ExecutiveLoyalty.org

Two-step Severance Plans

[NEW]  2018.11.30  GM Layoffs and a Smart RIF Strategy.  It is never easy to downsize a workforce.  The best companies aim to combine a considerate exit for those who leave, with morale-building incentives for those who remain.  What better way to start than GM has done, as reported in this CNBC article:  

  • [What GM offered]  "GM is allowing some employees who took the buyouts to leave as early as this coming Saturday with an official last day of Jan. 31 and salary and benefits continuing for six months after that. Executives could also leave in December with an effective last day of Feb. 28 and a full year of salary and benefits, according to the severance materials."
  • ​[What GM achieved] "GM offered voluntary buyouts to roughly 17,700 eligible employees in North America with at least 12 years of service, according to the document. The company was aiming for 8,000 voluntary buyouts among its salaried workers as part of a total headcount reduction of 14,000, spokesman Pat Morrissey confirmed. He said about 2,250 workers accepted severance agreements by the Nov. 19 deadline."
  • [The Rest of the Story] "The carmaker previously said that involuntary layoffs would follow if there were not enough takers." 

Given that GM aimed for 8,000 voluntary terminations and only had 2,250 accept, it seems that as many as 5,750 employees will now be involuntarily terminated - almost certainly with less favorable benefits than those who accepted the voluntary severance offer. The lesson for employees is clear: if you are not a high performer and are not feeling secure in your job, think hard about accepting a voluntary severance offer because an involuntary severance could be much more painful.  

* * * 

Regarding two-step reductions in force (RIFs), this does enable employers to downsize their workforces in a smart, considerate manner.  A well-designed program has the potential to encourage resignations by those who either want to retire or should leave because they are weak performers. They may exit with dignity, and enhanced severance.  A follow-on RIF may then make further cuts as needed, at a cost savings because the severance need to be less because that best enables the voluntary severance offer to have appeal. Coincidentally with any RIF, smart employers consider how to address the concerns and morale of continuing employees (see Moving Forward from a RIF).   


As a general matter, the most successful VSPs operate through a few basic steps, namely:

  1. Select groups of employees are invited to “request” inclusion in a severance plan (or program) that promises particular benefits in exchange for general releases of their claims.  As in the Fidelity report noted below, the select group can be older.
  2. During a window period, eligible employees may respond to the employer by sending in a written request to have the employer accept their offer to terminate employment.
  3. Based on its workforce needs, the employer chooses to accept or to reject employee requests, and then implements the desired terminations.
  4. If the VSP does not achieve its workforce reduction goals, the employer implements a follow-on involuntary reduction in force (“RIF”).

VSPs can work well when employers assure opt-ins are voluntary yet at the same time carefully warn about the potential for less generous RIF if the VSP does meet its objectives.  If executed poorly, VSPs can spur litigation.  Discussed below are illustrations of both outcomes..

  • 2017.06.30   Voluntary Severance Plan - Fidelity's Experience.  What happens when 3,000 employees over age 55 receive a buy-out offer because they have more than 10 years of experience?  Fidelity made that offer to 7% of its workforce, and more than 50% of the eligible employees accepted.  Fidelity's spokesperson is quoted as saying "the results exceeded our expectations" (see also Boston Globe, "More than 1,500 Fidelity workers take buyouts").
  • 2017.03.04  Backfire . . . Delaware Case.  The Delaware case mentioned above (Girardot v. The Chemours Co.) had its roots in a corporate spin-off, followed by a VSP, followed by a RIF.  The latter occurred because, in the words of the court, “the voluntary reduction in force did not sufficiently reduce costs.”  Litigation came from VSP participants who alleged that “they would not have elected to participate in the VSP had they been informed of the possibility that the [RIF plan] would be implemented with greater benefits.”

VSP Risks and Precautions
The Girardot case highlighted the need for VSP communications to be made to eligible employees through FAQs, or other vehicles, that explain how the VSP will operate, as well as how it will differ from a possible future RIF.  Imprecision or ambiguity can open the door for claims by employees who feel in hindsight that that they were misled or under-informed about their choices. 

  • Employers should also take VSP precautions with supervisory employees.  Well-intentioned advice could inadvertently convert a VSP into an involuntary program. This may result for example if by particular employees are forewarned that they would be smart to take the voluntary severance because they are at risk of being terminated in any event if a RIF occurs.  That kind of advice could open the door for claims that the VSP is a ruse for involuntarily terminating protected classes of employees (such as older ones).  
  • Employment discrimination laws pose another risk for those implementing a VSP.  Claims may come at all stages – from how the eligible class is selected to who will be terminated. Problems can arise from discrimination that is intentional, or statistically demonstrable. That said, for a VSP that is truly offered on a voluntary opt-in basis, employers may make limit VSP eligibility to select older employees (as Fidelity did) or other business-justified groups.

ERISA – Often the Best Litigation Shield

Delaware’s Girardot decision focused on whether ERISA governed claims arising under the VSP.  The court found ERISA to be inapplicable (and dismissed the ERISA case) because – "the one-time, lump sum payments distributed under the VSP did not require the creation of a new administrative scheme, and the bonus payments were payable ‘per usual Company practices based on financial results’ which, like the continuation of existing benefits for a limited duration, did not materially alter the existing administrative scheme."   ​


Interestingly, the VSP was not structured to fall within ERISA, although it could have been.  See “Say Hello to Smart Good-byes” for reasons why employers may want to ERISA-fy their severance practices, in order to mitigate a VSP’s litigation risks. In a nutshell, the benefits of an ERISA severance plan generally include the following:

  • no litigation until there has been an exhaustion of the plan’s claims procedures, which may foreclose claims that are not promptly asserted;
  • judicial review under highly deferential standards, rather than de novo;
  • litigation in federal court under well-defined ERISA rules applied by a judge, instead of before a jury in state court;
  • damages that ERISA limits to plan benefits and potential attorneys’ fees, rather than the full panoply of damages recoverable through tort claims outside ERISA.

CONCLUSION
It is not easy to right-size a workforce. Voluntary severance plans offer a means for doing so in a constructive manner that minimizes litigation risks -- by enabling employees to leave voluntarily, through execution of claims releases as a condition for severance. As with any good idea, problems are possible. But they are generally foreseeable and avoidable by those who execute the VSP thoughtfully.

RELATED LINKS:

  • Sample Plan: Avnet (2011)
  • Sample FAQs: Boeing (2014)
  • Moving Forward from a RIF: retaining and motivating those who continue