The Trouble with Terminations: What employers need to consider when a reduction in force is in play
Reductions in force (RIFs) can occur in a variety of settings, ranging from those driven by the economy, loss of a major customer, merger, or the broom of new management sweeping clean. In many cases, employers will offer severance arrangements in exchange for obtaining from employees a release of claims arising out of the employment relationship, or its termination. Where a single employee or only a few employees are involved, a stand-alone severance agreement might be sufficient. However, when a large number of employees are involved, the Federal Worker Adjustment and Retraining Notification (WARN) Act, or state analogs and other federal and state laws, can also come into play, which might not be obvious and could pose both concerns and opportunities that employers should consider.
When an employer offers a substantially similar severance arrangement to a group of employees, it should consider whether it is (or should be) creating a plan subject to the Employee Retirement Income Security Act (ERISA). Doing so is not necessarily a bad thing. An employer-sponsored severance plan that complies with ERISA has advantages, such as limiting employees’ avenues for disputes about severance made under the plan and the forum in which such claims can be brought. The existence of such a plan can be used as a tool in attracting talented employees; especially if the employer requires its employees to sign restrictive covenants.
The downside of an ERISA severance plan is that the employer will have to comply with ERISA regulations. Even non-ERISA severance arrangements face issues; such as assuring that release of claims and confidentiality language complies with the National Labor Relations Act, the Older Workers Benefit Protection Act and the Equal Employment Opportunity Commission’s position on release of discrimination claims. The point is that employers should evaluate carefully the benefits and consequences of severance and the form in which it is being offered.
A relatively new concern for employees facing severance that includes continuation of medical insurance, whether or not in an ERISA type plan, is the interplay between the Consolidated Omnibus Reconciliation ACT (COBRA) or state analogs, and the Affordable Care Act (ACA). The potential complexity of this interplay is beyond the scope of this blog. Suffice it to say that it can result in employees either being left without medical insurance until a new open enrollment period under the ACA, or paying what often is higher premiums for coverage under COBRA. Accordingly, employers need to carefully consider any severance arrangement, whether in a standalone setting, or in a larger RIF.