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Are You Preparing for Layoffs?

July 14, 2022

By Anthony Kaylin, courtesy of SBAM Approved Partner ASE

Layoffs, what?  In this market?  Employers cannot find workers and yet now there is talk of retrenchment.  Whether soft or hard landing, most agree that a recession is coming. 

Will it be sooner or later? Many think 2024.  But with high inflation and the Federal Reserve pushing up interest rates to slow an economy already hampered by supply chain and labor supply issues, employers are becoming paralyzed with inactivity regarding their short-term future and investments.

Former Treasury Secretary Lawrence Summers believes that unemployment has to go up to reduce inflation.  “We need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” said Summers. “There are numbers that are remarkably discouraging relative to the Fed Reserve view.”

Currently the unemployment rate is at 3.6% nationally.  Although a number of new hires occurred last month, the unemployment rate stayed stable.  That means that workers on the sidelines are not rejoining the workforce.  With plentiful jobs, there should be increased participation, but the job hires are more job switching than new entrants into the job market.  High gas prices and lack of childcare are two major drivers for workers to stay on the sidelines, even with retirees hit with the recent 401K losses.

The signs are there, employers are starting to withdraw job offers to candidates that they pursued diligently. When a company revokes a job offer, it indicates a company’s business outlook has changed so quickly it has to undo hiring plans made sometimes weeks before.

Since all appears connected, in a recession, businesses are loath to give up their cash reserves, but to keep it as a rainy-day fund.  Therefore, with salaries generally the largest expense of any business, do more with less will likely be the norm coming up.  As such, HR needs to be prepared for the reductions in force and prepare a plan to take to leadership to gradually reduce headcount in a meaningful, yet positive way for the employer.  When the economy picks up again and the employer needs workers again, a bad experience could translate to a limited candidate pool. 

Moreover, discrimination claims will arise, leading to unbudgeted legal costs.  “There are often claims of discrimination following layoffs, whether those are individual terminations or when it’s in these large groups,” said Nancy Gunzenhauser Popper, an Epstein Becker Green member. “Even if the stated reasoning is not that someone was chosen for an improper reason, we see an uptick in claims following larger group layoffs.”

Therefore, when planning layoffs, it is recommended to take four steps to reduce potential costs and liability. 

  1. Ask for volunteers. According to Jackson Lewis PC principal Garen E. Dodge, “The job market is pretty hot, a lot of employers are looking for workers. So, what I would recommend is before you do any terminations, you ask essentially for volunteers who would like a severance package.”  This scenario allows workers who want to leave to do so while maintaining workers who don’t.  If a high-performing worker wants to leave, the likelihood is that they would leave no matter what so salary counteroffers won’t make them more productive.  Develop a plan anticipating these workers will leave.
  2. Do the analysis of the before and after workforce based on a variety of protected categories to ensure that there is no pattern or practice to the layoffs.  Wigdor LLP partner Michael Willemin, who represents workers, said a disparate impact analysis can nip this problem in the bud. “Companies really should make sure they keep an eye on statistical data,” Willemin said. “It could really be by chance that a certain number of women are laid off versus men.”  Or older workers, and likely more expensive workers, than younger workers.
  3. Inventory the workers who may be on a job protected leave. If a worker is on FMLA leave, for example, but the whole department is laid off that is one thing. But do not target workers on leave. “It’s important to be mindful of people who are within various protected leaves of absences, in addition to those who have protected characteristics,” said Epstein’s Popper. “It’s an important thing to be thinking about during that selection process.”
  4. Don’t assume a last in first out approach to layoffs would be best. There could be unintended consequences. “It’s definitely a risk if the new hires have been all diverse hires and that’s who you’re targeting for elimination,” Garen Dodge said. “That’s going to potentially spark litigation.”

Finally, HR needs to not only strategize and be proactive with the leadership team, but also make sure to engage legal counsel to reduce or eliminate if possible, any unintended consequences and costs. 

Source:  Wall Street Journal 6/22/22, Bloomberg 6/20/22, Law360 6/17/22

Photo by Raj Rana on Unsplash

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