Reductions in Force (Portfolio 398)

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Tax Management Portfolio, Reductions in Force, No. 398-2nd, analyzes the myriad laws that apply to an employer that wishes to implement voluntary or involuntary reductions in its employee workforce. The Portfolio covers discrimination claims that can be raised in connection with such workforce reductions and the implications of such workforce reductions under labor relations laws. In addition, the Portfolio addresses various issues arising under the Internal Revenue Code, the Employee Retirement Income Security Act, the Worker Adjustment Retraining Notification Act, and COBRA. Finally, the Portfolio analyzes various practical issues that can arise in the course of communicating and implementing reductions in force.


The Reductions in Force portfolio was authored by the following attorney.  



Kathy Davidson Ireland, B.S., obtained her J.D., Order of the Coif from Marshall-Wythe School of Law. She was the Editor for Student Contributions at William & Mary Law Review. She obtained her LL. M., Labor Law from The National Law Center, George Washington University and is a member of the District of Columbia Bar and Maryland Bar.



Detailed Analysis

I. Introduction

II. Reductions in Force: Minimizing the Risks of Age Discrimination and Common Law Liability

A. Coverage of the Age Discrimination in Employment Act

1. Its Purpose and Scope

2. Employer Defenses Under ADEA

3. The Burden of Proof in Discrimination Cases

4. Damages in Discrimination Actions

B. Involuntary Reductions in Force

1. How Inferences of Discrimination Are Raised in Involuntary Terminations: Courts Carefully Scrutinize All the Facts and Circumstances Involved in Reductions in Force Where Older Workers Are Terminated.

