Is There Litigation Risk Lurking in Your Layoff? OWBPA Reminders for Softening Markets

While recent official government statistics reflect a strong and growing economy, the view from my office over the past couple of months has suggested that current business conditions, at least in certain market segments, are anything but rosy. Over this period, I’ve fielded a steadily growing number of inquiries about layoffs—almost a half dozen of these inquiries came my way within the past two weeks. Whether the uptick in reductions in force under consideration in certain market segments is temporary or a longer term trend, the fact remains: Layoffs only result in labor cost savings, particularly in the short-term, when they are carefully planned and implemented in a manner that eliminates—rather than stirs up—litigation risk.

Among the keys to implementing a reduction in force that achieves business objectives is understanding and complying with the Older Workers Benefit Protection Act of 1990 (“OWBPA”), which amended the Age Discrimination in Employment Act (“ADEA”) to safeguard older workers’ employee benefits from discriminatory practices based on age. For employers considering layoffs, here’s an OWBPA refresher:

Under the OWBPA, releases of age discrimination claims must be “knowing and voluntary.”

All releases of federal age discrimination claims—whether obtained in connection with a layoff or otherwise—must comply with the OWBPA, which invalidates such releases unless they are “knowing and voluntary.” To be knowing and voluntary, a release must:

  • be in writing;
  • be written in a manner reasonably calculated to be understood by the employee;
  • specifically refer to the ADEA;
  • not require the worker to waive claims that arise after the execution date;
  • be in exchange for something of value in addition to that which the employee is already entitled; and
  • advise the worker to consult with an attorney before signing the release.

In addition to the above, for releases obtained in connection with individual terminations, a release is not knowing and voluntary under the OWBPA unless the employee has at least 21 days to consider before signing and 7 days after signing to revoke acceptance.

The OWBPA imposes special, heightened “knowing and voluntary” requirements for releases of age discrimination claims obtained in connection with layoffs.

When an employer obtains a release in connection with an “exit incentive or other employment termination program,” a release of age discrimination claims under the ADEA is not knowing and voluntary unless the employee from whom the release was obtained: (i) is given 45, rather than 21, days to consider the offered release, (ii) is given 7 days after signing to revoke acceptance, and (iii) receives the following detailed information about the program:

  • the class, unit, or group of individuals covered by the program;
  • the eligibility factors for the program;
  • the time limits applicable to the program; and
  • the job titles and ages of individuals who were eligible or selected for the program, and the ages of all individuals in the same job classification or organizational unit who are not eligible or selected for the program.

To the extent there is confusion over whether these more strident knowing and voluntary requirements apply, it typically stems from the OWBPA’s reference to exit incentive and employment termination “programs.” Few employers think of reductions in force as “programs,” but the OWBPA’s implementing regulations make clear that they are: “A ‘program’ exists when an employer offers additional consideration for the signing of a waiver pursuant to an exit or incentive or other employment termination (e.g., a reduction in force) to two or more employees.”

The most common OWBPA pitfall with respect to layoffs is misunderstanding the statute’s informational disclosure requirements.

Most employers know that the OWBPA exists and know that it imposes special rules, including a rule requiring informational disclosures, for releases of ADEA claims obtained in connection with layoffs. The thorny issue for most employers is determining exactly what information must be disclosed to satisfy the OWBPA.

The EEOC’s guidance on the required informational disclosures is far from elucidating. In its OWBPA implementing regulations, it explains that to determine which employees are in the same “job classification or organizational unit” as those selected for layoff, the employer must identify the relevant “decisional unit”:

A “decisional unit” is that portion of the employer’s organizational structure from which the employer chose the persons who would be offered consideration for the signing of a waiver and those who would not be offered consideration for the signing of a waiver. The term “decisional unit” has been developed to reflect the process by which an employer chose certain employees for a program and ruled out others from that program.

