How to Limit Litigation Risks During Layoffs
Guidelines to reduce your exposure to 'disparate impact' claims
Economic conditions remained bleak last month, with the U.S. Bureau of Labor Statistics reporting that "the unemployment rate [for July] was unchanged at 9.5 percent." In these difficult economic times, companies across the country have been forced to consider layoffs and other cost-saving measures. As many business leaders already know, layoffs can increase your exposure to employment discrimination lawsuits brought by disgruntled former employees. While there is no way to completely eliminate this risk, there are steps employers can take to reduce the likelihood that they will fall prey to disruptive litigation.
One obvious risk resulting from terminations is individual employment actions asserted by employees who claim they were victims of unlawful discrimination. Business conducting layoffs may be particularly vulnerable to age discrimination lawsuits. There has also been an increase in same-sex sexual harassment lawsuits, with statistics indicating that some of the largest jumps in the number of sexual harassment lawsuits filed by men occurred in states with the highest unemployment rates.
Companies conducting large-scale layoffs must also consider the risk of disparate impact claims. Under a disparate impact theory of discrimination, terminated employees may argue that a company policy or practice--which appears neutral on its face--disproportionately affects a particular group. For example, if the company terminates a disproportionate number of employees over the age of 40, those employees may allege that the company's selection process had a disparate impact on older workers.
Though some courts use additional methods of statistical analysis, the general rule is that a disparate impact exists where members of a non-protected class (e.g., employees under 40) are selected for termination at a rate that is less than 80 percent of the rate at which members of the protected class (e.g., employees over 40) are selected.
Companies can reduce their exposure to disparate impact litigation by using quantifiable and objective job-related factors such as seniority when selecting employees for layoff. If the company cannot base its termination decisions solely on quantifiable and objective factors, the managers responsible for such determinations should strive to be as objective as possible when reviewing employees' job qualifications and skills.
Businesses can also work with counsel to conduct a disparate impact analysis. The purpose of such an analysis is to determine--before conducting layoffs--whether there will be any disproportionate effect on workers over 40, females and/or minorities. If a disparate impact exists, the company should then consider whether it may be able to satisfy one of the defenses to disparate impact lawsuits.
Employers may also limit their potential liability by obtaining general releases from terminated employees, typically in return for some type of compensation. Employers should, however, be aware that there are strict legal requirements associated with obtaining a release, particularly with respect to older employees under the Older Workers Benefit Protection Act (OWBPA).
In addition to employment litigation, employers conducting layoffs must determine whether they are subject to the notice requirements of the federal Worker Adjustment and Retraining Notification Act and/or comparable state laws. To further complicate matters, business may have additional obligations under the Employee Retirement Income Security Act (ERISA), the Consolidated Omnibus Budget Reconciliation Act (COBRA) and state laws governing, among other things, payment of wages and insurance and severance benefits continuation.
Any employer considering a mass layoff should consult with competent counsel regarding all of these obligations and requirements. At the end of the day, careful planning can reduce the company's legal risk and financial exposure.
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