Behind the Headlines: Employment Rights Survive Economic RIFs

Who is Chosen – What Must Be Paid and When – What to Keep in Mind

During difficult economic times, when employers are reducing expenses by reducing headcount, some employers mistakenly ignore their legal obligations to ensure that layoffs are conducted within the bounds of the law and that employees are compensated as required by law.  If targeted for layoff, employees should be mindful of the following.

Who is Chosen

A reduction in force (“RIF”) does not relieve an employer of its obligation to not discriminate or retaliate based on protected class, such as race, gender, age or disability, or on protected activity, such as whistleblowing.  In a non-RIF case, proof of unlawful motive may require evidence of who received or retained a specific job, e.g., a person not of the protected category.

In a RIF case, however, when jobs are being eliminated or re-configured, such evidence may not exist.  Nonetheless, decisions regarding who receives a remaining or re-configured job during a “game of musical chairs” and who does not is still subject to legal scrutiny.  See Sullivan v. Liberty Mutual Insurance, 444 Mass. 34 (2005) (a plaintiff in a RIF case may proceed with her case by “producing some evidence that her layoff occurred in circumstances that would raise a reasonable inference of” unlawful motive).  Thus, the law recognized that a RIF does not bullet-proof an employer’s decision-making from scrutiny and that each decision must be evaluated based on its own circumstances.

What Must Be Paid and When

Statute

Under the Massachusetts Wage Act, MGL c, 149, sec. 148, a laid-off employee must be paid all wages due in full (including accrued but unused vacation pay) on the last day of employment.  Any delay subjects an employer to liability for three-times the unpaid wages plus attorneys’ fees. See Reuter v. City of Methuen, 489 Mass. 465 (2022).

Under the Worker Adjustment and Retraining (“WARN”) Act, 23 USC c. 23, sec. 2101, et seq., employees subject to plant closings and/or mass layoffs, as defined under the Act, are entitled to pre-termination 60-day notice or, if such notice is not given, to lost pay and benefits for what should have been the notice period.  A plant closing is when one or more facilities or operating units in a given location are to be shut down for more than 30 days and more than 50 employees are impacted.  A mass layoff may involve a series of layoffs over a 30-day period that will result in the loss of jobs for 500 or more employees, or more than 50 and less than 500 employees if more than one-third of the workforce is impacted.  Note, however, that the WARN Act applies only to employers with 100 or more full-time employees.  Note, too, that the Act does not regulate all plant closings and mass layoffs, certain closings related to the completion of a particular project where the employees impacted were hired with the understanding that their employment was limited to the duration of such project.

Severance Plans, Equity Awards, and Individual Contracts

For many employees, the terms of their employment include severance plans, equity awards and / or individual employment contracts that provide favorable terms in the event of a layoff or other termination by the employer without cause.  Severance plans may provide for pay and benefit continuation, often tied to one’s organizational rank and years of service.  Equity awards may provide for accelerated vesting and / or extended exercise of options.  Individual employment contracts may provide for all of that and more, such as pre-termination notice and post-termination outplacement and transition services.

If there is any question as to what the employee may be entitled, written request should be made under Massachusetts law for a complete copy of the “personnel record.” MGL c. 149, sec. 52C.  Under that law, the employer must provide a copy to the employee within 5 business days.

What to Keep in Mind

Separation agreements should be carefully reviewed and negotiated

It is common for the provision of favorable separation terms to be conditioned upon releasing of legal claims.  Often, though, employers will want to include additional terms, more than that to which they are contractually entitled and, sometimes, more than that which they are legally allowed to propose.  See McLaren Macomb and Local 40 RN Staff Council, Office and Professional Employees, International Union (OPEIU), AFL–CIO. NLRB Case 07–CA–263041 (Feb. 21, 2023) (regarding non-disparagement and confidentiality terms, employers of National Labor Relations Act Section 7 covered employees may not offer such employees severance agreements that require waiver of Section 7 rights).

When an employer requests agreement to terms to which it is not contractually entitled, and assuming such terms can be legally proposed, such as to a supervisory employee not covered by NLRA Section 7, the employee may use this as an opportunity to try to negotiate for additional separation terms.  For example, if an individual employment agreement conditions severance pay on the employee’s release of legal claims but the employer wants to add post-employment restrictions, such as non-solicitation of customers, non-disparagement, or on-going cooperation, and if the employee is amenable, the employee may request greater severance pay and benefits in exchange.

The bottom line is that, if presented with a separation agreement, the employee should review it carefully with legal counsel prior to signing or even conceding even partial agreement. Many agreements include notice of the right to consult counsel, of the amount of time one has to consider the agreement (usually 21 or, for most RIFs, 45 days) and of a revocation period (usually 7 days).  Indeed, such notice and revocation period are required for employees age 40 and older under the Older Workers Benefit Protection Act (“OWBPA”), 29 U.S.C. §626(f).

Non-competes are unenforceable against an employee who has been laid off in a RIF

Non-compete restrictions, outside of the sale of business context, are subject to close scrutiny under both case law and statutory law. See, e.g., Automile Holdings v. McGovern, 483 Mass. 797 (2020) (citing the “long recognized public interest in the ability of individuals to carry on their trade freely”).  Thus, since October 1, 2018, unless imposed or “re-upped” as part of a separation agreement, non-compete restrictions are unenforceable under Massachusetts law against an employee who has been laid off or terminated without cause. See M.G.L. c. 149, sec. 24L.

Again, however, if the employee is amenable to some non-competition restrictions in exchange for, for example, continued equity vesting and/or extended exercise for stock options, this may be an opportunity to negotiate.

Beware IRC Section 409A

Deferred compensation, such as that to which an employee becomes entitled only upon a separation from service, e.g., a layoff, is subject to scrutiny under Internal Revenue Code Section 409A (“409A”).  An employee may be liable for accelerated taxation, interest and/or substantial penalties for deferred compensation arrangements that fail to comply with 409A requirements.  For example, when a departing employee continues to receive pay for a year of post-termination, but also continues to provide post-termination consulting services, there may be a question as to whether a separation actually took place.  If no separation took place, the payment of the severance pay was a 409A violation.  To avoid this, the terms of the on-going consulting should be drafted to conform with IRS guidance.  If the level of service is 20% or less of the average level of service performed during the immediately preceding 36-month period, the employee is presumed to have separated from service. On the other hand, if the level of service is 50% or more of the average level of service performed during the immediately preceding 36-month period, the employee is presumed to have not separated from service. No presumption applies either way between 20% and 50%.

This is only one example of 409A traps for the unwary.  Again, the laid-off employee should seek legal advice to be sure that the separation documents are consistent with the law’s requirements.

Conclusion

Who is chosen, what is owed and when, and myriad other matters should be considered at the time of a layoff.  Even in an economic RIF, indeed, especially in an economic RIF, employees who are targeted should be mindful of their rights and of their employer’s responsibilities to them.