Hard Times, Hard Choices: Reductions In Force
(from Maine Townsman, January 1992)
By Linda McGill, Esq.

[Although the majority of the material in this article is accurate, given the 1992 date, we advise that you seek legal counsel for any updates to the law.]

Although there is yet no final blueprint for resolving Maine's budget crisis, it appears inevitable that revenues to municipalities will be drastically reduced. Coming on the heels of two years of cost-cutting and belt tightening, the new cuts will force many municipalities to lay off workers. Those that can or must keep their current work force may need to freeze or cut payroll and benefit costs.

Reductions in force (RIFs) and changes in benefits or working conditions involve a variety of legal and practical issues that must be considered before action is taken. Cutting jobs or changing benefits before these legal implications are analyzed can result in costly lawsuits, arbitrations and other complications, eliminating or reducing the very savings that these drastic measures were designed to produce.

This article outlines some of the most common issues that must be considered by municipal employers when they evaluate and implement RIFs and other reductions in personnel costs in response to reduced municipal revenues.

Reductions In Force
The term reduction in force (RIF) is used to mean a layoff or termination of workers, generally for a long duration or even permanently. A RIF may entail abolishing one or more positions from the personnel line or simply laying off the employees in these positions, but keeping the positions with the intent of ultimately filling them again, when the budget permits or operations require. A RIF is distinguished from a "furlough" or temporary layoff, where employees are required to take relatively short amounts of time off without pay.

Cause and Hearing
Although terminations must generally be for cause in the municipal sector, 30-A M.R.S.A. § 2601(l), this standard does not apply when the termination is made in good faith for budgetary reasons.

The Maine Supreme Court has held that the requirement of cause and the right to a hearing that apply when termination is based on an employee's fitness or ability to do the job do not apply when a position is eliminated because of a budget reduction. Durepos v. Town of Van Buren, 516 A. 2d 565 (1986). Personnel rules, town ordinances and collective bargaining agreements must be checked to determine whether these create independent and enforceable rights to cause or a due process hearing or other review when an employee is laid off.

Criteria To Determine Selected Employees
In general a municipal employer has the right to determine the size of its workforce and the jobs to be performed and to select the employees who will perform the work.

Important and specific limitations, particularly on the selection or retention of employees in the event of a layoff, may be found in a collective bargaining agreement and/or in personnel rules or ordinances. (see “RIFs in a Unionized Setting”).

Subject to such limitations, the task for the employer facing a RIF is to look at municipal operations, determine which jobs must continue to be performed, determine how many employees are needed to do those jobs, and then to decide the criteria that will be used to select which employees will be retained and which laid off. Besides being sound from a business standpoint, the criteria must be consistent with any pre-existing contract or rules and must be non-discriminatory in intent and effect.

Within these boundaries, the employer may select any criteria, such as seniority, ability to handle more than one job function, funding sources for positions, direct service versus administration, or past or present performance. (Caveat: if performance is used, it should be measured through objective and documented evaluations. An employer that decides to make performance a criterion for layoffs, when performance evaluations have historically not been given or have been sporadic or poorly conducted, is inviting trouble. On the other hand, an employer that has regularly conducted performance evaluations should not attempt to use different criteria or ignore past evaluations in the context of a RIF).

Once the criteria are identified, the employer should test how they will play out. If there is a discriminatory effect (for example, the sole female patrol officer will be the only employee laid off) the employer should review the plan with counsel to assess risk and liability for a discrimination claim.

