It is never easy to downsize a workforce. The best companies aim to combine a considerate exit for those who leave, with morale-building incentives for those who remain. What better way to start than by using what GM has done as an example, as reported in a November 28th CNBC article, quoted below:
What GM offered – “GM is allowing some employees who took the buyouts to leave as early as this coming Saturday with an official last day of Jan. 31 and salary and benefits continuing for six months after that. Executives could also leave in December with an effective last day of Feb. 28 and a full year of salary and benefits, according to the severance materials.”
What GM achieved – “GM offered voluntary buyouts to roughly 17,700 eligible employees in North America with at least 12 years of service, according to the document. The company was aiming for 8,000 voluntary buyouts among its salaried workers as part of a total headcount reduction of 14,000, spokesman Pat Morrissey confirmed. He said about 2,250 workers accepted severance agreements by the Nov. 19 deadline.”
The Rest of the Story – “The carmaker previously said that involuntary layoffs would follow if there were not enough takers.”
Given that GM aimed for 8,000 voluntary terminations and only had 2,250 accept, it seems that as many as 5,750 employees will now be involuntarily terminated – most likely with less favorable benefits than those who accepted the voluntary severance offer (note we have not seen GM statements on this point). The lesson for employees is clear: if you are not feeling secure in your job, think hard about accepting a voluntary severance offer because an involuntary severance could be much more painful.
From an employer perspective, a two-step reduction in force (RIF) has the potential to downsize a workforce by first offering voluntary severance benefits to select classes of employees in order to encourage resignations by those who either want to retire or should leave because they are weak performers. A subsequent stage in the RIF process may then make further staffing cuts, if needed. As we will discuss in a follow-up alert.
Structuring a Two-Step RIF
As a general matter, the most successful two-step downsizings operate through the execution of a few basic steps, namely:
- Select groups of employees are invited to “request” inclusion in a voluntary severance plan or program (VSP) that promises particular benefits in exchange for general releases of their claims. As with the Fidelity experience noted below, the select group can be older.
- During a window period, eligible employees may respond to the employer by sending in a written request to have the employer accept their offer to terminate employment.
- Based on its workforce needs, the employer chooses to accept or to reject employee requests, and then implements the desired terminations.
- If the voluntary aspect of the program does not achieve the company’s workforce reduction goals, an involuntary RIF may immediately follow (or follow in stages), with the art being to carefully craft the overall timeline at the outset.
Voluntary severance offers work best when employers take precautions to assure that opt-ins are truly voluntary. Coincidentally with offering the VSP, those employers carefully warn about the potential for less generous RIF if the VSP does meet its objectives. If executed poorly, voluntary severance plans can spur litigation. Below are illustrations of both outcomes, as well as strategies for efficiently resolving any severance-related claims.
What happens when 3,000 employees over age 55 receive a buy-out offer because they have more than 10 years of experience? Fidelity made that offer to 7% of its workforce, and more than 50% of the eligible employees accepted. Fidelity’s spokesperson is quoted as saying “the results exceeded our expectations” (see “More than 1,500 Fidelity workers take buyouts,” Boston Globe, 6/30/2017).
Backfire . . . Delaware Case
Girardot v. The Chemours Co. (DE D.Ct 3/29/2017, affirmed by 3rd Circuit 4/30/2018) (“Giradot”) had its roots in a corporate spin-off, followed by a VSP, followed by a RIF. The latter occurred because, in the words of the district court’s opinion, “the voluntary reduction in force did not sufficiently reduce costs.” Litigation came from VSP participants who alleged that “they would not have elected to participate in the VSP had they been informed of the possibility that the [RIF plan] would be implemented with greater benefits.”
VSP Risks and Precautions
The Girardot case highlighted the need for VSP communications to be made to eligible employees through FAQs, or other vehicles, that clearly explain how the VSP will operate, as well as how it will differ from a possible future RIF. Imprecision or ambiguity can open the door for claims by employees who feel in hindsight that that they were misled or underinformed about their choices.
Employers should also take VSP precautions with supervisory employees. Well-intentioned advice could inadvertently convert a VSP into an involuntary program. This may result, for example, if particular employees are forewarned that they would be smart to take the voluntary severance because they are at risk of being terminated in any event if a RIF occurs. That kind of advice could open the door for claims that the VSP is a ruse for involuntarily terminating protected classes of employees (such as older ones).
Employment discrimination laws pose another risk for those implementing a VSP. Claims may come at all stages – from how the eligible class is selected to who will be terminated. Problems can arise from discrimination that is intentional, or statistically demonstrable. That said, for a VSP that is truly offered on a voluntary opt-in basis, employers may limit VSP eligibility to select older employees (as Fidelity did) or other business-justified groups.
ERISA – Often the Best Litigation Shield
Delaware’s Girardot decision focused on whether ERISA governed claims arising under the VSP. The Third Circuit found ERISA to be inapplicable (and dismissed the ERISA case) because, as stated in the district court decision: “the one-time, lump sum payments distributed under the VSP did not require the creation of a new administrative scheme, and the bonus payments were payable ‘per usual Company practices based on financial results’ which, like the continuation of existing benefits for a limited duration, did not materially alter the existing administrative scheme.”
Interestingly, the VSP was not structured to fall within ERISA, although it could have been. See “Say Hello to Smart Good-byes” for reasons why employers may want to ERISA-fy their severance practices, in order to mitigate a VSP’s litigation risks. In a nutshell, the benefits of an ERISA severance plan generally include the following:
- no litigation until there has been an exhaustion of the plan’s claims procedures, which may foreclose claims that are not promptly asserted;
- judicial review under highly deferential standards, rather than de novo;
- litigation in federal court under well-defined ERISA rules applied by a judge, instead of before a jury in state court;
- damages that ERISA limits to plan benefits and potential attorneys’ fees, rather than the full panoply of damages recoverable through tort claims outside ERISA.
It is not easy to right-size a workforce. A two-step RIF offers a means for doing so in a constructive manner that minimizes litigation risks. It enables employees to leave voluntarily, through execution of claims releases as a condition for severance. While as with any good idea, problems are possible, they are generally foreseeable and avoidable by those who proceed carefully.