Corporate Downsizing: A Hotbed of Litigation

by Deb Denison, Esquire

It is the reality of corporate life in the 1990's that sooner or later your company is likely to revamp its budget and realign its workforce which will result in a downsizing. This downsizing is called a reduction in force (RIF) and can result in litigation by an employee who does not believe his or her termination is justified or legal. Litigation from a RIF can arise in many contexts including wrongful discharge, the American with Disabilities Act, the Pennsylvania Human Relations Act and Title VII of the Civil Rights Act.

Most RIF terminations occur to middle management positions which are typically held by individuals over 40. Therefore, the laws governing older workers are the primary focus in any RIF.

Two laws exist to protect older workers from discrimination. The first is the Age Discrimination in Employment Act (ADEA). This law was designed to prohibit discrimination against individuals who are 40 years of age or older. It applies to employers with 20 or more employees, employment agencies, and labor organizations. .

An employee must show the following in order to prove discrimination in a RIF:

  • Membership in a protected class (over 40); and
  • Discharge from a job for which the plaintiff was qualified while other workers not in the protected class were retained.

Because the burden on the employee to demonstrate the above test is relatively easy, corporations often offer severance packages to their employees in exchange for a release from liability for any age discrimination claims.

In 1990, Congress enacted the Older Workers Benefit Protection Act (OWBPA) as an amendment to the ADEA. The OWBPA outlines the requirements for a release of claims for age discrimination and the enforceability of such releases.

In order to obtain an effective voluntary and knowing release, the following standards must be met:

  • The waiver must be part of an agreement between the employee and the employer that is written in a manner which can easily be understood by the individual or an average employee eligible to participate.
  • The waiver must specifically refer to the rights or claims arising under the ADEA.
  • The agreement cannot require the waiver of any rights or claims which may arise after the waiver is executed.
  • The waiver may only be based on consideration (benefits, cash payment, consulting agreement) over and above what the employee was already entitled to.
  • The employee must be advised in writing to consult an attorney before signing the agreement.
  • The employee must be given a period of at least 21 days to consider the agreement. If the agreement is provided as part of an incentive program or group termination program, the employee must have at least 45 days to consider the agreement.
  • The agreement must reflect that the employee has 7 days after signing the agreement to revoke his consent. The agreement therefore can not become effective or enforceable until after the revocation period has expired.
  • If the waiver is provided in connection with an incentive or group employment termination plan, the employee must be given the following information in writing at the beginning of the 45 day period:
    • The class, unit or group of individuals covered by the program, the eligibility factors of the program and time limits applicable to the program;
    • The job titles and ages of all employees eligible or selected for the program and the ages of all employees in the same job classification or organization unit who are not eligible or selected for the program.

If these standards are not met, the release may fail and permit an employee to file suit.

If you are an employee facing termination due to a RIF, you should collect all available information regarding the RIF and provide it to your attorney for review. As always, you should not sign any release without a full understanding of your rights.

If you are an employer preparing for a RIF, it is important to provide well drafted agreements and releases to all employees affected. You must be prepared to provide all requested information on the RIF to help your employees understand the process and to assist them into the next phase of their lives.