Decreases in the size of a company's work force always carry a risk of potential litigation and it is particularly important to structure reductions in force ("RIFs") with specific business goals in mind. Employers may be able to limit the costs of defending wrongful termination claims through predispute releases or mandatory arbitration agreements. What follows are some practical hints on conducting reductions in force and on how to maximize the chances that releases and mandatory arbitration agreements will be upheld by the courts. As discussed below, the courts are split on whether an employee can be made to waive various statutory protections.

Objective Criteria for Termination

Reductions in force often do not consider an employee's longevity with the company or his past performance, rather it involves an assessment of the skills and specialized knowledge that the company will need to survive and/or thrive in tomorrow's market. The focus is first and foremost on the needs of the company and only then on whether particular individuals are a good "fit."

Employers must develop objective criteria by which to assess each employee's value to the company and apply these criteria consistently to all employees who are eligible for the RIF. Such criteria may range from interpersonal relations to technical versatility. Whatever the factors are by which employees are evaluated, the factors should advance a legitimate business objective and be developed and analyzed with the help of experienced human resource personnel.

In developing a set of criteria by which to rank employees, employers should not assume that their meaning is self-explanatory to all affected employees. Those who are evaluating others for possible lay-off should be clear about what the company is looking for in its inclusion of particular factors. For example, a general category concerning "people skills" may include judgments about customer relations, co-worker interactions, or ability to manage. If all of these types of relations are subsumed by the overarching category of "people skills," this assumption should be explained to those applying the criteria to individual employees. If the category proves too broad, it may require refinement, or the development of sub-sets of factors.

When individual employees are evaluated to assess their importance to a company's future needs, employers must ensure that the ranking criteria are being applied consistently. This validation can be accomplished by a process in which lay-off decisions involve a number of "decisionmakers," and are not left in the hands of just one person or evaluator. Management teams or groups of supervisors who are in a position to best determine what the company's future project or market needs require should have a collective say in the retention or dismissal of various individuals. Such round-table discussions can best capture what the impact of particular personnel decisions may be on the organization as a whole. For example, an employee whose continuing usefulness to the company may not be apparent to one project manager may have a particular skill set which is very much in demand by another project manager. The goal is to maximize the company's business purpose of retaining an effective work force, while minimizing the chances that lay-off decisions can be viewed as arbitrary or somehow impermissibly discriminatory.

Employers must be able to show that their reductions in force have a business neutral purpose and to assure that the employees understand why they are being terminated. Each employee should have an opportunity to appeal the lay-off decision and the method of appeal should be clearly delineated and consistently applied. When terminated employees complain about any perceived unfairness in their termination, the basis for that perception should be explored. The absence of complaints about discrimination or harassment can help defeat later claims that the company somehow knew of and ratified a supervisor's allegedly discriminatory animus in selecting a particular worker for termination.

The Threat of Age Discrimination

Despite a company's best efforts to make objective, and consistently apply, its termination criteria, reductions in force may have a disparate impact on older workers, especially when there is a need for workers with newer technological skills. That mere fact that older workers are disproportionately affected, however, does not, in and of itself, defeat an employer's claim that a reduction in force was motivated by business necessity. In fact, many courts have held that a disparate impact analysis is not applicable in the context of age discrimination claims. See, e.g., Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993) (an employer does not violate the Age Discrimination in Employment Act if its sole reason for terminating an employee is to avoid paying pension benefits, even if such action disproportionately affects old workers); O'Connor v. Consolidated Coin Caterers Corp., 116 S.Ct. 1307 (1996) (ADEA prohibits discrimination on the basis of age and not class membership); Marks v. Loral Corp., 66 Cal.Rptr.2d 46 (1997) (employers may prefer lower paid workers to higher paid ones, even if the preference falls disproportionately on older workers). As one court has stated, one should not confuse "a quarrel with the merits of the company's business decision--a quarrel in which the ADEA plays no role--with a case of illegal age discrimination." Equal Employment Opportunity Commission v. Texas Instruments Inc., 100 F.3d 1173, 1187 (5th Cir. 1996). Another court, however, recently granted class status to employees in an ADEA suit, noting that if the matrix used to evaluate employees for lay-off selection was found to violate the ADEA, all of the plaintiffs would have been victims of a discriminatory policy or plan. Schwed v. General Electric Co., 1997 Westlaw 204394 (N.D.N.Y. 1997).

Human resource personnel and others who do exit interviews or who are part of the appeals process need to be careful about their use of language, whether in formal communications or in casual conversation. For example, an employee due to be laid off for genuine business reasons may be off-handedly referred to as "excess baggage," "set in his ways," "out of touch" or "inflexible," or there may be allusions to the need for an infusion of "new blood." While these phrases are ambiguous and may be purely innocent when expressed, they can be used to support an older employee's claim that age discrimination was involved in the decision to terminate his employment. The plaintiff's expert is likely to argue that such phrases are typical code words or euphemisms to describe workers who are viewed as "too old." Even if a jury does not believe that this is enough to establish liability for age discrimination, it is often enough to give the court a material issue of fact with which to deny an employer's otherwise strong motion for summary adjudication.

