Beyond Layoffs: Controlling Payroll Costs in Creative and Legal Ways Bob Blackstone Holly M. Hearn L

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Beyond LayoffsControlling Payroll Costs in
Creative and Legal WaysBob BlackstoneHolly M.
HearnLawton HumphreyHolly Wylam KleinMarch,
2009
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Overview of Program

• Introductory Comments
• Reducing Hours, Pay and PTO
• Job Sharing and Work Share Programs
• Benefit Issues PTO, COBRA
• Voluntary Buy-Outs, Early Retirement and Key
  Lessons Learned from RIFs
• Questions?

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Effects of the Economic Downturn

• Management Distraction
• Rapidly Changing Priorities
• Risk of Losing Focus
• Limitations on Resources
• Strain, Stress, and Uncertainty in Workforce
• Increased Complaints, Claims, Charges, and
  Lawsuits (Leave v. Grieve)

• Employers with more than 100 employees
• must provide 60 days advance written notice
• of impending plant closing or mass layoff
• to employees, union (if any), state and local
  government officials
• Penalty backpay and benefits for each day of
  violation
• Up to 60 days
• Up to 500 per day civil fine
• Baby WARN Acts in states usually more stringent
  (e.g., New York 50 employees / 90 days notice)

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Laws/Considerations Affecting Salary Expense
Reduction Efforts

• WARN
• OWBPA
• Wage and Hour Laws
• Discrimination Laws
• Labor Relations Considerations
• Contractual Obligations/Promissory Estoppel

• Employers with more than 100 employees
• must provide 60 days advance written notice
• of impending plant closing or mass layoff
• to employees, union (if any), state and local
  government officials
• Penalty backpay and benefits for each day of
  violation
• Up to 60 days
• Up to 500 per day civil fine
• Baby WARN Acts in states usually more stringent
  (e.g., New York 50 employees / 90 days notice)

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Reduced Hours and Pay

• Reduce hours worked
• Reduce number of work days
• Shut down facility temporarily
• Reduce pay without reducing hours

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Reduced Hours

• Pros
• ? Reduction in payroll
• ? Alignment of labor and demand
• ? Retention of talent
• ? All share in pain
• ? Reduced work load mitigates lost pay

• Cons
• ? Employee morale lowered
• ? Risk loss of strong performers
• ? Reduce ability to serve customers

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Reduced Pay

• Pros
• ? Reduction in payroll
• ? Alignment of cost
• and revenue
• ? Retention of talent
• ? All share in pain
• ? Increase ability to serve customers

• Cons
• ? Employee morale lower
• ? Risk loss of talent
• ? No extra time off to mitigate the pain of
  lost pay

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Legal Issues To Watch For

• Wage Hour
• ? Non-Exempt
• Minimum wage
• ? Exempt
• Salary basis test - impermissible deductions

• Breach of Contract
• ? Written agreements
• Individual contracts
• CBAs
• ? Implied agreements
• Handbooks
• Commission plans
• Benefit plans

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Strategies Reduced Hours

• Non-Exempt Employees
• Shorter days
• Reduced work week (individual or company-wide)
• Voluntary personal days

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Strategies Reduced Hours

• Exempt Employees
• Eliminate entire work week (Furlough)
• Adopt reduced work week schedule
• Voluntary personal days off

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Strategies Reduced Hours

• For All
• Check agreements, handbook, offer letters
• Document new arrangement
• Check impact on benefits coverage

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Reduced Pay (Same Hours)

• Check agreements, handbook, offer letters
• Confirm at-will employment
• Consider fluctuating work week method for
  non-exempt employees
• Consider retention bonuses deferred compensation

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Mandatory/Voluntary Use of PTO

• Reduce PTO accruals and accounting liabilities
• Use to mitigate effects of wage loss from salary
  reductions, reduced number of workdays or work
  hours

