As businesses work to overcome the economic fallout of the COVID-19 pandemic, workforce reductions can help significantly reduce costs. However, in order to benefit from the savings, businesses must comply with all legal obligations. If not, the layoffs may end up hurting your bottom line.

Several companies being hard-hit by the pandemic have announced mass layoffs in recent weeks. Late last month, the Walt Disney Co. announced a reduction in force that involved 28,000 theme park employees. American Airlines announced it is furloughing nearly 19,000 workers.

Avoiding Missteps When Reducing Your Workforce

If your company is contemplating a temporary or permanent reduction in staff, we encourage you to make a comprehensive plan that addresses the myriad of legal issues that may arise. Below are several important issues to consider:

  • Layoff vs. Furlough: While the terminology is often used interchangeably, no staff reductions are equal. The distinctions are important when communicating with employees and determining your legal obligations. A furlough is a mandatory temporary leave of absence from which the employee is expected to return to work. Because it does not terminate the employment relationship, a furlough can be helpful when businesses don’t have enough money to pay employees and/or have enough work for them during a slow period, but do not want to terminate employees. In contrast, a layoff typically involves terminating the employment relationship due to a lack of work or payroll funding. While employers may hope to recall workers, it is not guaranteed. Finally, a reduction in force (RIF) involves eliminating a position with no intention of replacing it.
  • Payment Obligations: Employees who are terminated via layoff or RIF are generally entitled to unemployment compensation. Depending on the specific circumstances, furloughed employees may also be able to collect unemployment insurance to cover their reduced work hours/wages. Employers should also determine how to handle any accrued paid-time off, as employees may be entitled to a pay out under the terms of their contract and/or state law. Employers should also determine pay for furloughed workers. Under the Fair Labor Standards Act (FLSA), employers do not have to pay non-exempt employees who are furloughed. In addition, employers do not have to pay exempt employees who are furloughed for a full workweek if the employee does not perform any work during that week.
  • Continuation of Benefits: Benefits coverage is also dependent on the circumstances, so it’s essential to determine how your benefit plan and any applicable state laws will impact your employment decision. It is also important to note that employers may elect to pay benefits for terminated employees for a specified period of time.
  • Federal Notice Requirements: Under the Worker Adjustment and Retraining Notification (WARN) Act, a WARN notice is required when a business with 100 or more full-time workers (not counting workers who have less than 6 months on the job and workers who work fewer than 20 hours per week) is laying off at least 50 people at a single site of employment, or employs 100 or more workers who work at least a combined 4,000 hours per week, and is a private for-profit business, private non-profit organization, or quasi-public entity separately organized from regular government. Notably, a temporary layoff or furlough that lasts longer than 6 months is considered an employment loss. The WARN Act does include certain exceptions to the requirements when employers can show that layoffs or worksite closings occur due to faltering companies, unforeseen business circumstances, and natural disasters. With regard to COVID-19, the applicability of the “unforeseeable business circumstances” exception rests on an employer’s particular business circumstances.
  • NJ Notice Requirements: New Jersey’s WARN Act requires employers with 100 or more employees to provide notice prior to laying off 50 or more employees within a 30-day period; the notice requirements specifically apply to mass layoffs and the transfer of operations/termination of operations. The WARN Act previously required employers who failed to satisfy the notification requirements to pay severance to impacted employees. In January, Gov. Phil Murphy signed Senate Bill No. 3170 (SB 3170) into law; it makes the requirement to provide severance pay apply whether or not the employer provides the required notice. However, COVID-19 has prompted further amendments. The definition of mass layoff was amended to expressly exclude “a mass layoff made necessary because of a fire, flood, natural disaster, national emergency, act of war, civil disorder or industrial sabotage, decertification from participation in the Medicare and Medicaid programs as provided under Titles XVIII and XIX of the federal Social Security Act, or license revocation pursuant to P.L.1971, c.136.” Accordingly, layoffs due to COVID-19 will generally not be subject to the WARN Act’s requirements. The new law also delayed the effective date of SB 3170 until 90 days after the public health emergency ends.
  • Discrimination Risks: When planning for a round of layoffs or reduction in force, it is important to examine the demographics of the employees who may be impacted. While your intent may not be discriminatory, if the layoff or RIF disproportionately affects a protected class, such as older workers, you could face a discrimination lawsuit.

Key Takeaway

Given the wide range of legal issues that may arise when conducting furloughs, layoffs, and reductions in force, it is essential to work with experienced legal counsel. A knowledgeable attorney can walk you through the process and help ensure that the process achieves the cost-saving you intend. To discuss your company’s unique circumstances, we encourage you to contact a member of Scarinci Hollenbeck’s Labor & Employment Group.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Howard Bader, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.