Avoiding Discrimination


Age Discrimination Claims

Reductions in force often expose an employer to age discrimination claims because the impact of cuts may fall more heavily on older workers than on younger ones. Both the federal Age Discrimination in Employment Act (ADEA) and the Maine Human Rights Act (MHRA) protect against age discrimination. Age discrimination claims expose an employer to back and front pay liability, liquidated damages, attorney's fees and a jury trial.
1) Burden of Proof. The Plaintiff in an age discrimination case must initially demonstrate a prima facie case of unlawful
age discrimination by showing the following:
• that he is a member of the protected class (i.e., over 40);
• that he was laid off from a job for which he was qualified; and
• that others not in the protected class were treated more favorably.
In order to rebut the prima facie case, an employer must articulate a legitimate non-discriminatory reason for its action. Once the employer does so, the employee must prove that the proffered reason is a mere pretext for discrimination. Some courts, however, have required age discrimination plaintiffs in a RIF case to present direct, circumstantial
or statistical evidence indicating that age was a determining factor in the employment decision.
2) Forced early retirement of an employee subjects the employer to a substantial risk of liability under the ADEA or MHRA. If the employer asserts economic necessity as its justification, it must show that the need for the drastic cost reduction is bona fide, and that the forced early retirements are the least-detrimental alternative means available to reduce costs.
Deprivation of Benefits: If early retirement will deprive an employee of benefits which he would have earned but for the RIF, this could be evidence that the employer's reasons for the discharge are pretextual.
Failure to Follow Employer's Procedures: An employer's failure to follow its own seniority or RIF procedures may permit an inference that the employed's age motivated its decision.
Criteria for Selection: Basing a RIF on the elimination of higher paid positions may permit an inference that age motivated the employer's actions, where the higher paid positions are filled by longer service, and therefore older, employees.
3) Voluntary Retirement Programs must be truly voluntary for the employer to be able to effectively defend them against age discrimination claims. If the offer of early retirement cannot be declined and the employee is not allowed to keep working, the offer is not voluntary since he has no real choice.
- Factors to be considered in determining voluntariness include: how much time the employee has to make his decision, details of the offer, whether the employee is afforded an opportunity to negotiate over the terms of the offer, whether the employee is encouraged to consult his own attorney.
- An early retirement program must not be a subterfuge to evade the purposes of an early retirement option in and of itself does not warrant an inference of age discrimination.
- Waivers and releases: If an employer is offering an early retirement program in exchange for the enhanced benefits, the employer may request the employee to release and waive any and all claims, including age discrimination claims that the employee has or may have against the employer at the time of or as a result of the early retirement. To be effective, an employee's waiver must be knowing and voluntary and supported by additional consideration beyond the benefits to which he is already entitled (vested benefits). Factors to be considered in determining whether a waiver is knowing and voluntary include: the amount of time the employee is given to review the release/waiver; specificity of document language; whether the employee is encouraged to consult his own attorney; and whether he has an opportunity to negotiate terms.

Other Potential Civil Rights Claims

In planning a RIF, the employer should also analyze the impact of its prospective action to determine if members of some other protected class (minority, female, handicapped) are being disproportionately affected, or treated differently. If so, the employer should carefully review with counsel the manner in which these employees have been selected for reduction.

COBRA Applies

COBRA applies to employer sponsored group health plans for employers of 20 or more employees. COBRA requires the plans to continue health care coverage at the employee’s expense in certain situations (called “qualifying events”) where the employee and his or her dependents (called “qualifying beneficiaries”) would otherwise lose coverage under the terms of the plan.

In the context of RIFs, the qualifying events are: (1) termination of employment, or (2) reduction in hours sufficient to affect group health care coverage.

For municipal employers, the application of COBRA to a RIF meant that the plan administrator should be notified when an employee is terminated or whenever an employee's hours are reduced enough to trigger a reduction in health care coverage. The plan administrator is then required to give the appropriate COBRA notice to the employee. The employee will have 60 days to elect whether to continue coverage at his or her own expense. Group coverage is generally available for 18 months after termination or reduction in hours.

Vacation Pay
Maine law, 26 M.R.S.A. § 626, requires that vacation pay that has already accumulated or accrued pursuant to an employer's policy must be treated like wages and paid on the next pay day following termination.

The law does not require a particular accrual rate, or even that vacation accrue at all; it is up to the employer to determine the actual policy and the conditions for accrual and vesting. Thus, if a municipal employer's policy provides that annual vacation accrual vests on June 30 (for example) and a RIF occurs on January 30, there is no obligation to pay the amount of vacation pay that has not yet vested.

