Beyond Fair WARNing: Regulatory & Reputational Pitfalls of Workforce Reduction

So far this year, employers have laid off nearly 700,000 people, led by broad cuts in federal government employment, while other sectors like retail and consumer goods have been hard-hit as well.

With about 45% of companies predicting they’ll shed jobs this year, corporate leaders are facing challenging realities: Global market uncertainty and shaky consumer spending may lead decision-makers to lean toward layoffs, but such moves risk internal morale and reputation damage that can be just as costly as the negative economic forces leaders seek to mitigate.

“It can often take businesses months or years to return to normal productivity levels after a layoff,” said Stephen Paskoff, president and CEO of consulting company ELI. “And because business priorities and markets change frequently, those workforce reductions may not even be necessary over the long term.”

Companies considering workforce reductions to cut costs in this uncertain economic environment must consider legal, regulatory and business impacts, as well as the human effects of layoffs and could consider looking to potential alternatives that might accomplish their cost-cutting goals without sacrificing jobs and morale, employment law and business experts told CCI.

Fair WARNing

Unlike the federal government, which this year alone has hundreds of thousands of jobs with more planned for next year, private sector employers likely need to make slower, more deliberate decisions about workforce reductions because they are governed by a different set of regulations than government employers, said David Wimmer, partner at employment law firm Swerdlow Florence Sanchez Swerdlow & Wimmer in Los Angeles.

 “There are more consequences to private sector employers for not following the rules,” Wimmer said, though it’s worth noting some of the DOGE-driven federal layoffs are currently under court challenge.

Private employers that conduct blanket layoffs without following legal protocols could face class-action suits and be liable for millions in back pay and penalties. And they could run afoul of regulations. The federal Worker Adjustment and Retraining Notification (WARN) Act requires employers with 100 or more employees to provide written notice to employees, union representatives and the local government at least 60 calendar days in advance of a mass layoff.

“Failure to comply can result in significant liability, including back pay and penalties,” said Eric Kingsley, a partner at Kingsley Szamet Employment Lawyers in Los Angeles.

Some states and municipalities have their own additional WARN laws, too. For example, in California, employers must abide by the federal WARN Act and the more restrictive California WARN Act, which affects businesses with 75 or more employees.

“California’s interpretation and enforcement of its own WARN statute continue to be dynamic, especially with the rise of remote work and temporary closures,” Kingsley said.

New York and New Jersey have both amended their WARN Act equivalents to expand protections, said Sean Libby, a partner at Elarbee, Thompson, Sapp & Wilson in Atlanta. Both states now require 90 days’ notice of a covered layoff, and New York has clarified that remote employees outside of New York must be counted when determining coverage under the law.

“Because states largely continue to lead the way in such changes, employers may have numerous conflicting requirements for multi-state layoffs that must be considered,” Libby said. 

In addition to the WARN Act, employers should consider other laws like the Age Discrimination in Employment Act of 1967 (ADEA) or Title VII of the Civil Rights Act of 1964 before conducting a layoff.

Title VII would be invoked if an employee’s protected status, such as pregnancy or disability, is taken into consideration when selecting individuals to be laid off, Libby said. Some employers provide severance packages to employees in exchange for a release of potential ADEA claims. For those agreements to hold up in court, the Older Workers Benefit Protection Act of 1990 outlines several requirements for severance packages, including time to review the agreement and to revoke a signature after signing, Libby said. For workers 40 and older, employers are required to provide information about the “decisional unit” from which employees were selected for termination, including the job title and age.

“Compliance with these requirements is technical, and employers often fail to define the decisional unit correctly or provide job title and age information for the correct group of employees,” Libby said.

Minimizing the fallout

Complying with rules and regulations isn’t the only thing to think about; there’s also risk exposure, the potential for layoff-related litigation and impact analyses to consider, experts said.

“Maybe the company faces potential wage and hour liability, and if so, they might want to mitigate that risk with a severance package,” Wimmer said. “Also, think about what the economy is like and how hard it will be for a laid-off employee to find a new job. If employees face difficulties finding new jobs, that often increases the risk of litigation.”

