Evaluating All the Options

Conference table

As the world grapples with containing the Coronavirus, business owners and employers must also face a disheartening question: How can I keep paying my employees?  While we all hope that this pandemic and related economic pain is short-lived, this is a real question that many are having to ask themselves. Answers are not easy and will likely differ for every business. The process of coming to an answer a business owner can live with involves evaluating all the options. Approaching these questions in a methodical manner is also essential to limiting a potential wrongful termination claim.

  1. Evaluate Your New Budget and Your Current Cash Position.  You must understand your company’s cash in-flows and out-flows.  How have they already changed?  What changes do you reasonably expect in the next several weeks or months?  Are you a business that relies on walk-in traffic or in-person customer interaction?  Does your business require the physical presence of employees in your office or at a jobsite?  What happens in the event that your area becomes a Coronavirus “hot spot” and faces mandatory stay-home orders for all but essential needs?  Are there planned cash-expenditures that can be “pushed” a bit further into the future?  Does your business keep a “rainy day fund,” and what are the priorities for that money?  Do you have access to a line of credit or other financing option?  Without answers (or at least educated guesses) to these questions, it’s virtually impossible to estimate what steps a company may need to take to survive – including adjusting staffing levels.
  2. What are Your Actual Employee Costs?  Knowing the amount that is paid in salaries or hourly wages is one thing, but knowing how much your employees actually cost is another. Employment taxes at the federal, state, and local levels need to be considered, as do the costs of employment benefits packages (retirement, insurance, company vehicles, paid leave, etc.). Are there any governmental relief programs that could potentially apply to help offset those costs (e.g., the new Families First bill)?
  3. Is Your Business Unionized or are Other Written Employment Agreements in Place with Any Workers?  If your business is subject to a collective bargaining agreement, you must consider those provisions prior to taking any actions that impact the terms and conditions of employment. The National Labor Relations Act requires employers to bargain with labor unions representing their employees on issues related to wages, hours, and other conditions of employment. Absent a contrary provision in a collective bargaining agreement, employers may not act unilaterally to change the terms and conditions of employment, including reducing the number of hours worked by employees or modifying pay and/or benefits. Likewise, if your business has written agreements with any of its employees, such agreements must be reviewed prior to taking any action that may be contrary to that agreement.

Armed with this information, businesses can ask the next questions: Are cost-cutting measures to the employee base necessary and, if so, how deep do those cuts need to go?  There are no black and white answers because an employee’s value is not measured purely in dollars and cents.  Business owners must evaluate who adds value to their business in intangible ways as well as tangible ways. How does one value the employee who keeps up office morale and helps manage difficult employee relationships as compared to the employee who is a fantastic salesperson?  Additionally, if employment issues are not handled with a delicate touch now, a company will face difficulty recruiting or retaining workers in the future.  With all of those factors in mind, it’s legitimate for a business to consider various cost cutting measures relating to their staff:

  1. Terminations and Mass Layoffs. Terminations and mass layoffs are two of the more aggressive and permanent cost-cutting measures that employers may be considering. These approaches are “final” in the sense that the employees may not be available for re-hire when a business returns to its normal operations. 

    Prior to closing a business, discontinuing an operating unit, terminating employees, or engaging in mass layoffs, businesses must determine whether they are subject to either the federal WARN Act or a state equivalent mini-WARN Act. The federal Worker Adjustment and Retraining Notification Act (“WARN”) applies to employers of a certain size in such situations and covers employers that employ either:  (i) 100 or more employees, excluding part-time employees; or (ii) 100 or more employees, including part-time employees, if the part-time employees collectively work at least 4,000 hours each week excluding overtime.  (29 U.S.C. §§ 2101- 2109.) 

    Under WARN, mass layoffs that last more than six months are covered. Mass layoffs are reductions in force that result in employment loss at a single site of employment during any 30-day period for at least 50 employees who comprise at least 33% of active employees or 500 employees. For some employers, though, closure of the business or an operating unit will become an issue.  In that case, the question will be if there’s an employment loss for at least 50 employees. Counting employees in either situation can become quite an exercise, and it’s not a straightforward process. If applicable to an employer, WARN requires 60 days advance notice not only to the workers (and their union representatives if applicable), but also to certain governmental bodies prior to the termination or layoff occurring. Failure to give the required notices can result in significant penalties and claims.

    There are exceptions to the 60-day notice period that are highly dependent on the facts and circumstances of each case.  Those circumstances can include:

    a. Situations in which the business is actively seeking new capital or business and reasonably believes that (i) the new capital or business would allow the employer to avoid or postpone a plant closing and (ii) advance notice would harm its ability to obtain the new capital or new business.

    b. The closing or mass layoff was caused by business circumstances that weren't reasonably forseeable at the time the notice would have been required.

    c. The closing or mass layoff is due to a natural disaster.