On the other hand, if the employer's policy provides that vacation pay accumulates at the rate of one day per month and the employee being laid off has worked for 12 months, the full amount of vacation pay must be given on the pay period following the last day of employment.


Recall Rights
There is no right to be recalled from layoff under state or federal law. Recall rights exist, if at all, by virtue of a collective bargaining agreement or personnel rules or ordinances.

Employers must be wary of the appearance of discrimination in refilling jobs with someone besides the person on layoff. For example, if an employer lays off a 50-year-old worker and shortly thereafter hires a 25-year-old to perform the same job, this will invite an age discrimination claim that may be difficult to defeat (since it will be hard to justify passing up the experienced and qualified older worker in favor of a new hire.)

When hiring into the same or similar job from which an individual has been laid off, when the laid off individual is available for work and is a member of a protected class (e.g., sex, age, handicap), the employer must have a convincing, non-discriminatory justification for selecting another person.

RIFs In A Unionized Setting

Decision To RIF
When employees are covered by a collective bargaining contract, the language of the contract controls the employer’s ability to lay off employees, to reduce hours, to abolish and to reassign duties within or outside the bargaining unit. Many contracts contain management rights clauses that explicitly reserve to the employer the right to determine the number of employees, to eliminate positions, to determine and assign job duties and the like. Even if the management rights clause is broad and general and does not spell out or give examples of specific management powers, in the absence of language to the contrary these rights will be presumed under the "reserved rights" doctrine.

The first step in looking at a RIF of unionized employees is to determine what language in the contract permits or restricts the employer's decision to reduce the number of employees for budgetary reasons.

If there is no language governing the employer's right to do so, there is an argument that the employer must bargain the decision (separate from the impact) to reduce the work force when the decision is driven by the need or desire to reduce labor costs. Practically speaking, this would stymie the layoffs. There is little incentive for a union to agree to reduce positions. Moreover, the MLRB has held that an employer may not unilaterally implement its last, best position (in this case, implement the layoffs) until the entire range of dispute resolution processes - negotiations, fact-finding, mediation, interest arbitration - has been exhausted.

An employer faced with a claim by a union that there is an obligation to bargain the decision to lay off or eliminate positions should seek legal advice from MMA or its attorney immediately.

Relevant Contract Clauses

Assuming that the union contract permits the employer to make the decision to implement a RIF, there almost certainly will be language restricting or controlling how or when the layoff will be conducted and who will be affected. Relevant contract clauses might include: the role of seniority and skills and abilities in determining which employees will be laid off; bumping; severance pay; vacation pay; benefits continuation; notice period; subcontracting restrictions; or recall rights.

It is crucial that relevant contract language be identified and analyzed before undertaking a RIF. In many cases, layoff restrictions will have been in the contract for years but not invoked at all, so that the employer, union and employees may be faced with its application and interpretation for the first time.

Obviously, it is preferable to reach consensus with the union about what rights and procedures apply. If consensus is impossible, the employer may need to make its own well-analyzed, supportable conclusions about the language and proceed, hoping that its position is ultimately convincing to the union or succeeds at arbitration.

Impact Bargaining

The extent and specificity of the contract language applicable to layoffs controls whether the employer must bargain the impact of the layoffs on wages, hours, and working conditions.

In general, there is no duty to bargain over a term that is specifically covered under the parties' contract, since that term has already been negotiated. On the other hand, the union may make proposals on topics that are not covered in the contract, and the employer may have a duty to bargain to impasse over these proposals.

The scope of the impact bargaining obligation is also affected by whether the contract has a "zipper clause," maintenance of benefits clause and other articles that at first blush may not seem directly related to RIFs.

Before entering into negotiations over the impact of layoffs, an employer should seek advice from MMA or their town counsel.

Information Request
The union may demand information, such as economic data, budget analyses, analyses of options besides layoff and the like.

