As interest rates rise and the threat of a recession looms, many employers are beginning to struggle with balancing the cost of maintaining their workforce with an expected decrease in profits. The frequent result of such a balancing act is a mass layoff. While a reduction in workforce may be inevitable, below are options that employers can consider to try to avoid that outcome. For all of these alternatives, employers should apply any changes consistently across the workforce to avoid claims of inequity or discrimination.

  1. Transfer Idle Employees. If certain employees are being paid to work in areas of the business with little or slow activity, employers should consider transferring or redeploying them to perform another function that will provide the company with more equitable returns.
  2. Reduce Employee Hours. Hourly workers can be placed on a reduced-time or part-time schedule, and overtime hours can be reduced or eliminated entirely. If the workforce is unionized, employers should confirm whether they are permitted to make these changes unilaterally under the collective bargaining agreement. Employers should also consider how a reduction in hours may impact employees’ eligibility under employee benefit plans, particularly any employer-provided health plan.
  3. Apply for State-Sponsored Work-Share Programs. In the event employers decide to reduce employee hours as opposed to headcount (e.g., instead of laying off 20% of the workforce, an employer reduces hours for all employees by 20%), the employer may be able to provide relief to the impacted employees by applying for state-sponsored work-share programs. Work-share programs, also referred to as short-term compensation programs, allow employees to collect a reduced amount of unemployment income when their hours are reduced. Currently, approximately half of the states in the U.S. sponsor a work-share program (including California, New York, Florida, and Texas).
  4. Reduce Compensation. Employers can reduce compensation for certain employees. Bonuses, commissions, grants, and other incentive payments may be subject to modification depending on the contract, or plan or program. The salaries of non-exempt employees without a contractual right to a certain level of compensation can be frozen or even temporarily reduced. Normally, a reduction to the predetermined salary of an exempt employee will cause a loss of the exemption. However, that rule is relaxed during a business or economic downturn so long as the reduction in salary is a bona fide decision not used to evade the salary basis requirements. The salary reduction must not be related to the quantity or quality of an employee’s work, and it cannot be reduced below the current Fair Labor Standards Act threshold of $684 per week (or any higher state threshold for exempt minimum salaries). Additionally, pay reductions for exempt employees may not be modified by day-to-day or week-to-week decisions. Rather, courts have suggested that such salary fluctuations should happen no more than twice per year. Any salary reduction of an exempt employee during a business or economic downturn must be prospective, meaning the change cannot occur after the employee has already earned the salary, and changes must be clearly communicated to employees to avoid wage payment claims.
  5. Halt Onboarding. While many employers have already implemented a hiring freeze, many others may have outstanding job offers pending that could be withdrawn. When deciding whether to withdraw an offer, employers should be careful to avoid any discrimination claims in selecting which offers to revoke. To the extent an offer has been accepted, employers may still be able to rescind, but should consult with legal counsel to ensure that they are aware of all possible negative consequences, particularly if there is an argument that the offer was not for “at-will” employment or the candidate has already acted in reliance on the offer (such as resigning their current employment or moving to the new job location).
  6. Reduce Non-Employee Workforce. To the extent employers use independent contractors or leased employees, the employer may be able to terminate an existing arrangement. However, employers should carefully review the contracts to ensure they understand the termination requirements and procedures and the consequences of such a termination. Employers also should be cognizant of misclassification claims that may arise in the event affected individuals subsequently claim that they were in fact common-law employees and entitled to benefits as such.
  7. Encourage Use of Paid Time Off. In the event the employer decides that a location needs to close, employers can encourage their employees to use accrued paid time off, to the extent the employer reasonably expects the closure to be temporary. This measure will not reduce wage costs, but it can reduce operational costs.
  8. Allow Salaried Workers to Take Voluntary Unpaid Leave in Increments. Some employees may take an offer for voluntary unpaid leave (which can also be framed as a sabbatical or a career pause). Further, salaried employees could agree to take voluntary leave one day (or more) per week to reduce costs.  However, employers should be mindful that the voluntary unpaid leave rules are strict for exempt employees. Voluntary leave for exempt employees can be unpaid if the employee takes the time off for a full day of work for personal reasons and the decision is completely voluntary.
  9. Institute Mandatory Unpaid Leaves or Furloughs. Mandatory unpaid leave, also known as a furlough, is an option available to employers. Unlike layoffs, furloughs involve putting employees on a period of definite or indefinite unpaid leave with the expectation that they will at some point return to work. While a furlough is unpaid, employers should consult with counsel before discontinuing employee benefits. Employers should communicate with employees regularly if the furlough will last for an indefinite period of time. Employers may allow or prohibit employees from using accrued paid leave during a furlough period unless otherwise prohibited by state or local law. State laws differ on whether employers can require employees to use accrued paid leave during a furlough. Some states allow employers to require the use of paid leave, but others impose restrictions, such as California. If non-exempt employees do not work, they do not need to be paid. Exempt employees in the U.S. must be paid a full week’s salary if they perform any work in a week, so they need to be furloughed in strict one-week increments that align with the employer’s work week. Employers who choose to furlough large numbers of employees, or implement extended furloughs, should evaluate whether the action could implicate the federal WARN Act or state WARN Acts (for example, a furlough of six months or more would likely implicate the federal WARN Act). Employers should also look at any collective bargaining agreements or employment contracts before taking this step.
  10. Offer a Voluntary Separation or Early Retirement Package. Employees may be incentivized to leave the workforce with a voluntary separation package. This allows the employer to reduce overhead costs associated with employing the individual and eliminates the employee’s salary from future costs.  Frequently, the highest paid employees are those who have been at the company for the longest and therefore are closer to retirement. While it may be difficult given liquidity issues, if employers can incentivize these employees (many of whom may have started contemplating retirement already) to retire early, cost savings can be realized. Certain job duties handled by departed employees can be transitioned to other workers with less on their plate due to the downturn. Employers considering an early retirement package should consult counsel to ensure compliance with applicable laws such as the Age Discrimination in Employment Act (ADEA), the Employee Retirement Income Security Act (ERISA), or the Older Workers’ Benefit Protection Act (OWBPA).

