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Apr 24, 2020

Key Considerations in Employee Terminations

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Originally published March 24, 2020 – Last updated April 24, 2020

KEY CONSIDERATIONS IN EMPLOYEE TERMINATIONS

The rapid global spread of the novel coronavirus (COVID-19) has forced many businesses to operate with reduced staff, with some concluding that employee layoffs are necessary. This memorandum discusses key considerations for companies that are contemplating or may be soon forced to consider a reduction in force.

Legal Notices

Depending upon the size of an employer and how many employees a company is terminating, employers may be required to provide advance notice of terminations. In addition, employers are required to provide employees who are being terminated with notice of their rights to continued health care coverage. The following outlines these key legal notices that must be provided when separating employees, and what to do when compliance with advance notice requirements is not feasible.

WARN

Facility closures, whether temporary or permanent, and mass layoffs may implicate federal and state worker notification statutes, or “WARN” laws.

Under the federal Worker Adjustment and Retraining Notification Act of 1988 (WARN Act), employers with 100 or more employees are required to provide 60 days’ advance written notice to terminated employees in the event of a “plant closing” or “mass layoff.” A plant closing is a permanent or temporary shutdown of a single work site, or one or more “facilities or operating units” within a single work site, which results in an employment loss for 50 or more full-time employees during any 30-day period. A mass layoff is a reduction in force of 500 or more full-time employees, or between 50 and 499 employees if they constitute at least 33% of the employer’s active workforce during any 30-day period.

There are exceptions to the strict 60-day notice requirement for “natural disasters” and “unforeseeable business circumstances.” The WARN Act and related guidance do not specifically contemplate pandemics; examples of natural disasters speak of weather-related natural disasters, specifically a “flood, earthquake, drought, storm, tidal wave or tsunami.” Employers may, however, be able to rely on the “unforeseeable business circumstances” exemption if a plant closing or mass layoff was “not reasonably foreseeable” at the time notice would have been required. In order to be considered unforeseeable, an event must be sudden, dramatic and an unexpected action or unforeseeable condition outside the employer’s control. It is important to note that even if the unforeseeable business circumstances exemption applies, employers are still required to give as much advance notice of termination as is practicable. Additionally, the employer bears the burden of proving that it appropriately relied on an exemption if it provides less than 60 days’ notice. If an exemption is not available, and providing 60 days’ notice is not feasible, an employer may owe back pay and benefits with respect to each terminated employee for up to 60 days, possible attorneys’ fees and a civil penalty of up to $500 a day per employee.

Many states also have their own “mini-WARN” laws that are more expansive than the federal notice requirements. These laws may impact smaller employers, require a longer notice period and expand the scope of the required notice. For example, under New York’s WARN law, private sector employers that have (1) 50 employees in the State of New York (excluding part-time employees) or (2) 50 employees who collectively work a total of 2,000 hours per week in New York (including overtime) must provide 90 days’ notice prior to closings affecting 25 or more workers, mass layoffs involving 25 or more full-time workers (if the 25 make up at least 33% of all the workers at the site) and mass layoffs involving 250 or more full-time workers. Similarly, under California’s WARN law, employers that have a facility that employs 75 or more employees within the prior 12 months must provide 60 days’ notice prior to a cessation or substantial cessation of industrial or commercial operations or a mass layoff of 50 or more employees during any 30-day period. While New York’s WARN law includes exceptions for natural disasters and unforeseeable business circumstances that mirror the federal WARN Act, California’s analog ordinarily only provides an exception if terminations are made necessary by a “physical calamity or an act of war.”[1]

If instead of a mass layoff, a qualifying employer decides to furlough employees, “WARN” laws must still be considered. Under the WARN Act, notice obligations are not triggered if employees will be furloughed for fewer than six months. However, a temporary layoff that exceeds six months or a reduction of hours by 50 percent for a period of six months or more will constitute an “employment loss” and trigger WARN’s notice obligations. An employer implementing a furlough on account of COVID-19 may believe that it is short-term, but if conditions persist longer than expected, employers should reassess whether WARN will apply. For more information on employee furlough considerations in the wake of COVID-19, please refer to our client note, “Employee Furlough Considerations.”

