Navigating the Rocky Shoals of Layoffs, Furloughs and RIFs

In this tough economic climate, many employers are being forced to consider rather unpleasant ways to reduce costs.  Some of those methods include laying off non-critical employees, furloughs (requiring employees to take unpaid periodic time off) or RIFs (mass layoffs).  While all of these strategies have obvious downfalls, including decreased morale, increased unemployment compensation premiums and possible litigation, employers also need to be aware of the various legal requirements that apply when these tools are used.  Making matters even more confusing, the new economic stimulus plan has placed increased burdens on employers when employees are terminated.  If you are considering a layoff, furlough or RIF, do not forget these important rules.

If you let an employee go as part of a layoff or RIF, you must provide their final pay on their last day of work.  The final paycheck must include all earned unpaid wages and benefits, including accrued time off.  Commissions and bonuses must also be paid on the employee’s final day if the employer is capable of calculating the amount of the commission or bonus on that day.  If the employer is not able to calculate the amount of the commission or bonus (for example, if the employer has not yet received payment on the sale), then the employer must pay the commission or bonus as soon as it is able to make that calculation. If you fail to provide a terminated employee with her final pay on the last day of work, the employee is entitled to a waiting time penalty for each day the final paycheck is late, for up to thirty days.  Final pay rules do not apply to furloughs unless the furlough spans more than one pay period.

Many employers are choosing to furlough employees for short periods in order to save money now, while retaining employees for the anticipated recovery.  If you are considering furloughing employees, be aware of potential issues with respect to exempt employees.

You may furlough non-exempt employee by asking them to take off one or more days per pay period without pay.  In that case, you simply don’t pay the employee for the time the employee does not work.  For exempt employees, however, the situation is much more complicated.  You are required to pay an exempt employee an entire week’s salary for each week in which the employee performs any work.  Thus, you may not ask an exempt employee to take off a Friday and pay that employee 4/5 of his salary without jeopardizing the employee’s exempt status.  However, you can furlough an exempt employee without pay for an entire workweek.

You may also reduce the normal schedule of a non-exempt employee to save costs.  In that situation, you would change the non-exempt employee’s normal work schedule to a reduced hour schedule (i.e. thirty-two hours per week versus forty hours per week). Again, the exempt employee would only be paid for the hours worked.  For exempt employees, however, you may not reduce the employee’s weekly salary based on a reduction in the amount of time worked during the week.  Accordingly, you may not use a reduced hour schedule for exempt employees in order to reduce their pay.

If you decide to furlough employees or impose a reduced hour schedule, you must also decide whether to allow affected employees to use their accrued time off. That decision is up to you.  For exempt employees, however, you can require the use of accrued time off in order to satisfy the requirement that an exempt employee be paid for a full week in which they perform any work.  In this example, you could require an exempt employee to take every other Friday off and to use accrued PTO to be paid for that day.  While this will not result in any immediate cost savings, it will get the PTO off your books.  Of course, if the exempt employees does not have enough accrued PTO to cover that day, you must still pay the employee for the full week.

If you are doing a large scale RIF (defined as an unemployment loss at a single site of employment for fifty or more employees during any thirty day period), you are required to provide WARN Act Notices to all affected employees and to the EDD, the Local Workforce Investment Board and the chief elected official of each city or county government within which the RIF occurs.  You must provide these notices sixty days prior to the RIF date.  A failure to meet these requirements can result in liability to the affected employees for the difference between sixty days and the amount of notice actually provided.  Penalties may also be assessed.

If you offer your RIF’d employees a severance package as part of their termination, there are also additional requirements for obtaining a valid release from those employees.  Employees included in a RIF must be provided with forty-five days in which to consider a release agreement.  The employees must also be informed in writing as to any class, unit or group of individuals covered by the program pursuant to which the release agreement is being offered, any eligibility factors for the program, any time limits for applying for it and the job titles and ages of all individuals eligible or selected for the program within the portion of the employer’s organization from which eligible employees were chosen, as well as the ages of all individuals in the same unit who were not eligible or selected for the program.  Release agreements that do not comply with these requirements are invalid as to age discrimination claims.

The recent economic stimulus bill imposes additional COBRA requirements on employers when an employee is terminated, whether as part of a RIF or an individual termination. When you terminate an employee, you must now provide them with a notification that they are eligible for subsidized COBRA benefits.  As an employer, you may be responsible for paying the subsidy to the provider but may seek reimbursement by deducting the subsidy from your payroll taxes.

In addition to notifying employees who are currently being terminated of their COBRA subsidy rights, employers must also notify employees who involuntarily lost their jobs as far back as September 1, 2008 of their right to subsidized COBRA benefits, even if those employees did not initially sign up for COBRA.  Those employees now have a second chance to sign up for subsidized COBRA benefits.

If you are contemplating a layoff, furlough or RIF, make sure you understand your obligations under the various state and federal laws that apply.  Otherwise, your attempt to save money may actually cost you money.