    Employers falling under one of these three exceptions must still give as much advance notice regarding mass layoffs and plant closings as is practicable. Employers governed by WARN will likely want to consider whether the COVID-19 pandemic constitutes unforseeable business circumstances that weren't reasonably forseeable at the time the notice would have been required. 
  2. ​​​​Voluntary Separations.  Some employees may willingly quit their job if provided a separation agreement. Candidly, some workers simply do not want to go to work right now given the risks presented by the Coronavirus. Others may prefer to have their employment record reflect a voluntary quit rather than a termination. Separation agreements will require the payment of money or other consideration in order to support the employee’s release of claims for things such as wrongful termination, and not all claims may be released. However, such separation payments may be a small price to pay for many employers as compared to a difficult termination or harming the morale of your remaining workforce. Additionally, voluntary separations will likely help preserve the relationship with the employees at issue, which will be a good thing if the employer wishes to rehire those individuals in the future.
  3. Mandatory Furloughs Furloughs are essentially mandatory reduction of hours or time off. Hourly nonexempt workers must be paid for all hours worked, so if the hourly employee performs work during a furlough they must be paid for that time. 

    For salaried exempt employees, wage deductions are not permitted due to a slowdown in business.  Deductions may not be made from an exempt employee's predetermined salary for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available. Deducting an exempt employee’s salary due to a slowdown in business will ordinarily cause a loss of the exemption over a two year look back period and moving forward.  However, there is one exception:  when an exempt employee performs no work for a full week, even if occasioned by the employer, their wages may be deducted for the full week. 

    Additionally, an employer can make a prospective reduction in pay for salaried exempt employees due to an economic downturn, provided the change is bona fide and not used as a device to evade the salary basis requirements. Such a predetermined regular salary reduction, not related to the quantity or quality of work performed, will not result in loss of the exemption, as long as the employee still receives on a salary basis at least $684 per week. On the other hand, as explained above, deductions from predetermined pay occasioned by day-to-day or week-to-week determinations of the operating requirements of the business constitute impermissible deductions from the predetermined salary and would result in loss of the exemption. The difference is that the first instance involves a prospective reduction in the predetermined pay to reflect the long term business needs, rather than a short-term, day-to-day or week-to-week deduction from the fixed salary for absences from scheduled work occasioned by the employer or its business operations.

    Employees may be permitted to use accrued time off in order to make the leave less of a financial burden on the employee.  Additionally, should the employer determine that a business closure or layoff is necessary at a later time, such PTO or vacation time likely would have been required to be paid out anyway. Prior to imposing a furlough, employers need to determine if the employee’s benefits are impacted and whether a benefit plan permits employees to remain on the plan while furloughed. It’s possible that COBRA may be triggered by putting an employee on furlough.

  4. Reduced Hours.  In connection with hourly non-exempt workers, reducing hours worked may be an effective method of reducing wage expenses.  In reducing hours, employers must be careful of two main issues:  (1) if the hour reduction exceeds 50% during each month of any 6-month period, WARN may be triggered; and (2) if the hour reduction is significant, there may be issues with the employee’s ability to remain on benefits.

  5. Reduced Pay.  So long as there is not a written employment agreement, an employer may be able to reduce the pay of either salaried exempt or hourly nonexempt workers on a prospective basis, as outlined above. In connection with salaried exempt workers, employers must be careful to not reduce a worker’s pay beneath the minimum salary required to maintain the exemption from overtime. Similarly, with hourly nonexempt workers, wages may not be reduced beneath minimum wage. 

  6. Benefit Reductions.  Reductions in benefits may be useful in reducing the overall costs related to employees; however, an employer’s ability to reduce benefits may be limited by the plan documents as well as applicable law. Likewise, written employment agreements may mandate certain benefits be provided. Employers will need to consult with their benefits providers prior to reducing benefits.

With any of these approaches, employers must be careful to make decisions based on objective, non-discriminatory factors. For example, it would be highly problematic (and likely against the law) to target employees because they are in a protected class. Protected classes include the traditional categories of race, gender, age, etc. However, protected classes also include those people with disabilities and those who have used paid sick leave under the newly-enacted Families First Act or used the newly-expanded Family Medical Leave Act. Many employees will have such issues due to the COVID-19 pandemic. Employers should carefully document how they made the decisions to take the actions they elect to take and ensure that such actions don’t have a disparate impact on a protected class.

If you have any questions on this topic or wish to explore possible options for your business, please contact our Labor & Employment Law Practice Group and  subscribe to our Labor & Employment E-Briefs to keep up with the latest HR news, tips, and updates.

Woods Aitken recently launched a Coronavirus Resource page that includes valuable information regarding the coronavirus pandemic and all of our publications on COVID-19. We encourage you to visit this page often for updates.