Reduction in Work Force, Furloughs, and Layoffs – COVID-19 Crisis

COVID-19 is quickly drastically changing everyone’s business.  Given that many businesses’ most significant expense is their people, COVID-19 presents a “Sophie’s choice” for entrepreneurs and almost all entrepreneurs are going to have to make some tough decisions related to their teams and employees.  Here’s some information for you to consider. But, all of this comes with the caveats that (i) this is general information and your company’s specific facts may change the analysis set forth below (e.g., industry, # of employees, state where employee works, etc.) and (ii) some of this information is moving so quickly that this information may quickly become outdated by new information, new legislation, and new best practices.

 

Obvious Measures First

In just about every instance over the past week when I have talked with clients, the entrepreneurs who are facing cost-cutting decisions are concerned about their employees and how this will affect them too.

At the risk of stating the obvious, it’s worth mentioning that, first you should review your company’s expenses and determine any non-essential expenses that you can cut.  This should entail a detailed review of your income statement and determine which expenses you can cut. Likewise, you may be able to change the process internally to realize better cash flow.  For example, requiring some or all of a payment in advance to delivery can suddenly increase the speed that cash flows through your business. Of course (also at the risk of stating the obvious), the company should consider a hiring and promotion freeze.

 

Less Drastic & Temporary Measures (Half-Measure)

For most businesses, however, the obvious actions listed above won’t make a big enough impact in offsetting lost revenues. They’ll need to take the reluctant action of dealing with the payroll expense line on their income statement.

As a less drastic alternative to laying off employees, entrepreneurs with employees might consider:

  • Implementing a furlough
  • Reducing employees’ hours for a temporary period
  • Reducing employees’ pay for a temporary period

Pros

Furloughs and reduced working hours or compensation can provide necessary cost-saving measures while retaining employees with institutional knowledge and experience. Retaining experienced employees reduces the costly and timely process of rehiring and retraining personnel when economic conditions improve and allows the employer to ensure some consistency in tough economic times.

Potential Problems

While furloughs and other temporary cost-saving arrangements have many long-term benefits, they must be carefully structured to comply with the Fair Labor Standards Act (FLSA) and state wage and hour laws. For example, certain cost-saving measures may jeopardize the exempt status of salaried exempt employees under the FLSA. The penalties or liabilities that could arise from an entrepreneur’s failure to comply with these laws can be significant (and can include the employee’s attorneys’ fees and triple damages in some cases).

In addition, companies with foreign workers whom they have sponsored for a green card or nonimmigrant visa status may be required to notify the US Citizenship and Immigration Services.  Check with your immigration attorney.

 

Drastic and Permanent Measures (Full-Measure)

When the employers determine that a layoff is necessary, there are two main approaches to consider:

  • Voluntary Reductions- the Company may implement voluntary reduction in its workforce by offering those who leave special benefits (e.g., exit incentives, severance package, placement services, training, etc.).  
  • Involuntary Reductions.  The Company can always terminate its at-will employees (subject to applicable federal, state, and local laws).  The Company must take care not to violate any discrimination, harassment, or retaliation laws. For some companies (generally, 100 or more employees) they might be subject to the WARN Act, which would require 60 days’ notice to employees.  If for some reason your employees are in a right to work state or otherwise have a “for cause” employment agreement, compliance with those laws and agreements will be required. Colorado is an at-will state.

Each of these require some planning and, under normal circumstances, careful planning at that.  But, at the very least, the company should record the reasons for taking the measures to demonstrate the business justification and to minimize the risk of discrimination or other legal claims.  These will help serve your defense should you be sued later for the action you took.

There’s no doubt that this analysis is a terrible experience for the entrepreneur and the Company.  But, sometimes, as an entrepreneur it requires making tough and unpopular decisions. As the saying goes “heavy lies the crown.”

 

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