The EEOC also provides examples:

  • Facility-wide: If an employer seeks to reduce headcount by ten percent at a particular facility, the decisional unit is the facility.
  • Division-wide: If an employer seeks to reduce headcount by fifteen employees in the Computer Division, the decisional unit is the Computer Division.
  • Reporting: If an employer seeks to reduce headcount of those employees reporting to the Vice President of Sales by ten percent, the decisional unit is employees reporting to the Vice President of Sales.
  • Job Category: If an employer seeks to reduce headcount among its accountants by ten percent, the decisional unit is the all accountants employed by the employer.

The problem, as even the most savvy in-house lawyers and human resources professionals know, is that the EEOC’s examples address only the most simplistic reductions in force. And neither its guidance on nor its general approach to the decisional unit concept accurately reflects the way in which layoffs are actually considered, planned, and implemented.

Employers rarely are eager to implement layoffs, and when layoffs are necessary, most want to reduce headcount only as much as is absolutely necessary to respond to adverse business conditions. This means that reductions in force often are planned and implemented in real time—I am frequently asked for advice in situations in which the list of employees selected for layoff is not finalized until the morning the layoff will be announced. In such situations, particularly when the employer has implemented nationwide reductions across many facilities and the layoff has affected job classifications from the top to the bottom of the organization, determining the proper decisional unit can be confounding, creating a strong temptation to “solve” the problem by over-disclosing. The problem—and from a litigation risk standpoint, danger—with this approach is that courts have repeatedly held that defective disclosures, whether the defect is the failure to disclose enough information or instead the disclosure of too much information, render releases invalid. This is because the disclosures required by the OWBPA are meant to arm older workers selected for layoff with information that helps them (or their counsel) determine whether age may have played a role in their selection. The provision of too little or too much information about the layoff renders the disclosure of little use in this regard.

There is no easy fix to the decisional unit dilemma. But when I am having particular trouble identifying the proper decisional unit, I often find that the problem stems from lack of information—an employer has described to me a group of employees selected for layoff and would like my help in determining the decisional unit. While it may be possible to determine from this information what the employees selected for layoff have in common with one another, commonality is not the touchstone of the decisional unit analysis. To identify the correct decisional unit, it is necessary to step back from the layoff selection list and to ask how the employees on the list were selected for layoff.

The bottom line for employers.

Releases are a key tool deployed to obtain cost-savings in connection with reductions in force. Not only do they make layoffs less challenging for affected employees, they buy peace with these employees—ensuring that they will not shortly after layoff assert claims relating to their selection for termination—claims that eat away at and sometimes eliminate any short-term savings to be gained through the reduction. In connection with layoff planning, and particularly in connection with releases to be obtained in connection with layoffs, employers should keep in mind the following practical tips:

  • Layoffs should be planned as far in advance as is possible, and employers should keep in mind that the preparation of releases for the layoff, especially OWBPA-compliant releases, will require time and consideration.
  • As part of front-end layoff planning, employers formulate a plan for how layoff selection decisions will be made. When employers keep the decisional unit concept in mind from the earliest planning, OWBPA information disclosures are considerably less complicated to prepare.
  • Employers should remember that more complex is not always better—releases, particularly those used in connection with layoffs impacting employees with less experience and sophistication with respect to legal documents, are more effective when they are short and written in plain language.
  • In situations in which decisional units have been considered from the start of planning, or when the layoff decision-making process has evolved as the layoff was planned, employers should not, for purposes of OWBPA information disclosures, try to formulate “decisional units” based on final layoff selection lists—identification of the proper decisional unit must bear a relationship to the way layoff decisions were made, and employers should try to retrace the steps in the layoff decision making process to identify proper decisional units.
  • When in doubt, employers should remember the goal of the OWBPA’s informational disclosures—when the disclosures contain so little or so much information that they are of little use in determining whether age played a role in layoff decisions, it is wise to double-check to make sure that decisional units have been properly identified.