In general, an employer has a broad obligation to provide to the union, at its request, data and information relevant and necessary for the union to fulfill its obligation as a bargaining agent. Before providing the union with sensitive information, the employer who has received an information request should (1) ask that it be put in writing, and (2) seek legal advice from MMA or its counsel. There is no obligation to create documents that do not exist, or to do the union's costing or other analysis.

Practical Incentives To Encourage Voluntary Terminations

Early Retirement Plans
Many pensions plans allow for "early retirement," meaning retirement before the plan's normal retirement age. Usually, an employee who elects early retirement will receive a benefit which is actuarially reduced to reflect his or her shortened length of service and expected life span. Because of this actuarial reduction, the early benefit does not cost the employer any more or very little more than if the employee had worked until normal retirement age. For instance, an actuarially reduced pension beginning at age 60 is usually two-thirds of the normal benefit received at age 65. A pension received at age 55 is usually one-half the normal pension.

To assist a RIF, an employer may choose to enhance the terms of early retirement on a short-term basis, or amend the company pension plan to allow for early retirement during a "window period" of, for example, three months. There are few limits on how such an incentive may be structured. This enhanced benefit will often, however, cost the plan more than if the employee worked until normal retirement age. Thus, employee funding of the plan must be adjusted when an enhanced early retirement benefit is adopted.

Early Retirement Plans are a popular incentive for businesses to provide their employees, especially their management employees, to increase normal attrition and assist a reduction in force. These plans may be similarly beneficial for the public employer and should be considered as incentives to voluntary termination.
Early retirement must be voluntary!

As noted earlier, to avoid age and other discrimination claims, steps must be taken to ensure that an employee's choice to elect an early retirement benefit is entirely VOLUNTARY. The plan must be described adequately in writing and the employees who elect the increased benefit and retire must actually receive the increase benefit.

Thus, if an older employee is told to take the early retirement option before the end of the window period because all the older employees will be laid off anyway, the benefit is offered coercively and there is probably exposure to an age discrimination claim. On the other hand, if the benefit is offered as an alternative to the risk of layoff, it is a completely voluntary election.

To avoid the accusation of involuntary early retirement, the employer should require the employee opting for early retirement to sign a statement that he understands the provision of the agreement and elects to take early retirement voluntarily and of his own free will.

It is strongly recommended that an employer not propose early retirement to an employee or employees without first obtaining advice of counsel.

Retiree Health Coverage
As an added incentive, many open window plans offer other benefits such as continuing health care coverage that are identical to those offered under the employer's normal retirement programs. Of course, the employee would be entitled to COBRA coverage if the employer-sponsored group health plan coverage terminated at retirement. An employer may agree to pick up that premium for the 18-month continuation period or agree to voluntarily extend the COBRA coverage until the employee receives coverage under Medicare.

Voluntary Severance Pay Plans
Severance pay is a lump sum paid to employees upon discharge or permanent layoff and in some instances upon resignation. It is known by many names - "exit allowance," "discharge bonus," "separation wages," "severance allowance," "termination pay" and "dismissal pay."

Like early retirement plans, severance pay plans can be designed in many different ways, depending on the employer's needs. For instance, severance pay may be conditioned on a specific number of years of service and/or a certain level of performance.

Severance pay plans must also be completely VOLUNTARY in order for the employer to avoid claims of age and other discrimination.

In the private sector, severance pay plans are usually enforceable under the federal Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq. These enforcement provisions of ERISA do not apply to public employees. A public employee may attempt to enforce a claim to severance pay under state law, through a breach of contract claim in state court, under the labor contract or through the MPELRA.

RIFs and Workers Comp
The Maine Workers' Compensation Act forbids discrimination by the employer against any employee for testifying or asserting any rights under the Act. An employee who prevails in a discrimination claim before the Workers' Compensation Commission is entitled to reinstatement, back pay, reestablishment of employee benefits and attorneys' fees.

