Question: We have to cut expenses significantly – and it’s come down to reducing headcount. What should we consider?
Answer: From time to time employers are challenged with cutting payroll expenses. So what should you consider when you have to make that tough decision to eliminate positions? There are very few laws in the private sector around how to determine and conduct a permanent layoff or reduction in force (RIF). There are no legal requirements around laying off employees based on seniority or bumping rights back to the last held job. However, it is important that you have defensible criteria for determining which positions and employees are affected by a layoff. Here are a few considerations:
- Focus on the business functions/position(s) to be cut back first, then on the incumbents. Does the work group you’re considering have a common purpose, the same job title or skills? Can you clearly outline the position to be eliminated is the least necessary based on business needs? Avoid “laying off” an employee as a pretext for addressing a poor performer.
- Do you have any written layoff criteria your company has committed to in your policy manual or employee handbook? Outside of a collective bargaining agreement, most employers will not have written layoff criteria such as seniority in job, seniority with the company, or performance. We recommend that you not outline/commit to these in a policy manual unless your company is prone to regular layoffs.
- Do you have documented performance history on all employees in the work group/job title or department? Ideally, the employer would lay off the poorest performer. Proving that may be a challenge if there are not written appraisals in the file. This performance record may also include awards, disciplinary actions, customer complaints or compliments. In the absence of historical performance data, the employer may prepare a performance appraisal on each employee in the work group, evaluating everyone on the same criteria.
- Once you’ve determined who is to be laid off, based on business needs and clearly objective criteria (performance history, training, seniority), look at the profile of the employees who will be affected. Are they representative of your work force? In other words, if 75% of your work force is under age 40, then a similar percentage of your laid off employees should be under age 40. There may be exceptions for this based on unique skill sets, but watch out for great imbalances in the make-up of your laid off staff. Sending everyone over age 50 out the door and leaving only younger employees to run the shop may raise an initial discrimination complaint.
- In most cases, when business picks up the employer is not legally required to recall/rehire the last employee laid off. However, filling the job within a short period of time with a new (younger, non-pregnant, or non-minority) employee may raise an eyebrow that the layoff was not for legitimate business reasons, but was to eliminate an employee for non-work related (read “discriminatory”) reasons. There are no rules around the rehire period, but we recommend it be at least six months, and 12 months is better. (Please note: Labor Code section 2810.8 provides recall rights for qualified employees of covered employers who were employed for six months or longer and whose most recent separation from active employment by the employer occurred on or after March 4, 2020, and was due to a reason related to COVID-19, including a public health directive, government shutdown order, lack of business, reduction in force, or other non-disciplinary reason due to COVID-19. There is a rebuttable presumption that layoff during the period mentioned above is due to the COVID-19 pandemic, unless the employer establishes otherwise by a preponderance of the evidence. Recall rights end on December 31, 2025. See Labor Code Section 2810.8 for industries (generally hospitality industries) that are affected by the right to recall to work.)
- Employers who layoff 50 or more employees may have legal reporting and notice requirements under the California and federal WARN Acts. We hope you don’t get there. If you do, you will want to call your legal counsel to discuss notice requirements.
Other Payroll Reduction Options
Some employers prefer to share the pain and reduce salaries across the board rather than layoff one employee. This salary reduction approach may be for top management, for all salaried employees, or throughout the company. Some employers cut back the work schedule in exchange for the salary reduction; others still need full productivity with 10% less payroll.
Corporate culture will drive some of this decision. Our experience has been that it’s easier on the organization to layoff one or two employees and let them get on with their lives rather than have 20 cranky employees working for less.
The California Employment Development Department offers a program called Work Sharing Unemployment Insurance that allows employers to reduce schedules in lieu of layoff and supplement the affected employees’ salary with unemployment funds. Click here to visit the EDD’s Work Sharing Program website.