Although every entrepreneur has high hopes for the future, some business owners get to a point when they need to downsize. In times of crisis, situations like recessions, a loss in customers, a slowdown in the economy or other issues might force companies to cut down on expenditures. And one of the biggest costs to a company is the payroll of the employees, prompting some companies to reduce their workforces.
Layoffs, furloughs, reductions in force (RIFs) and contract terminations are some of the extreme measures a company in crisis may choose to take in order to cut expenses. To manage organizational downsizing, a company must know certain terms and laws before getting into the process of reduction in force.
What Is a RIF?
A Reduction in Force (RIF) occurs when a company decides to let go of an employee or eliminate an entire unit due to budget constraints, workforce planning initiatives, organizational restructuring, elimination of positions, or any unforeseen events. Basically, RIFs are permanent terminations of employment. By doing so, the organization maintains its budget and just enough staff to run the business efficiently. In cases of RIF, the employer has no intention of retaining the employee, but prefers to cut costs.
RIFs usually consist of two types: Voluntary Reduction in Force (VRIF) and Involuntary Reduction in Force (IRIF). VRIF is when an employee decides to leave the company by deciding to resign or take early retirement, whereas IRIF happens when an employee does not make a voluntary decision to leave the company, but the decision is instead made by the company’s management.
What Is a Layoff?
A layoff describes a situation when an employee is asked to leave their position. Such a condition typically happens due to economic downturns, unit shutdowns or a company’s decision to go in another direction.
In some cases, a layoff may not be permanent, which is known as a temporary layoff. In these situations, the employer aims to rehire the employee when the situation gets better. However, in most cases, layoffs are permanent. With layoffs, a large number of an organization’s employees may be affected.
What Is a Furlough?
A furlough refers to a situation in which working hours and working days are temporarily reduced by the company. In some cases, the employer also reduces salaries of employees as a measure under the furlough. The most common reasons for furloughs are any temporary, sudden or unforeseen changes in the market conditions, driving lower demand for the products or services. Another reason for furlough can be a disruption in the supply chain, which leads a company to work with a smaller staff. Furlough simply means that it is a required, temporary leave of absence from which the employee is expected to return to work when the circumstances allow.
In the case of furloughs, employees typically have their jobs, but are not getting paid. However, some employers may opt to offer partially paid time off (PTO) or furlough pay. PTO means employees will get paid for some days or will get a reduced salary.
What Is Severance?
Severance can be defined as compensation paid to a laid-off employee by the employer. It can be a sum of money or an amount to be paid over a period of time. In legal terms, when a company furloughs employees, the engaged person is still on the payroll and may get some amount of salary. However, furlough does not involve any separation or severance. In some cases, laid off employees are required to get at least some severance, depending on the employee’s contract and/or state laws.
In general, severance is often based on the tenure of employment with a company. For example, it can be a week's pay for every past year of service or any other amount agreed upon by the employer. A severance package can also include health insurance coverage for a period or continuation of some other employee benefits. Essentially, it entirely depends on the employer to offer severance, as there is no legal obligation to provide severance to a laid-off employee.
What Is the WARN Act?
The legal requirements to laid off employees include abiding with the standards of the Worker Adjustment and Retraining Notification (WARN) Act. Under the Act, an employer has to provide a minimum notice of 60 days to employees before rolling out layoffs. Usually, this is compulsory for companies with over 100 employees, which are planning to lay off at least 50 percent of the workforce from a single unit. However, the WARN Act is not applicable when the company furloughs employees. In case the employer fails to give the required notice, then an employee can legally take action against the employer and may also access severance.
What Is COBRA?
The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows laid-off employees to access health care benefits that they previously had. These benefits typically last for a certain period of time and require the employee to pay a larger than usual share of the premiums. However, if the employee is furloughed, the employee is still on the payroll and has not technically lost access to group coverage provided by the organization. However, if an employer designates the furlough as a reduction in hours, it may make the employee qualify under COBRA.
What Is Unemployment Compensation?
Unemployment benefits are typically provided to furloughed employees as well as to laid-off employees. Though the laws may vary from state to state, most places provide unemployment benefits for up to 26 weeks. Unemployment compensation benefits are paid by the state to unemployed workers who have lost their jobs. The benefits are meant to offer an income to jobless workers until they can find employment or any work to generate income. To qualify for the benefit, eligibility criteria must be satisfied, like having worked for a minimum stipulated period of time. Unemployment compensation acts as a partial income replacement for a particular time or until the worker finds employment, whichever comes first.
Know These Employment Laws
There are many employment laws that every organization must consider before deciding to move ahead with a workforce reduction. Some of these laws are as follows:
Family and Medical Leave Act (FMLA): This regulation provides individuals with an opportunity to take care of their loved ones or themselves in case of any critical health issue or injury. It is not illegal for an employer to lay off an employee during their FMLA leave; however, it is illegal for the employer to lay off an employee because of the employee's FMLA leave. The federal FMLA gives employees the right to be reinstated to their jobs after their leave ends. However, if the position of the employee has been eliminated from the company, then the FMLA doesn't protect the employee.
Age Discrimination in Employment Act (ADEA)/Older Workers Benefit Protection Act: This regulation protects older employees from any discrimination based on age. It amends the Age Discrimination in Employment Act (ADEA) that protects the rights of employees over 40 years old in all terms of employment. According to the Older Workers Benefit Protection Act, employees over the age of 40 are entitled to various employee benefits like severance pay, and cannot be asked to sign any legal waivers. ADEA acts as a safety guard to ensure that older and vulnerable workers aren’t unfairly laid off from work and don’t face discrimination based on age.
Americans with Disabilities Act (ADA): This rule prohibits any discrimination against individuals with disabilities. The law ensures that people with disabilities have the same rights and opportunities as everyone else.
Equal Employment Opportunity Act: This law gives authority to the Equal Employment Opportunity Commission (EEOC) to sue anyone in federal court when it finds reasonable cause to believe that discrimination has occurred in employment based on race, sex, color, religion, or national origin.