2. Statements That Can Provide Evidence of Discrimination

3. Other Specific Termination Criteria That May or May Not Provide Evidence of Discrimination

a. Job Elimination

b. Quantity of Production as a Criterion

c. Performance Criteria for Layoff

d. No Special Efforts Necessary for Older Workers

e. Age Proxies

(1) Pension Eligibility

(2) Seniority

(3) Salary

4. Statistics

5. Affirmative Action and Systems in Reductions in Force

6. Reducing Potential Liability - a Checklist

C. Statistical Evidence of Discrimination

1. Disparate Impact Claims

a. Judicial Recognition of Disparate Impact Theory

b. Creation of Discriminatory Effect and Intent

c. Disparate Impact and Selection Decisions

2. Disparate Treatment Claims

3. Age Band Analysis

4. Analyzing Statistics Before a Reduction in Force

a. Fisher's Exact Test

b. Sample Size and Appropriate Statistical Tools

c. Statistical Analysis as a Defense Against Discrimination Claims

D. Common Law Liability Arising from Reductions in Force

1. Express or Implied Contractual Actions

a. Connecticut Courts' Decisions

b. New York Courts' Decisions

c. California Courts' Decisions

d. Federal Courts' Decisions

2. Avoiding Liability in Implied–In–Fact Contractual Actions

a. Personnel Interviewers

b. Employee Manuals and Literature

c. Written Offers of Employment

d. Personnel Policies

E. The Older Workers Benefit Protection Act and Voluntary Programs

1. The Supreme Court's Decision in Betts: The History Behind the OWBPA

2. The Basics of the OWBPA

3. Rules for Voluntary Early Retirement Incentive Plans

4. Legality of Voluntary Early Retirement Programs in Light of the OWBPA

F. Waivers and Releases: Statutory Requirements of OWBPA

1. Requirements

2. Validity of Waiver Under OWBPA

III. Reductions in Force Under the National Labor Relations Act

Introductory Material

A. The Duty to Bargain About Early Retirement Incentive Plans

B. The Duty to Bargain About Layoffs

1. Employer Obligations to Decision Bargain About Layoffs

2. Employer Obligation to Effects Bargain About Layoffs

C. Unlawful Motivations for a Reduction in Force

D. Conclusion

IV. Reductions in Force: Issues Under the Code and ERISA

A. Overview of Incentives That Can Be Offered in a Voluntary Early Retirement Program

B. Types of Incentives

1. Incentives Under an Existing Defined Benefit Plan

a. Subsidized Early Retirement Benefits; Credited Service

b. Social Security Bridge Payments; Cost–of–Living Increases

c. Subsidized Joint and Survivor Benefits

2. Excess Plans

3. Supplemental Executive Retirement Plans

4. Nonqualified Pension or Profit Sharing Plans

5. Additional Benefits

C. Benefits Available in Voluntary Early Retirement Programs

1. Qualified Defined Benefit Plans

a. “Qualified” Plan

b. Overfunded Plans

c. Nondiscrimination: Three Requirements

(1) Nondiscrimination in Contributions or Benefits

(a) General Test for Nondiscrimination

(b) Ratio Percentage Test

(c) Highly Compensated Employees

(d) Nondiscriminatory Classification Test

(e) Average Benefit Percentage Test

(2) Benefits, Rights and Features

(a) Current Availability

(b) Effective Availability

(3) Timing of Amendment

d. Employer Discretion

e. Anti–cutback Rule

f. Section 415 of the Code

g. Integration

h. Administrative Expenses

2. Severance Pay Plans

a. Not a Pension Plan

b. Welfare Benefit Plan

c. Neither a Pension Plan nor a Welfare Plan


3. Excess Plans and SERPs

a. Excess Plans

b. SERPs as Top–Hat Plans

4. Nonqualified Pension and Profit Sharing Plans

a. Exempt from Code Requirements

b. Subject to Certain ERISA Requirements

c. Deductibility of Employer Contributions

5. New or Enhanced Retiree Medical and Life Insurance Benefits

a. Employer's Right to Modify or Discontinue

b. Self–Insured Medical and Group Term Life Insurance Plans

6. Financial and Career Counseling

a. Independence of Counselor

b. Tax Aspects

D. Effects of a Reduction in Force; Liability for Severance and Retiree Medical Benefits

1. Effect on Ongoing Plans

a. Partial Terminations

b. Minimum Participation Rule

c. Cash or Deferred Arrangements

d. Nondiscrimination and Minimum Coverage

2. Potential Liability for Severance Benefits and Retiree Medical Benefits

a. Severance Benefits

b. Retiree Medical Benefits

V. Reductions in Force: Communication and Implementation

A. Communication Issues

1. General Communication Issues

2. Communication Issues Upon Consideration of a Reduction in Force

a. ERISA Considerations

b. State Law Considerations

3. Communication Issues in Implementing a Reduction in Force

a. Disclosure

b. Oral Modification of a Program

B. ERISA Section 510

1. Overview

2. The Basic Section 510 Claim

3. Section 510 and Reductions in Force

a. Plant Closings and Similar Cases

b. Benefit Costs as a Factor in Layoff Decisions

c. Section 510 and General Cost Savings

d. Section 510 and Benefit Plan Amendments

4. Avoiding a Section 510 Claim

C. State Plant Closing Laws

1. Overview

2. ERISA Preemption of State Plant Closing Laws

3. Continuation of Health Coverage Following a Plant Closing

VI. Health Care: Continuing Obligations Arising from Reductions in Force

A. Continuing Health Care Obligations Under COBRA

1. Group Health Plans to Which COBRA Applies

2. COBRA Qualifying Events

3. Length, Cost and Quality of Continuing COBRA Coverage

4. Sanctions for Failure to Comply with COBRA

B. State Statutes

1. California Statutes Requiring Continuation of Coverage

2. Connecticut Statutes Requiring Continuation of Coverage

3. Illinois Statutes Requiring Continuation of Coverage

4. Massachusetts Statutes Requiring Continuation of Coverage

5. New York Statutes Requiring Continuation of Coverage

6. Texas Statutes Requiring Continuation of Coverage

7. ERISA Preemption

VII. Compliance with the Federal Worker Adjustment and Retraining Notification Act (WARN)

Introductory Material

A. WARN's Notice Requirement

1. Definition of “Employer”

2. Definition of “Affected Employee”

B. Definition of “Plant Closing” and “Mass Layoff”

1. “Plant Closing”

2. “Mass Layoff”

3. “Temporary Employment”

4. “Employment Loss”

5. “Single Site of Employment”

C. Definition of 60–Day Period

1. The “Faltering Business” Exception

2. The “Unforeseeable Business Circumstances” Exception

D. Definition of “Notice”

1. Notice to Affected Employees' Representatives

2. Notice to Affected Employees Without Representative

3. Notices to State

E. Enforcement

1. Employee Rights

2. Damages


Working Papers

Table of Worksheets

Worksheet 1 Sample Severance Pay Plan

Worksheet 2 Defining ‘Gross Misconduct’ Under COBRA

Worksheet 3 Sample WARN Notice

Worksheet 4 Sample General Release and Covenant Not To Sue

Worksheet 5 Greater Washington Board of Trade Threatens State Benefit Continuation Laws




United States Code:


Legislative History:

Treasury Rulings:


Department of Labor Guidelines:

Attorney General Opinions:



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