COBRA

Employers should bear in mind that if they sponsor group health plans, they must notify terminated employees of their right to elect benefit continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) upon termination of employment (other than for gross misconduct) or a reduction in hours causing the employee to lose coverage under the health plan. COBRA requires that continuation healthcare coverage for covered employees and their beneficiaries extend for 18 months from the date of a “qualifying event” (extensions are mandatory in certain states; e.g., up to an additional 18 months (or 36 in total) of coverage is required for health insurance policies subject to New York law) after such event. COBRA covers group health plans sponsored by a private-sector employer that employed at least 20 employees (whether full- or part-time) on more than half of its typical business days in the previous calendar year. Failure to timely provide a COBRA notice to terminated employees can subject employers to a significant penalties.[2] Employees and their families must receive at least 60 days’ notice of the right to elect COBRA continuation coverage. Note that COBRA’s application is dependent on continuing to have a group health policy in place for other active employees.

Remote Terminations

Ordinarily, when an organization terminates an employee, it is recommended that the termination be communicated in a face-to-face meeting between the employee and two company representatives, often a manager and a member of Human Resources. However, as of the date of this publication, many employers have permitted, or have been required to allow, their workforce to work remotely. In a remote working environment, employers may not be able to terminate employees using traditional means and should consider a video conference, or if unavailable, a telephone call, as opposed to effectuating the termination in writing or via email. In any such video conference or call, employers should strive to have at least two employer representatives present. Human resources should follow up with a written communication memorializing the termination and explaining next steps, including electing COBRA, returning personal property (as detailed further below), and, particularly in light of COVID-19, where to find information about applying for unemployment benefits. Employers should also consider how and when to disconnect the terminated employee from access to the company’s computer network system following the termination meeting when it may be their only means of contact. Prior to initiating terminations, ensure that personnel contact information, including home addresses, personal telephone numbers and personal email addresses, is up to date in case you need to reach employees when they no longer have access to the company’s network.

Reclaiming Property and Confidential Information

Following an employee termination, employers typically ensure that all company property and confidential information of the business is promptly returned. This can be a relatively seamless process if the termination is conducted in person, as employees typically have the opportunity to return property in their possession before leaving company premises. However, if employees are quarantined or otherwise prohibited from reporting to the office, it will be more difficult for an employer to promptly reclaim its property. Employers should instruct employees to mail company property to the office and consider sending a self-addressed, pre-paid mailing label to the terminated employee if they cannot send a messenger to retrieve it. If a terminated employee possesses confidential information, employers may consider destruction of the material rather than requiring its return. Employers should take great care to thoroughly sanitize physical property that is returned prior to storing it or redeploying it. Additionally, employee access cards, credit cards and any other similar forms of property or financial access should be deactivated promptly, and if returned, sanitized.

Final Payments and Separation Pay

Employees are typically entitled to certain payments for services provided through termination. In addition, an employer may be contractually obligated to, or decide to, provide additional severance payments, often in exchange for a release of claims or in support of restrictive covenants.

Earned Wages

Employers must pay employees all of their earned wages that have not yet been paid through their final day of employment. Depending on the state, the company’s employee policies and any contractual entitlements, this may include accrued but unused vacation, paid time off or sick leave. Employers should also ensure that employees have been reimbursed for all properly submitted business expenses. Failure to pay employee wages can subject officers, directors and owners of employers (which in New York and California, include corporations and partnerships) to personal liability under certain circumstances. Keep in mind that some states, like California, require that employees receive final wages and accrued vacation on their final day of employment.

Separation Agreements

Employers may offer additional payments or benefits as consideration for a release of claims that apply post-termination. Keep in mind that for a release of claims to be enforceable, it must be voluntarily entered into by the employee (after having a reasonable time to consider its terms) and be supported by adequate consideration. Employers should use caution when implementing layoffs that include members of a protected class, including employees who request or take leave due to COVID-19. For information on developments in federal and state legislation regarding workplace discrimination in the wake of COVID-19, please refer to our client note, “Developments in Workplace Discrimination Guidance in the Wake of COVID-19.” Note also that where a release is sought with respect to claims under the Age Discrimination in Employment Act of 1967 (ADEA) (protecting those 40 and older), special timing rules, and in the case of group terminations, information requirements, apply. If a company is providing severance in exchange for a release, be sure that the release is executed and any revocation period has run its course before commencing severance pay. Employers implementing broad-based severance plans prior to layoffs should consider whether the severance plan will be subject to ERISA and ensure compliance with deferred compensation rules under Section 409A of the Internal Revenue Code.

Enforcing Restrictive Covenants

Employment agreements and severance arrangements may also require compliance with restrictive covenants as a condition to payment in states where post-termination restrictions are enforceable. To ensure the enforceability of restrictive covenants, employers should take the same approach to enforcing their restrictive covenants as they have historically in order to protect current and future intellectual property, trade secrets, employees and customers.

Insurance Programs

Employers may take comfort in knowing that federal and state insurance programs may provide some relief to employees who timely file a claim for benefits.