RIFs which affect employees receiving Workers' Compensation pose such a significant legal risk that municipal officials will certainly want to consult legal counsel prior to any such action.

Unemployment and The Public Sector
Virtually any termination and RIF has implications for the employer under Maine's Unemployment Insurance Law, 26 M.R.S.A. § 1041 et seq.

Governmental entities are liable under the Unemployment Insurance law. Governmental entities are defined as "the State of Maine, municipal corporations, and other governmental subdivisions and any instrumentality of one or more of the foregoing." 26 M.R.S.A. § 1043 (28).

Among the individuals excepted from unemployment insurance coverage are:
- Elected officials;
- Members of legislative bodies or the judiciary;
- Officials in major non-tenured, policymaking or advisory positions; and
- Individuals in policy-making or advisory positions whose official duties do not require more than eight (8) hours a week to perform.

Generally, most employers pay a tax into the unemployment system, based on their experience rating, to provide unemployment insurance to their employees. The employer's tax is directly tied to the number of employees who receive unemployment benefits. Public employers and non-profit organizations may elect to reimburse benefits paid to their former employees outside the unemployment system, in lieu of making contributions.

The principal criteria for benefit eligibility:
- The claimant must file a claim for benefits for each week or part of a week he is unemployed.
- The claimant must register for work and report at the nearest office of the Bureau of Employment Security;
- The claimant must be able and available for full-time work;
- The claimant must be actively seeking work; and
- The claimant must have been paid at least two times the annual average weekly wage in each of two (2) different quarters and total wages of at least six (6) times the annual average weekly wage for insured work in his/her base period.

A claimant is ineligible for benefits if:
- The claimant voluntarily separates from employment without good cause;
- The claimant retires;
- The claimant is discharged for work-connected misconduct;
- The claimant is suspended by the employer as discipline for misconduct;
- The claimant refuses suitable job opportunities or work;
- The claimant is entitled to severance or dismissal pay;
- The claimant makes a misrepresentation in his/her claim for benefits; or
- The claimant is discharged because of a conviction for a work-connected felony or misdemeanor.

Practical Approach To RIFs
In order to minimize the likelihood of litigation and/or potential liability in case litigation occurs, the employer should follow these steps:
1) Analyze alternatives to layoffs. Consider pay cuts, job sharing, furloughs, reductions through attrition, etc. Be able to articulate why other alternatives will not work.
2) Analyze what positions and/or employees must be retained and which ones can, in the context of a budget crisis, be eliminated either permanently or temporarily.
3) Analyze which sections of the municipality's personnel rules, ordinances and/or collective bargaining agreements apply to layoffs or non-disciplinary terminations.
4) Analyze the criteria that will be used to determine which employees will be laid off.
Examples: position not required operationally; seniority; ability to do more than one job; performance; funding source. Are the criteria chosen consistent with personnel rules, ordinances, collective bargaining agreement?
5) Analyze the obligation to notify the union and/or bargain prior to the layoffs.
6) Develop the severance terms for laid off employees. What must be paid/done as a matter of right (e.g., COBRA notice, vacation pay, recall rights, etc.)? What can be done to minimize impact, even though there are no rights at issue (e.g., severance pay, health insurance continuation, outplacement, etc.)? Check personnel rules, ordinances, collective bargaining agreement.
7) Look at the impact or patterns of the layoffs for discriminatory effect. If older workers, women or handicapped individuals are affected disproportionately, seek legal review.
8) Analyze appeal rights, if any, of laid off employees.
9) Once criteria and procedures are developed, be consistent. In general, do not depart from the plan or make exceptions.
10) When calculating savings from RIFs or other personnel actions, consider cost of unemployment benefits, severance pay, vacation pay, need for additional incentives; potential for arbitration or litigation, and other "hidden" costs.

 

 

Linda McGill is a partner in the law firm of Moon, Moss & McGill in Portland, Maine. Ms. McGill practices all aspects of employment and labor relations law. She has served on the Maine Labor Relations Board and practices widely in the public sector.