Caught in the Tide: Issues Arising from Mass Layoffs

A bearish economic outlook has launched a wave of mass layoffs throughout the technology, financial services, and media industries. To name a few, Twitter, Google, Goldman Sachs, Microsoft and Disney —the giants of corporate America — are shedding employees at an alarming rate. While the reasoning behind such large-scale reductions in force may be open to debate, both employers and employees who are caught up in the wave have important practical issues to address. Here is a general overview.

Notice:  Both Federal and New York State Law, encapsulated in what are known as WARN Acts (Workers Adjustment Retraining Notice) require advance notice if the layoff involves a specified number or percentage of employees. The calculations for determining whether a WARN Act applies are complex but if it does apply, the employer must give 60 days’ notice under federal law and 90 days’ notice under New York law. The employer can satisfy WARN Act requirements by paying severance in lieu of notice.

Severance:  There is no federal or state law requiring companies to pay severance, but many employers have contractual obligations to do so either through individual employment contracts or firm wide severance plans. Severance is almost always conditioned on the employee signing a release of claims.

Health insurance:  Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), employees are entitled to remain on their employer’s plan for up to 18 months after the termination. An employer may agree to cover some or all of the costs, but it is not legally obligated to do so, absent a contractual obligation.

Vacation Pay: Employees may be eligible to receive compensation for unused accrued vacation time in some cases.

Bonus: Most employers specify that bonuses are discretionary and that the employee must be employed at the time the bonus is paid, not necessarily when it is earned. This may involve forfeiture of a significant amount of compensation, particularly in the financial services industries. While courts usually allow companies to place such limitations on bonus payments, if the employee has an argument that the bonus was directly tied to their work, rather than general company performance, they might have a claim for unpaid wages.

Equity/ Deferred Compensation: If the employee was granted stock or other deferred compensation, there is an issue whether termination without cause, as in a layoff, allows vesting to continue or even to accelerate. The company may have the discretion to permit such acceleration.

Post-Employment Obligations: The importance of confidentiality, non-disparagement or post-employment restrictions are probably less important in a mass layoff scenario as the terms of the reduction in force are likely to be public knowledge. Nonetheless, employees should review the terms of any severance agreement to see what, if any, post-employment obligations they may have.

Large scale reductions in force are stressful for both sides. A clear understanding and agreement on the issues set forth above may make the transition easier.

This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact RPJ Partner Alice K. Jump who counsels clients on litigation, alternative dispute resolution and business counseling, with particular emphasis on representing clients in the financial services and real estate industries as well as educational and non-profit institutions. Ms. Jump is admitted to practice law in New York and before the United States District Courts for the Southern and Eastern Districts of New York and the United States Court of Appeals for the Second Circuit.