Unemployment Insurance

Employees who become unemployed through no fault of their own and who meet state specific work and wage requirements will be entitled to participate in the U.S. Department of Labor’s unemployment insurance programs. Unemployment insurance is a joint state-federal benefit program that provides cash benefits to eligible workers who become unemployed. As part of the COVID-19 response, the Families First Coronavirus Response Act, enacted on March 18, 2020, provides, among other things, $1 billion for emergency grants to states to process and pay unemployment insurance benefits. Additionally, the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), enacted on March 27, 2020, provides economic relief to individuals who have lost income due to COVID-19 by providing supplemental federal funding to state unemployment insurance programs and expanding eligibility for unemployment benefits to individuals who are not traditionally entitled to benefits under state unemployment programs. For a more in-depth discussion on the provisions of the CARES Act, including enhanced unemployment benefits, please refer to our client note, “Congress Passes Largest Ever Economic Stimulus Package: Key Provisions of CARES Act.” Employers that initiate a reduction in force should provide terminated employees with information on how to apply for unemployment insurance and encourage them to promptly contact their state’s unemployment insurance program as soon as possible after becoming unemployed, given present backlogs and increased unemployment benefits available for a limited time under the CARES Act. Once a former employee has filed a claim for unemployment benefits, the state unemployment administrator may contact the former employer for verification of the circumstances surrounding the termination.

As noted in a recent release from the U.S. Department of Labor, federal law affords significant flexibility to states to amend their laws to provide unemployment insurance benefits, including where: (1) an employer temporarily ceases operations due to COVID-19, preventing employees from coming to work (akin to furlough); (2) an individual is quarantined with the expectation of returning to work after the quarantine is over; and (3) an individual leaves employment due to a risk of exposure or infection or to care for a family member. Many states are waiving the seven-day waiting period for unemployment insurance benefits for individuals out of work due to COVID-19, which is consistent with the CARES Act. Employers and employees should closely monitor changes under federal and state law designed to provide employees extraordinary relief.

Workers’ Compensation

Employers should check the terms of their workers’ compensation policy to see if it covers a pandemic or other health-related crisis. Workers’ compensation policies generally provide insurance benefits to employees for injuries “arising out of, or during the course of, employment,” including “occupational diseases” under the applicable policies and state law. State statutes vary, but generally, to be an “occupational disease,” it must be work-related, assessed based on factors such as the nature, the injured employee’s activity, and the time and location of the injury.[3] It may be difficult for an employee to prove that he or she contracted a virus such as COVID-19 at work, particularly if employers take proper precautions to protect employees such as requiring employees to work remotely, increasing sanitizing and cleaning efforts and reducing or eliminating in-person meetings. Employers should use care to provide a safe work environment, as successful workers’ compensation claims may result in increased contribution costs and risk of employee claims under the Occupational Safety and Health Act of 1970 (OSHA).

Our Take

Terminating employees is never easy. Given the unique challenges that may arise when terminating employees under current circumstances, companies can still follow evolving best practices and must comply with legal requirements. Legislation providing relief for those experiencing job loss is also continuing to evolve. Companies should consult with their legal advisors before taking action to institute employee terminations.[4] For more information about other alternatives to termination in the wake of COVID-19, please refer to our client notes “Considerations when Reducing Executive Salaries” and “Employee Furlough Considerations.”

Footnotes

[1]   In response to the COVID-19 pandemic, California has relaxed advance notice requirements under California’s WARN laws for closures and layoffs due to COVID-19.
[2] The penalty includes an excise tax of $100 per qualified beneficiary, but not more than $200 per family, for each day the employer is in violation.
[3] Under New York law, an “occupational disease” must be produced by a “natural incident to a particular occupation,” such as asbestosis from asbestos removal.

Authors and Contributors

John J. Cannon III

Partner

Compensation, Governance & ERISA

+1 212 848 8159

+1 212 848 8159

New York

Doreen E. Lilienfeld

Partner

Compensation, Governance & ERISA

+1 212 848 7171

+1 212 848 7171

+1 650 838 3804

+1 650 838 3804

New York

Gillian Emmett Moldowan

Partner

Compensation, Governance & ERISA

+1 212 848 5356

+1 212 848 5356

New York

Matthew Behrens

Associate

Compensation, Governance & ERISA

+1 212 848 7045

+1 212 848 7045

New York

Melisa Brower

Associate

Compensation, Governance & ERISA

+1 212 848 5070

+1 212 848 5070

New York

Sonia Khandekar

Associate

Compensation, Governance & ERISA

+1 212 848 5325

+1 212 848 5325