Workforce, Benefit Reductions: Beware of Traps

Julie Shenkman
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By Peter Knopp, J.D.

The economic downturn forced many employers to contemplate or actually resort to reductions in workforce and retiree benefits as a means of cutting expenses.

Reductions in workforce as part of cost-saving restructuring have definitely been on the increase. For example, according to statistics released by the Department of Labor's Bureau of Labor Statistics, there were 150 mass layoffs recorded in February 2001 (layoffs involving 50 or more employees per company). This was the most recorded in one month since 1995. Even if these layoffs applied equally and without discrimination to both younger and older workers, the companies involved may still face unexpected legal actions and the accompanying costs if they ignore the provisions of various federal and state laws and regulations.

Let's take a look at a few of these traps for the unwary.

The Provisions of WARN

Employers with at least 100 full-time employees are subject to the provisions of the Worker Adjustment and Retraining Notification Act (WARN), 29 USC s.2101 et seq. As such, they are required to provide employees with 60 days' written notice before any plant closing involving termination of 50 or more full-time employees, or a mass layoff involving termination of 33 percent or more of the workforce. An employer that fails to comply with WARN may be liable for back pay and attorney's fees. Wage and Hour Laws Federal and state wage and hour laws require employers to pay nonexempt employees for all hours actually worked. Furthermore, these payments must be made within a specified time period that varies depending upon the provisions of the relevant state law. If employers promised their employees that they would pay for accrued but unused vacation days, sick days, or personal days, state law may require them to honor these agreements. Indeed, state law may require them to make such payments even in the absence of such agreements. In Tennessee, for example, the law requires separation pay to include accrued vacation and other compensatory leave owed to the employee.

Agreements to Pay Severance

State law does not require employers to pay severance. If companies have promised to pay severance, however, some states treat the severance owed the terminated employee in the same manner as wages. Failure to timely pay severance, therefore, may lead to civil and criminal liability. It is not illegal, however, for employees to agree to take a reduced amount of severance.

EEOC Rules

Severance agreements often provide that payment is conditioned upon the employee's waiving of the right to sue the employer. Rules issued by the Equal Employment Opportunity Commission (EEOC), however, permit older terminated workers to challenge in court the legality of severance agreements containing waivers without having to give back any severance already received. Clauses in severance agreements requiring older workers bringing suit to pay the employer's court costs and attorney's fees are prohibited by EEOC rules. EEOC rules require employers to provide employees with written instructions to consult a lawyer before the employee signs a waiver of his or her right to sue the employer. Employees must be given 21 days to consider whether they want to sign such a waiver and 7 days to change their minds after agreeing to the waiver. If a terminated older worker's waiver of the right to sue was knowing and voluntary, it will pass muster with EEOC.

A recent decision of the U.S. Circuit Court of Appeals for the 4th Circuit held that enhanced severance benefits could be conditioned, not only on a waiver of the right to sue, but also on a promise not to solicit company customers (Friz v. J & H Marsh & McLennon, Inc., No. 00-1940 (1/22/01). (The case is discussed in the April 2001 issue of this newsletter.)

Reduction in Retiree Benefits

The Age Discrimination in Employment Act (ADEA) prohibits age discrimination with respect to "compensation, terms, conditions, or privileges of employment." This has been interpreted by the Older Workers Benefit Protection Act of 1990 (OWBPA) to include all employee benefits. The EEOC has recently been reconsidering the question of whether employer-sponsored health benefit plans constitute age discrimination if they give more coverage to retirees under the age of 65 than to retirees aged 65 or over.

This question was the focus of recent litigation before a federal court in Pennsylvania. To cut costs, the county of Erie, Pennsylvania, offered health benefits to retirees 65 and older (and, thus, eligible for Medicare) that were in some respects inferior to the benefits given to retirees under the age of 65. The U.S. Court of Appeals for the 3rd Circuit held that this constituted age discrimination in violation of the ADEA. It remanded the case to the federal district court for the western district of Pennsylvania, however, to determine whether the county satisfied a safe harbor provided by the ADEA-the so-called equal benefit or equal cost standard. On remand, the federal district court held that the county was not entitled to the safe harbor. (See Erie County Retirees Association v. County of Erie, Pennsylvania, 2001 WL 410361 (W.D. Pa.)). Given this decision, employers are on notice that it is risky to decrease the benefits of its older retired workers.

Workforce Reductions and the ADEA

It doesn't take much for a terminated worker over 40 to make out a case under the ADEA. All the worker has to do is offer evidence that he or she was over 40, was qualified for the job, and was terminated under circumstances giving rise to an inference of discrimination (such as the fact that a younger worker replaced him or her). A presumption then arises that the employer unlawfully discriminated against the employee. The employer can dispel this inference of discrimination, however, by offering evidence of a nondiscriminatory reason for terminating the employee. The employee then has to prove that the nondiscriminatory reasons presented by the employer were merely a pretext for discrimination.

In the case of Roge v. NYP Holdings, Inc., the U.S. Court of Appeals for the 2nd Circuit found that the employer had a nondiscriminatory reason for terminating the employee; its action was part of a legitimate, cost-saving workforce reduction. The court then noted that the employer had yet another nondiscriminatory reason for the termination - its good-faith belief that the employee had recently attempted to commit disability fraud. The court stated that "it is...entirely lawful for an employer [engaged in a legitimate cost-saving restructuring] to select for termination an employee who the employer in good faith believes recently engaged in fraud relating to the employment.

Whether or not fraud actually occurred, questionable circumstances surrounding an employee's claim for benefits provide a nondiscriminatory reason for choosing to terminate that employee over others when economic reasons force the employer to make such a choice." The employee could not prove that the employer's reasons for terminating him were a mere pretext for discrimination, and so the court affirmed the lower court?s grant of summary judgment for the employer.

Lesson to be learned: Keep records on all the questionable things you have good reason to believe your employees may have done. The records may come in handy when the employee claims you violated the ADEA.

Note: The text of the 2nd Circuit's opinion in Roge was published in the New York Law Journal, Aug. 8, 2001.


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