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Mandatory/Voluntary PTO Use

• Pros
• ? Reduces employers accounting liabilities
• ? Mitigates employees pain from furloughs,
  reduced workweeks and hours reduction
• ? May allow for less than full workweeks for
  exempt employees if PTO covers guaranteed
  salaries

• Cons
• ? Does not help employees with no/low PTO
  accruals
• ? Employer loses productivity without
  recognizing any immediate savings
• ? May negatively impact morale if employees
  forced to use PTO

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Strategies Mandatory PTO Use

• Check agreements, handbook, offer letters
• Adopt a written leave/PTO bank policy if you
  dont have one
• Clearly document dates and circumstances when PTO
  use will be required
• Consider reducing workweeks/hours and mandating
  PTO use when employees typically take time off,
  i.e. holiday weeks.

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Strategies Mandatory PTO Use (II)

• Exempt employees
• Deduct PTO only in full day or week increments
• Consult counsel before taking any partial day
  deductions

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Job Sharing

• Employees who would otherwise work part time in
  separate jobs instead share a single full-time
  positions duties and responsibilities
• Allows employer to retain skilled employees while
  reducing salary and benefit costs

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Job Sharing Arrangements

• Pros
• ? Allows employers to cut payroll expenses
  without cutting jobs
• ? Many employees desire part-time schedules and
  flexible work schedules
• ? Employer maintains skilled workforce for when
  business improves

• Cons
• ? Presents unique challenges to administer
• ? Potential loss of productivity caused by need
  for increased communication and some duplication
  of efforts

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Strategies Job Sharing

• Consider trial period at start
• Look for incumbents who are good team members,
  consultative and have strong communication skills
• Create position description showing shared and
  individual responsibilities of each job sharer
• Define work hours
• Consider physical restrictions and possibility
  of telecommuting

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Strategies Job Sharing (II)

• Employ a workable communication system
• Consider how performances will be evaluated
• Document circumstances under which job sharing
  arrangement will automatically end
• Confirm employers discretion to modify or end
  job sharing arrangement

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WA ESD Shared-Work Program

• Allows hourly employees to obtain unemployment
  benefits when hours are reduced in times of
  temporary economic downturn

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ESD Shared-Work Program

• Pros
• ? Allows employer to reduce payroll costs while
  retaining a skilled workforce
• ? Employees to recognize more income than if they
  were laid off

• Cons
• ? Hourly employees only
• ? Must be adopted on a company-wide or
  division-wide basis and apply to at least 10 of
  employees in that unit
• ? Reductions in hours must fall between 10 -50
  and not more
• ? Employer must still provide full time benefits

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Shared-Work Program Key Provisions

• Program designed to help employers avoid
  temporary layoffs
• Can involve entire company or specific sections
  or divisions
• At least 10 of employees in unit must
  participate 100 can participate
• Approved plan can be in effect for 52 weeks
• Full-time, hourly employees are eligible to
  participate

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Shared-Work Key Provisions (II)

• Employees workweek can be reduced by at least 10
  but not more than 50
• Employee receives UI benefits in corresponding
  percentage to hours reduction
• Employees receive benefits for maximum of 26
  weeks
• Health benefit coverage to participating
  employees must continue at full-time level
• Union representing employees in affected units
  must approve plan in writing

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ESD Shared-Work Program

• Information and application available at
• http//www.esd.wa.gov/uibenefits/faq/shared-work.p
  hp

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Employee Benefits Opportunities and Challenges

• General Benefits Structure
• Qualified Plans
• ? Reduced Employer Match
• ? Plan Loans and Hardship Withdrawals
• ? Relief from RMD Requirements
• Health and Welfare Plans
• ? Compliance with New COBRA Subsidy Law
• Compensation and Severance Arrangements
• ? Code Section 409A Compliance
• ? Severance and New COBRA Subsidy

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Opportunity Assess General Benefits Structure

• Review benefits structures for tax-advantaged
  enhancements
• ? Examples Cafeteria plans, Health Savings
  Accounts (HSAs), 401(k) plans, profit
  sharing plans
• Maximize tax advantages of existing programs by
• 1) educating employee participants, and
• 2) ensuring efficient administration

