Even the biggest online financial services companies can trip over intricate employment laws when trying to cut labor costs.  The most common strategies for containing labor costs-layoffs and reducing hours-have their own set of pitfalls.

Charles Schwab & Co. wanted to cut labor costs without discharging employees.  In order that all employees and managers shared the pain, it planned to require them to take Fridays off without pay.  In response to "conflicting reports" from its attorneys, however, Schwab made its plan voluntary. Why? Schwab's initial plan probably violated the Fair Labor Standards Act (FLSA) which requires overtime pay for most employees who work more than 40 hours a week. 

Salaried employees are exempt from the FLSA's overtime requirements. They are paid a salary on the theory that they are given certain functions and, in their discretion, use the time necessary to complete that function.  Their salaries do not rise and fall depending upon how many hours they work in a given week.

To ensure employers do not take unfair advantage of them, salaried employees must be paid their full salary for each week in which they perform any work.  Consequently, Schwab's plan to force salaried employees to take Fridays off and receive only four-fifths of their regular salary was probably unlawful.

Reducing Hours Lawfully

Only in accordance with a bona fide leave policy (i.e., vacation, sick leave) can an employer reduce a salaried employee's pay because of his absence from work during a week in which he performs work. Thus, Schwab's solution:  Voluntarily permit employees to take Fridays off as vacation, a floating holiday or unpaid leave.

Another more cumbersome solution would be to temporarily lower the salaries of salaried employees and then give them Fridays off "paid." While this may be administratively burdensome, the alternative may be the U.S. Department of Labor or a class-action lawyer suing on behalf of disgruntled employees.

Avoiding Litigation

Whenever an employer lays off employees, litigation may ensue.  Age
discrimination claims in particular flourish amid layoffs.  The key to quick victory in a discrimination claim is ensuring that the employee cannot credibly claim that the reasons for her discharge were false and must have been a pretext for discrimination. Companies can minimize breach of contract and discrimination claims arising from layoffs by taking the following steps:

• Use written employment agreements explicitly stating that employment is at-will;
• Have more than one decision maker participate in layoff decisions;
• Use objective criteria.  While subjective criteria are perfectly appropriate, and in many cases may be necessary when considering the performance of high-level employees, it is more difficult for an employee to argue that an objective criterion was applied discriminatorily;
• Put all criteria used to determine who will be laid off in writing and specify why certain persons were chosen for layoff in writing;
• Communicate reasons for the discharge to the employee truthfully. Any untruthful statement is a weapon for an employee to use in arguing that the employer lied to cover up discriminatory motives;
• Get each discharged employee to sign a release.  Releases of federal age discrimination claims for employees over 40 years of age must meet the requirements of the Older Workers Benefit Protection Act and counsel should review them.

WARN Notice May Be Required

The Worker Adjustment Retraining And Notification (WARN) Act was originally aimed at large manufacturing employers and requires detailed notifications to be given to workers and their representatives in the event of a mass layoff.  New economy employers also need to abide by WARN.  As the New York Times reported Feb. 21, the Connecticut Attorney General is suing Walker Digital over potential violations of this law.

Employers with 100 or more workers must give 60 days' advance notice of shutdowns affecting at least 50 workers and of layoffs that would last more than six months and affect one-third of the workers at the site. If more than 500 employees are affected, the employer must give notice regardless or what percentage of the workforce is laid off.

Penalties for violation of the WARN act are back pay and benefits to each employee for each day of violation and a fine of $500 for each day of failure to give advance notice to local government.  While WARN has a number of exceptions to this general rule, e.g., unforeseeable circumstances, an employer should seek legal advice before relying on these exceptions.

Containing employment claims is a necessity for an organization which is struggling through cost-cutting.  Planning ahead and knowing the rules of the game can make cost-cutting a little less painful for everyone involved.

Copyright 2001 Securities Data Publishing