Two-step Severance Plans
[NEW] 2019.05.23 Golf - Honorable Even in Severance. The USGA recently announced the need to downsize its workforce. Not surprisingly, the USGA's approach has class. Its offer of sweetened severance to those who volunteer to retire builds on a smart employer strategy that begins by seeking friendly exits, and follows soon after with involuntary terminations to the extent needed to reposition a business. Those two steps are often best handled in tandem, because the prospect for an involuntary termination with less favorable severance should incline poor performers and those who are less committed (or interested) to pursue a voluntary severance. See below for how this worked well for some successful companies. Today's healthy labor market creates an opportunity for employers to reshape their workforces at a time when employees should have significant reemployment opportunities. That dynamic makes a voluntary severance plan all the more timely to consider, whether for graying workers through early retirement windows, or on a broader basis by which enhanced severance is offered to select classes of employees (such as those in a division or product line). See the discussion below for insights about best practices to follow, and risks to consider.
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:
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:
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..
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.
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:
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.
Copyright © Joseph Poerio. All rights reserved.