Unfortunately, for some employers, the steps above will either be unavailable or insufficient to avoid a mass layoff. If a mass layoff is inevitable, employers should carefully consider how to select the employees who will be laid off and document the company’s business reasons for the decisions, as well as the criteria used to determine who (or what categories of employees) will be included in the layoff. Employers should also be careful to limit future litigation risks. For example, employers can reduce the risk of discrimination and retaliation claims by conducting a disparate impact analysis, which assesses the proposed class of employees included in a layoff to determine whether there are a disproportionate number of individuals from a protected class or who have engaged in protected activity. Employers should be cognizant of any severance obligations in the event of layoffs, and should review any applicable collective bargaining agreements or other contracts that may be relevant.  Employers should also evaluate whether their layoff invokes the federal WARN Act or any state WARN Acts.

In addition to assessing legal risks, employers should also consider ways to preserve the goodwill that they have built with their employees. Employers can consider assisting terminated employees in applying for unemployment income benefits or helping cover certain outplacement costs.

While a layoff is never ideal, through careful consideration of options and consultation with legal counsel, employers can navigate these decisions.

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Photo of Lindsay Burke Lindsay Burke

Lindsay Burke co-chairs the firm’s Employment Practice Group and regularly advises U.S., international, and multinational employers on employee management and culture issues and international HR compliance. She is a key member of the firm’s Institutional Culture and Social Responsibility practice, working together with…

Lindsay Burke co-chairs the firm’s Employment Practice Group and regularly advises U.S., international, and multinational employers on employee management and culture issues and international HR compliance. She is a key member of the firm’s Institutional Culture and Social Responsibility practice, working together with white collar colleagues to conduct culture assessments, internal investigations of executive misconduct, and civil rights and racial equity audits and assessments. Lindsay has been at the forefront of the changing workplace issues impacting employers in the U.S. in the last decade, including #MeToo, Covid-19, and the renewed focus on diversity, equity, and inclusion. She frequently advises employers in relation to their processes and procedures for investigating complaints of discrimination, harassment, and retaliation and trains executive teams and board members on culture risk and the lawful implementation of DEI programs.

Lindsay also guides employers through the process of hiring and terminating employees and managing their performance, including the drafting and review of employment agreements, restrictive covenant agreements, separation agreements, performance plans, and key employee policies and handbooks. She provides practical advice against the backdrop of the web of state and federal employment laws, such as Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Equal Pay Act, the Family and Medical Leave Act, the Fair Labor Standards Act, and the False Claims Act, with the objective of minimizing the risk of employee litigation. When litigation looms, Lindsay relies on her experience as an employment litigator to offer employers strategic advice and assistance in responding to demand letters and agency charges.

Lindsay works frequently with the firm’s privacy, employee benefits and executive compensation, corporate, government contracts, and cybersecurity practice groups to ensure that all potential employment issues are addressed in matters handled by these groups. She also regularly provides U.S. employment law training, support, and assistance to start-ups, non-profits, and foreign parent companies opening affiliates in the U.S.

