COVID-19 has brought unprecedented disruption and hard stops to many sectors of the US and global economies. In turn, employers are being forced to make extremely difficult decisions to support the safety of their employees and customers and, ultimately, to stay in business. As they move to offset revenue losses by reducing expenses, many will be compelled to reduce employee headcount.
One primary principle that leaders should follow throughout this process is to avoid actions in the name of expediency that will create a net negative for the business in the longer term. Put another way, businesses must remain mindful of what their staffing requirements will be on the other side of this crisis. Questions to assess should include:
- What opportunity loss will we experience at different levels of staff or workload reductions?
- How quickly will we be able to hire and onboard new or returning staff when higher business volumes resume?
- What is the demand for positions being considered for reduction and how should that inform our actions?
We urge you to take into consideration before making any final decisions the stimulus dollars available to your business to support you retaining staff. New information is coming out daily so please check our resources page regularly as we continue to provide updates.
If other avenues for expense reduction are exhausted and reducing headcount must be pursued, it is always advisable for leaders to connect with legal counsel for company-specific guidance before acting. In determining the best possible path forward, several factors must be weighed. Below, we examine these factors across four alternatives for reducing staff-related expenses.
Cutting employee hours can be an appealing alternative to letting people go altogether. However, if employers elect to take this route, they must do so in a manner that maintains employee protections and adherence to regulations. Items to consider include:
- Benefits eligibility – Depending on how your plan is written, a reduction in hours may trigger a loss of benefit eligibility. Businesses should check with their benefit broker or provider to understand the hours requirement of each plan. If hours are reduced below the threshold for benefits, a COBRA qualifying event may be triggered. Or, in some cases, the Affordable Care Act stability periods may protect medical benefits.
- Exempt status – Exempt status may be affected if the reduction in hours results in compensation that falls under the FLSA’s minimum salary threshold.
- Unemployment insurance – A reduction in hours may qualify individuals for unemployment benefits.
A furlough is a temporary reduction in hours or unpaid time. This may look like a 32 vs. 40-hour workweek for a defined period or changing employees to an unpaid status until they can be returned to work. Many restaurants, hotels, cinemas, and related businesses hard hit by the Coronavirus are exercising this option. Considerations for furloughing employees include:
- Benefits eligibility – In some circumstances, employers continue to pay employee benefits during a furlough. They may pay the employee portion of the premium and arrange with the employee to recuperate it when they return to work. Companies should check with their benefits broker on how furlough would impact eligibility.
- Exempt Status – For exempt employees, furloughs should begin on the first day of a workweek since furlough weeks cannot be prorated. If an exempt employee performs any work during any week they are furloughed, they are entitled to their full salary for that week. If employers need some contribution from these workers during the furlough period, consider converting them to an hourly rate and having them track their hours, then pay them for all hours worked.
- Unemployment Insurance – Furloughed employees may qualify for unemployment insurance. It should also be noted that employees may experience a reduction in unemployment benefits based on continuing compensation (e.g. such as allowing people to take PTO, etc. during furlough status). Every state is different in terms of the compensation that is factored into reductions to unemployment benefits.
A layoff is a termination of employment based on work not being available. An employer may conduct a layoff with the intention of it being a temporary action and rehiring the affected employees when business conditions improve to allow for it. Items to consider when weighing the impact of a potential layoff include:
- Benefits – A layoff is a COBRA-qualifying event. Benefits would terminate following plan rules and COBRA notifications would be sent for all COBRA-eligible plans.
- Unemployment Insurance – Employees may be eligible for unemployment insurance. If employees sign a release in exchange for considerations such as severance or COBRA premiums, those payments should not reduce their unemployment benefits in Texas but may in other states.
- Release documents – Additional protections and notification requirements are required in order to get a release of age discrimination claims under federal law. These protections are mandated by the Older Workers Benefit Protection Act. Typically, payment is offered in exchange for a release. Businesses will need to determine whether current economic conditions make this feasible.
Reduction in Workforce (RIF)
A RIF is similar to a layoff, but it is not expected that the company would rehire affected employees. Some examples of RIF include businesses that are closing permanently or eliminating positions due to reorganization. The same consideration factors apply for layoffs and reduction in force.
One final note: layoffs, furloughs, and certain reductions in hours that extend beyond 6 months, as well as RIF may trigger WARN or mini-WARN Act compliance. Careful consideration should also be made as to whether such actions trigger any statutory notices.
Tough Times and Tough Decisions
No employer ever wants to negatively impact the livelihood of the employees who have helped them build their business. But for many, economic conditions like those wrought by COVID-19 have made workforce reductions a necessity to maintain business viability. Decisions to pursue these paths must first be carefully considered, and then carried out in a manner that seeks to balance the best interests of the company and the affected individuals.
For expert perspective on the best path and process for reducing your company’s staffing expense, request a free consultation with a vcfo professional who can help.
Legal Disclaimer: The information contained in this document is provided for informational purposes only, and should not be construed as legal advice on any subject matter. You should not act or refrain from acting on the basis of any content included in this document without seeking legal or other professional advice.
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