Furloughs, Reductions in Force, and Alternatives to Consider

By John F. Lomax, Jr.

The unprecedented steps our society is taking to prevent the spread of COVID-19 will unfortunately take its toll on some employers, their employees and families.  With public health authorities in California issuing shelter-in-place orders and the prospect of significant relief provisions in Congress, the situation is unfolding rapidly.  Here, we offer suggestions to help employers consider their options on staff and expense reductions and the legal issues that may be implicated by such actions.  As noted in points 9 and 10 below, if an employer has employees represented by a union or employs foreign nationals on certain work visas, these options may be limited.

1. Furloughs or Temporary Layoffs:  A furlough or temporary layoff of employees for short periods of time, e.g., 2 weeks or 30 days, does not typically implicate the WARN Act, the federal law requiring notice of mass layoffs and plant closings.  With a furlough, an employer places its employees on an unpaid leave for a limited period of time, advising employees it will recall them when it is able to have them return to work.  Employees placed on furloughs may seek unemployment benefits, but a number of states have waiting periods before the affected employees become eligible for benefits and the employees may have to certify they are searching for employment elsewhere.  For example, Arizona, Colorado, Nevada and Utah have a one-week waiting period.  In light of the current crisis, California has announced it is waiving its waiting period for one week.  For exempt, salaried employees – meaning employees are exempt from overtime requirements under federal and state law – furloughs may present a challenge if the employer anticipates the exempt employees will work some hours in the week.  Exempt employees should not be asked to perform work for any whole week that employees are unpaid.  Finally, a layoff that extends for a significant period of time, however, may implicate the WARN Act and similar state notice requirements.
2. Reduction in Work Hours:  Under this approach, an employer reduces the number of hours its employees work each week.  An employer may adjust starting times or stop times or simply cut the number of hours worked.  Depending on the state, employees faced with a reduction in hours worked may be eligible for unemployment compensation, but only if they can certify they are actively seeking alternative employment.  For overtime exempt employees, this approach has a challenge as those employees must be paid their fixed salary for a week if they perform any work and are otherwise willing and able to work that week. However, please see below for possible options to reduce exempt employees’ salaries.  If the employer cuts the hours worked for employees by 50% or more and that reduction in hours lasts for a significant period of time, the WARN Act and similar state notice requirements may be implicated.
3. Reductions in Force: Under this approach, the employment relationship is terminated.  Employers considering this option should weigh whether its plans will be implicated by the WARN Act and other similar state notice requirements.  The WARN Act does not apply to employers with fewer than 100 employees, but in some states the standard may be lower if the state has a similar notice requirement.  When considering the WARN Act, pay close attention to the definitions as some terms like “employment loss” and “part-time employees” are not what one might typically expect.  Employers considering a reduction in force may opt to obtain a release of claims in exchange for a severance benefit.  Releases for this type of severance program need to have two features if they include a release of claims for age discrimination; they must provide 1) 45 days to review the release, not the typical 21-day period; and 2) they need to include certain mandatory disclosures related to the program and the ages and job titles of those in the affected decisional units.
4. Prospective Salary and Wage Reductions: For at-will employees who are not represented by a union and are not covered by employment contracts, an employer may unilaterally reduce the wage and salary of its employees, but any such wage and salary reductions need to be prospective and announced to the affected employees in advance. Wage reductions, however, cannot go below the applicable minimum wage or below the salary thresholds for certain exempt employees.  Like other measures outlined here, employer communications on reductions need to be thoughtful.  Some companies may opt to implement a reduction at the executive level as part of a "we are all in this together" message, but if the executives have employment contracts, salary reductions may require contract amendments.
5. Work Share Programs: This program involves asking or mandating that employees reduce their hours worked and share duties with other similarly situated employees.  This approach is often viewed as an alternative to furloughs or reductions in force.  Several state unemployment compensation schemes in Arizona, California and Colorado have work share programs that allow participating employers to have their employees receive unemployment compensation while also working part-time.  Depending on the state, one benefit of these programs may be that an employee does not need to certify he is looking for employment elsewhere.  An employer interested in those programs needs to apply to the applicable state office to gain approval for a work-share program.
6. Severance Plans: Many employers have severance plans that provide severance benefits in the event of job losses.  Employers may want to revisit their plans to determine how it will work in the event of a reduction in force, e.g., does it contemplate a release of claims, are the benefits provided appropriate for the situation and the employer and its employees.  Many employers’ severance plans are unfunded ERISA plans.  Those plans can typically be amended prospectively if changes need to be made, but there are notice requirements for changes.
7. Managing Vacation and Paid Sick Leave Programs: One lesson of the 2008 and 2009 downturn was a number of employers found themselves sitting on large accrued paid time off or vacation balances. In the intervening decade, the landscape of paid time off has changed considerably.  Many states and municipalities adopted mandatory paid sick leaves and some states have adopted laws to prevent employers from adjusting accrued vacation benefits.  Typically, employers will encourage employees to use these paid benefits to supplement or substitute for lost wages.  This issue may be affected by new legislation.  The bill that the House of Representatives approved over the weekend, however, limited its application to employers with fewer than 500 employees.  That threshold may change so this is an issue to watch in the next few days. 
8. Other Cost Savings Measures: Employers can and will be creative to save expenses and assist affected employees.  We anticipate some employers will freeze hiring, limit non-essential overtime, review and revise incentive and bonus programs, and take other steps to mitigate the impact on the business and employees.  But in so doing employers may want to consider the limits of their creativity.  For example, shifting employer expenses to employees may create potential liabilities under state laws.
9. Union-Represented Employees and Employees on Visas: Employers with union-represented employees will need to turn to their collective bargaining agreements.  Some labor contracts have strong management rights clauses and expressly authorize the employer to make decisions on reductions in force and furloughs, but even then, an employer may have a mandatory obligation to bargain over the effects of such a decision.  We anticipate some employers may seek to reopen negotiations with labor unions in light of this crises.  If an employer has union-represented employees but no labor contracts, then it is likely that employer will have a mandatory obligation to bargain with the union over the decisions that affect the union-represented workforce.
10. Employment of Foreign Nationals: Similarly, if an employer employs foreign nationals on certain visas, particularly H1-B and E-3 visas, it may not be able to take certain actions with respect to those employees.  For example, furloughs, temporary layoffs, work hour reductions, salary or wage reductions and work share programs may not be available for foreign nationals in light of the representations the employer has made to the government.