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Opportunity Reduce Employer Contributions

• Pros
• ? Potential for large reduction in employer cost
• ? Employees willing to accept reduced or no
  match in lieu of other cuts

• Cons
• ? Employee morale lower
• ? Remove plan from IRS safe-harbor 401(k) plan
  model
• ? Administrative burden of notifying employees
  and implementing change

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Opportunity Plan Loans and Hardship Withdrawals

• ? Do your plans provide for loans and hardship
  withdrawals?
• Advantage of providing support to employees at
  minimal cost
• Compliance Issue Ensure that loans/withdrawals
  are administered according to plan documents
• Show support to employees by circulating notice
  of opportunities and procedures

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Opportunity Relief from Minimum Distribution
Requirements

• For 2009, dont have to make minimum
  distributions to individuals age 70 ½
• Applies to defined contribution plans like 401(k)
  plans and IRAs
• Allows older individuals to continue to
  accumulate savings without requiring cash-out
  near market bottom

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Challenge Health/Welfare Plans

• Understand new COBRA subsidy rules effective
  February 17, 2009
• Employees only pay 35 of COBRA premiums for 9
  months
• Employer pays remaining 65 and is reimbursed by
  IRS
• Must provide DOL notice by April 17, 2009
• Resources at www.dol.gov/ebsa/cobra.htm

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Opportunity Reduce or Cap PTO Accruals

• Pros
• ? Potential for large reduction in employer cost
• ? Company policy may already provide for this
• ? May quickly eliminate large liability on books

• Cons
• ? Employee morale lower, especially among
  long-time employees
• ? May decrease productivity if allowed to phase
  out use
• ? Must comply with state laws that protect
  accrual of PTO as wages

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Challenge Comply with New Code Section 409A

• New law effective January 1, 2005 applies to all
  deferred compensation
• Prohibits discretion to accelerate or further
  delay payments
• Review severance payments and deferrals of bonus
  payments for compliance
• Avoid harsh penalty tax of 20 Structure
  compensation and severance agreements to comply

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Opportunity Severance and New COBRA Subsidy

• Employers who pay COBRA premiums may be excluded
  from eligibility for reimbursement from federal
  government under new COBRA subsidy legislation
• Restructure severance agreements to maximize
  employer reimbursement from IRS
• Examples

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Voluntary Buyouts and Early Retirement Incentives

• Pros
• ? Voluntary departures are better than
  involuntary departures
• ? Less damage to employee morale
• ? Can avoid restrictions on layoffs in labor
  contracts
• ? Can legally secure voluntary departure of
  employees who would otherwise be risky to lay off

• Cons
• ? Uncertain savings may not work
• ? Can be harder to target
• ? May lose good people
• ? Potential discrimination issues
• ? Potential fraud claims by previous retirees

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Legal Issues to Watch For

• Constructive discharge - program not really
  voluntary
• IRS discrimination issues under qualified
  retirement plans
• Availability to persons on FMLA or other leaves?
• Potential misrepresentation or fraud claims
• Potential age discrimination issues under ADEA

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Layoffs 2.0 WARN

• Federal and state WARN and mini-WARN Act
  concerns
• Examples
• New York 50 employee coverage threshold and 90
  days notice
• Wisconsin Applies to layoffs at single site or
  within same city

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Layoffs 2.0 Release Agreements

• Release agreement issues
• Exclusion of claims that cant be released
• Confirmation of being paid for all hours worked
• No knowledge of whistleblower issues
• Covenant not to sue issues
• Unique state law release requirements

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Layoff 2.0 OWBPA

• OWBPA issues for release of Federal age
  discrimination claims
• Going bare
• Definition of decisional units
• How much information do you give?
• Employees who are offered other positions
• Handling phased layoffs aggregate data
• Correcting errors in statistical information
• Description of eligibility factors

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Questions?Thank you!