Other best practices experts cited:

• Document the reasons for selecting employees for layoffs. The reasons should be legitimate, nondiscriminatory and not related to retaliation.
• Avoid any direct evidence of discrimination: “The top reasons for litigation are equal employment opportunity issues like race, age, gender and sexual orientation,” Paskoff said. “You can’t say or write, ‘We’re going to get rid of everyone who fits a certain category.’” Instead, use and document clear criteria based on business needs, such as recent performance evaluations, sales metrics or formal discipline reports, Libby said: “Employers may create legal issues if they have poorly defined selection criteria for determining who will be included in a layoff. A lack of clear criteria may lead to inconsistency in selections and hamper the employer’s ability to defend against a discrimination claim based on the layoff.”
• Perform a disparate-impact analysis. In some cases, the selection criteria may look fair on paper but in practice may disproportionately affect members of protected groups. For example, maybe an employer decides that it will keep on board only employees who live within 5 miles of the headquarters office to better facilitate in-person work. However, if the 5-mile radius around the office is a mostly white, affluent community, and a number of non-white employees live 6 or 7 miles from the office, that policy will appear to have a disparate impact on those non-white workers, Paskoff said. A disparate-impact analysis can determine whether selection criteria are fair for all groups. 
• Offer severance packages. If an employer offers severance packages, it’s standard practice to tie an employee’s acceptance of the severance package to a release of any potential legal claims, Kingsley said, but to effectively avoid claims, the severance packages must comply with all relevant laws, such as OWBPA for workers 40 and over.

Proceed with a human touch

If a layoff is imminent and unavoidable, “recognize that it’s going to be a painful situation,” Paskoff said. “You have to do it in a way that is communicated well and as fair as possible.”

Paskoff urges leaders to operate according to behavioral standards that reflect their organizational values as well as legal requirements.

“When people go to work, they’re devoting their time and themselves to the organization. Having a call with 150 people and telling them all they’ve lost their jobs is not ideal,” Paskoff said. “Companies need to establish core behaviors that address both legal risk and their values, because uncivil behaviors can cause harm to people as well as to your business.”

Not only is it crucial to treat dismissed employees with respect and empathy, but also when proceeding with a layoff, employers should carefully consider how they treat unaffected employees. 

“When layoffs occur, there’s so much focus on who’s exiting,” Wimmer said. “Companies often forget to provide reassurance to those who remain — and that’s a failure in planning.”

To maintain morale and reduce confusion, employers should develop a clear, advanced communications plan with a goal of instilling confidence in the plan and in the company’s leadership among remaining employees, Wimmer said. 

“One of the best ways to instill confidence is by showing those who remain that the company respects and is treating with dignity those who are laid off,” he said.

Alternatives to layoffs

Laying off employees is not the only way to reduce workforce costs, but companies should be mindful that all employment-related actions will be scrutinized by employees and, potentially, the public. For example, after years of remote work, some return-to-office mandates by large companies have been interpreted as attempts to reduce headcount without a layoff. That strategy is risky, Kingsley said.

“Although employers may require in-person attendance, employing return-to-office policies as a stealth method to push out resignations can leave the company vulnerable to constructive discharge or discrimination claims, particularly if remote work had been allowed before or if the policy disproportionately affects individuals with disabilities or those with caregiving obligations,” Kingsley said. “If reducing the headcount is the objective, it is far more prudent and legally advisable to be transparent and adhere to regular layoff protocols.”

Alternatives can help cut workforce costs in a more straightforward way without a reduction in force, such as:

• Reducing the number of contract workers or temporary workers.
• Offering voluntary separation or early retirement incentive packages.
• Reducing employees’ hours or implementing furloughs, though companies should stay mindful of wage and hour regulations.
• Job-sharing, cross-training or implementing technology to increase productivity without increasing headcount.
• Instituting a hiring freeze.
• Transitioning some full-time positions to part-time positions.