Photo of Carolyn Rashby Carolyn Rashby

Carolyn Rashby provides business-focused advice and counsel to companies navigating the constantly evolving and overlapping maze of federal, state, and local employment requirements. Carolyn’s approach is preventive, while recognizing the need to set clients up for the best possible defense should disputes arise.…

Carolyn Rashby provides business-focused advice and counsel to companies navigating the constantly evolving and overlapping maze of federal, state, and local employment requirements. Carolyn’s approach is preventive, while recognizing the need to set clients up for the best possible defense should disputes arise.

As a senior member of Covington’s Institutional Culture and Social Responsibility Practice Group, Carolyn has co-led significant investigations into workplace culture, DEI issues, and reports of sexual misconduct and workplace harassment.

As an employment lawyer with over two decades of experience, Carolyn focuses on a wide range of compliance and regulatory matters for employers, including:

  • Conducting audits regarding employee classification and pay equity
  • Advising on employment issues arising in corporate transactions
  • Strategic counseling on a wide range of issues including discrimination and harassment, wages and hours, worker classification, workplace accommodations and leave management, performance management and termination decisions, workplace violence, employment agreements, trade secrets, restrictive covenants, employee handbooks, and personnel policies
  • Drafting employment contracts and offer letters, separation agreements, NDAs, and other employment agreements
  • Advising on employee privacy matters, including under the California Consumer Privacy Act
  • Providing guidance on use of AI in the workplace and development of related policies
  • Leading anti-harassment and other workplace-related trainings, for employees, executives, and boards

Carolyn also works frequently with the firm’s white collar, privacy, employee benefits and executive compensation, corporate, government contracts, and cybersecurity practice groups to ensure that all potential employment issues are addressed in matters handled by these groups.

Photo of Mark Plotkin Mark Plotkin

Mark Plotkin — broadly recognized as one of the nation’s preeminent regulatory advocates — represents clients before the Committee on Foreign Investment in the United States (CFIUS) and other U.S. government agencies. He delivers outstanding results for global clients across industries. Mark’s practice…

Mark Plotkin — broadly recognized as one of the nation’s preeminent regulatory advocates — represents clients before the Committee on Foreign Investment in the United States (CFIUS) and other U.S. government agencies. He delivers outstanding results for global clients across industries. Mark’s practice includes having negotiated some of the most challenging compliance and security agreements ever concluded with the U.S. government – agreements that in many instances now are the template for the relevant industries.

Clients refer to him as “the dean of the CFIUS Bar” with an “unmatched history, experience and network” (Chambers USA). The American Lawyer has twice honored Mark as “Dealmaker of the Year“— in 2016 for his role securing CFIUS clearance for GlobalFoundries’ multibillion dollar acquisition of IBM’s semiconductor unit, and again in 2019 for his team’s successful and novel efforts in the CFIUS process to defend Qualcomm from a hostile takeover attempt by Broadcom.

Chambers Global says “Plotkin is widely regarded as one of the top national security attorneys in the USA and has extensive experience in advising industry-leading names before the CFIUS panel.” He also is nationally ranked for his expertise in both financial services regulation and data privacy.

Mark received his bachelor of arts degree in history, summa cum laude and with departmental honors, from Yale College, where he was elected to Phi Beta Kappa. He received his law degree with honors from Harvard Law School, where he was Comments Editor of the Journal on Legislation. Mark previously taught American government at Harvard College. He is an adjunct professor of law at Georgetown University Law Center, where he teaches a seminar on national security law; he also lectures on national security law at Yale Law School and other venues. He is a former Governor of the Yale Alumni Association, a member of the American Law Institute, and a life member of the Council on Foreign Relations. 

Mark is the co-author of numerous articles and book chapters on legal topics as well co-editor of Regulation of Foreign Banks & Affiliates in the United States (Sixth Edition) and editor-in-chief of E-Commerce Law & Business. He has testified before Congress, the U.S.-China Economic and Security Review Commission, and the Uniform Law Commission.

Photo of Molly Ramsden Molly Ramsden

Molly Ramsden’s practice focuses on the design, implementation, and ongoing compliance of employee benefits and executive compensation arrangements.

Molly assists employers of all sizes and industries maneuver the complexities of ERISA, the Internal Revenue Code, and all other federal, state, and local laws…

Molly Ramsden’s practice focuses on the design, implementation, and ongoing compliance of employee benefits and executive compensation arrangements.

Molly assists employers of all sizes and industries maneuver the complexities of ERISA, the Internal Revenue Code, and all other federal, state, and local laws that impact employee benefits and executive compensation.

In particular, Molly frequently advises clients regarding:

  • Health and welfare plans;
  • Tax-qualified retirement plans (defined benefit pension plans, 401(k)s, 403(b)s, etc.)
  • Equity compensation;
  • Nonqualified deferred compensation (top hat plans); and
  • Various other employment and/or benefits related matters.