From the recent bankruptcy of Steward Health Care, a large hospital system in Massachusetts, to Bristol Myers Squibb’s recent announcement that it would be laying off approximately 2,000 employees, to numerous biotech startups around the country, reductions in force and employee layoffs have become all too common.

Employers should be aware of their rights and obligations in these difficult situations and plan carefully.

Reductions in force: selection for layoff

Employers generally have broad discretion as to which employees to include in a layoff. Employee selection will likely depend on the circumstances that have led to the need for a reduction in force. For example, a company with a department that is no longer needed could choose to lay off the entire department, while a company looking to reduce the size of its workforce could choose to lay off a certain number of employees across multiple departments.

While employers have significant discretion in determining which employees to terminate, that discretion is not unfettered. Federal laws prohibit selecting employees based on protected characteristics such as age, disability, race/ethnicity, religion, gender (including sexual orientation and gender identity) and national origin.

Employers are also prohibited from selecting employees in response to their protected activity, including, for example, complaints about unlawful discrimination or harassment or certain wage violations. Many states have additional protected classes. Keep in mind that any employee who believes they were terminated based on an unlawful reason may pursue a legal claim against the employer.

Contractual obligations

Importantly, before moving forward with a layoff plan, all pertinent employment agreements must be reviewed to determine if there are any contractual requirements associated with termination of any employee who may be affected by the layoff. Individual employment agreements or collective bargaining agreements may contain any number of requirements related to termination including, for example, notice, bumping rights, rehire eligibility, final pay, severance pay, benefits, etc.

Pre-existing employment agreements may also contain any number of provisions that govern employees during the termination process and/or post-employment, including, for example, return of property, confidentiality, trade secrets, intellectual property, nonsolicitation, noncompetition and other restrictive covenants and employee obligations. It is best practice to communicate clearly with employees impacted by a layoff about their obligations at termination and going forward.

Severance agreements

Assuming the employer has no contractual obligation to provide severance pay, there is no legal obligation to provide severance pay. Nonetheless, it is generally best practice to offer every affected employee severance pay and/or benefits in exchange for a release of claims.

In the absence of a severance plan, or an individual or collective contract governing severance, the amount of the severance is entirely at the employer’s discretion; it could be a set amount for all employees, it could be calculated as a certain amount per year of service, or it could be a different amount for different job titles. In exchange for this severance payment, employers should require employees to sign a release, in which the employees waive their rights to sue the employer to the extent allowed by law.

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