from the rule.  If they are not under an exemption, they are called “non-exempt” and must be paid overtime wages (for hours worked over 40 hours in a week).  If they are under an exemption based on their job’s duties and responsibilities, they are called “exempt” employees and do not get overtime pay.  Exempt employees get a set salary every week that cannot be decreased except in limited circumstances.  This distinction can be key when decreasing pay.
  • New Legislation May Affect Company Decisions: At this very moment, there is legislation being circulated through the federal government that may involve sweeping paid leave protections for employees who are forced to take time off from work for various Covid-19-related reasons (such as: for the employee’s own treatment, preventive care, or quarantine, or to care for a family member who is being treated or a child whose school is closed).  Under the proposed legislation, employers may be required to provide up to 2 weeks of job-protected leave of full pay and up to 10 weeks of leave of partial pay to affected employees. In the event theses protections go into effect, deciding how to address lack of work and potential business shut-downs may become more legally complex. Given the changing landscape, it’s particularly important for business owners and executives to be strategic and proactive about potential changes to their workforce in the coming days and weeks.  Our feedback below is based on the status of the employment laws as it stands today.

Frequently Asked Questions

Below please find responses to Frequently Asked Questions that address business owners’ concerns about how they will make do with less budget to support employees. Please note that business situations vary and the answers for your situation are often fact-specific.  We hope the following FAQs address questions that are relevant and pressing to your business, but they are only general legal information.

  1. What are the legal considerations if I need to lay-off a group of employees?

Depending on the size of your company, the number of employees being laid off, and the location of the layoff, notice obligations under the federal Worker Adjustment and Retraining Notification Act (WARN) and state equivalents may be triggered.  For example, in New York, employers with 50 or more full-time workers may need to report a loss of employment of 25 employees and give those employees and the government at least 90 days’ notice of the termination (i.e., continue to pay employees during that time).   Although some exemptions (such as unforeseen business circumstances) may apply in light of COVID-19, and some temporary work stoppages may not require WARN notice, the WARN laws are highly technical and the potential penalties are steep, so we recommend consulting with employment counsel on your particular situation before terminating multiple employees at once.

Other legal considerations include the potential payout of sick and/or vacation hours, how layoffs may affect company (and the employees’) benefits and what legal obligations are triggered under the benefits plans and relevant laws (such as COBRA). The timing of paying employees their final paychecks (including potential commissions or bonuses), must comply with the applicable state law. In addition, to the extent you offer a severance in exchange for a release to laid off workers, there may be certain additional notice requirements under the Older Workers’ Benefit Protection Act.

  1. Business is down. To avoid a layoff, can I just reduce everyone’s hours?

For employees not entitled to overtime (including those who are paid on an hourly basis), generally yes, hours can be reduced. For employees who are classified as exempt from overtime wages, you may be able to reduce their hours, depending on the circumstances, but reducing their pay is more complicated, as discussed below in response to the next question.

Depending on how long cuts last, making significant cuts to employees’ work hours (generally more than 50%) can result in employers needing to comply with notification obligations under the federal WARN Act and state equivalents.  Reducing hours may also make employees eligible for unemployment insurance benefits, depending on the number of hours cut and the specific state’s unemployment regulations, for the work hours lost. For some employers, this may be something you wish to tell your employees, to help cushion the blow to employees of reduced hours and pay.

In addition to the legal considerations, there may be practical considerations at play, such as the impact on morale of reducing pay across the board versus other cost-savings measures. On the other hand, reducing pay may be more attractive than letting people go.

  1. Can I reduce an employee’s pay rate?

For non-exempt employees (whether they are paid hourly or on a salary), the short answer is yes, you can reduce their pay rate, so long as you pay employees for all actual hours worked at no less than the minimum wage applicable to their work location.  For example, California’s minimum wage is $13.00 per hour for large employers and New York City’s is $15.00 per hour.  Companies must track hours worked for non-exempt employees so that the company can be sure they are being properly paid for all hours they work.

For employees who are treated as exempt from overtime and required to meet a salary basis test, by law their salary must remain the same each work week, above federal, state and local minimum threshold requirements, so reducing pay could potentially undermine the exemption and require they be paid overtime wages.  That said, if hours are being reduced and the employee will not be working more than 40 hours in a workweek, that may not be an issue. However, the change-over can be tricky and should be done cautiously, with the assistance of experienced employment counsel before being enacted, as there are several potential legal pitfalls when reducing an exempt employee’s salary.

  1. What’s the difference between a furlough and layoff?

A furlough is a temporary work stoppage with the expectation the employee will be brought back to work, whereas a layoff results in the end of employment.  Both are usually done for economic reasons and may involve large numbers of employees.  In some situations, a furlough can be treated the same as a layoff in the eyes of the law, however there may be some distinctions that can affect things like federal and state WARN notice requirements, depending on the circumstances and the state.  As mentioned above, unemployment insurance benefits may also be available to employees who experience either a furlough or layoff, subject to the particular state’s unemployment coverage regulations.

  1. How should I decide which employees to layoff?

Although layoffs are inherently economic in nature, the decision of whom to layoff is far more complex and potentially risky.  To bolster the Company’s position in the event of a potential claim of discrimination or retaliation by a laid off employee, companies should consider and document the business reasons for each employee selection, make best efforts to use objective and consistent criteria for the selection of workers to lay off, and, if economically feasible for the business, consider whether to offer a severance payment in exchange for a release.  When times are tight, however, and the layoffs are for economic reasons, severance may not be a business option.  Moreover, if an entire department or area of the business is being furloughed or let go, employees will have greater challenges that their “selection” was discriminatory.

Follow-up

If you have any specific questions or concerns, please feel free to reach out to us.