Most employers are aware that stereotyping women and minorities or making unflattering remarks about an employee's sex, ethnicity, or religion are unacceptable. This same awareness and sensitivity does not always exist with respect to age and employers should be urged to include such sensitivity training for their employees. This is important not only to create a proper working environment, but to avoid liability under federal or state statute. Under the amended federal Age Discrimination in Employment Act, 29 U.S.C. §621, et seq., ("ADEA") an employee who proves age discrimination is entitled to lost wages; if a willful violation is established, he or she may collect liquidated damages equal to those lost wages. In California, state law allows workers to recover not only lost wages, but damages for emotional distress, punitive damages, and attorneys' fees.

No matter how carefully a reduction in force is planned, employers know that at least some former employees will begin to think about a lawsuit, especially if they have had difficulty in securing new, satisfactory employment. The time to limit the potential for such lawsuits is before a dispute over termination arises. Releases and arbitration agreements are two possible means of curtailing court action.

Releases of Employers from Liability

Releases are used to "purchase" an employee's right to pursue legal claims against an employer. To be enforceable, the employer must offer the terminated employee something of value to forego legal rights. Employers will often offer laid-off employees an enhanced severance package in exchange for an executed release and waiver of claims against the employer for causes of action arising out of the employment relationship.

Releases are meant to prevent an employee's direct access to the courts or various administrative forums to pursue statutory or other legal rights and, therefore, they must be carefully crafted to withstand legal scrutiny. To maximize the chances of enforceability, most state and federal jurisdictions minimally require the following three elements:

(1) the release should be in writing and executed by the releasing party;

(2) the release should offer some benefit or consideration independent of that to which the employee is already entitled. For example, a terminated employee might be offered an enhanced pension or separation package that is contingent on a release of the right to bring claims against the employer. Individuals who wish to preserve their right to sue an employer would receive only an ordinary severance package. The language of the release should make it clear that the enhanced package is in consideration of the released claims; and,

(3) there must be a knowing and voluntary waiver of legal rights.

Whether the waiver has been voluntary and with knowledge will ultimately depend on the totality of the circumstances, with the courts looking to the following kinds of factors: (1) the releasing party's education and business sophistication; (2) the clarity and specificity of the agreement; (3) the amount of time the employee has to examine the release; (4) whether the employee had an opportunity to seek legal advice or other independent counsel; (5) whether the employee had an opportunity to negotiate the terms of the release; and (6) what the employee received in return for the waiver.

Because a release asks an employee to forfeit important legal rights, it should be expressly marked as such and placed in a distinct document; it should not be buried in other material such as an employee handbook. Similarly, the language of the release should be clear and unmistakable. Waivers of particular statutory protections should be explicitly posed, rather than alluded to in broad references to "all claims" or of "all claims of discrimination or harassment."

Some statutes that protect employees' rights impose additional requirements for a valid release of the right to pursue claims. Under the federal Older Workers Benefit Protection Act of 1990, a release and waiver ordinarily is not binding under the ADEA unless it minimally provides for the following, as stated at 29 U.S.C. 626(f):

(1) the waiver is in a clearly understood writing between the employer and the releasing party and expressly references the releasing party's rights or claims under the ADEA;

(2) the waiver does not affect claims arising after the date of the release;

(3) there is consideration for the release beyond that to which the employee is already entitled;

(4) the employee is advised, in writing, to seek the counsel of an attorney before executing the agreement;

(5) the employee has at least 21 days to consider the agreement;

(6) if the waiver is part of a termination incentive or other employment termination program offered a group of employees, the employee has at least 45 days to consider the release and the employee must be afforded information concerning the age and job titles of employees eligible for the programs;

(7) the employee must have at least a seven day "cooling off' period to reconsider the agreement once signed; and,

(8) the agreement does not waive the EEOC's rights and responsibilities to enforce the ADEA.

While releases theoretically prevent suits against former employers, employees are increasingly challenging their validity in the courts. Such changes of heart can encourage frivolous litigation by employees who believe they have nothing to lose, especially when their case is taken on contingency. As a result, at least one court in New York has ordered that plaintiffs promise, up front, to return benefits received from their employer if the release is later found to be invalid. Kristoferson v. Otis Spunkmeyer, Inc., 965 F. Supp. 545 (S.D.N.Y. 1997) (alleging sex discrimination). Thus, even if the plaintiff should fail to prevail on his Title VII (of the Civil Rights Act of 1964) claim, he would forfeit any consideration he was earlier paid. As the Kristoferson court stated, the purpose of this rule "is to place formerly released plaintiffs at some potential economic risk if they choose to breach the facial terms of the release" and to assure that "neither side gets a completely free ride on the expensive conveyance of legal process." 965 F.Supp. at 549.

Similarly, another court recently found that a terminated employee had ratified the terms of a release by accepting a cash payment from her former employer, even though she had not signed the release. Somervell v. Baxter Healthcare Corp., 966 F.Supp. 18 (D.D.C. 1997) (alleging disability discrimination). There, the court held that an employee may not "have it both ways," by retaining both the consideration paid for a waiver of claims and the right to sue. In a like mode, both the Fifth and Fourth Circuits have held that while waivers found defective under the Older Workers Benefit Protection Act are voidable, they can be ratified if a worker accepts payments from a former employer. See Hines v. ABB Vetco Gray Inc.,___S.Ct.___, No. 96-546, January 13, 1997 (letting stand Fifth Circuit opinion that failure to return severance money precluded employee from suing employer under ADEA, (See 85 F.3d 624 (1996)); Blisten v. St. John's College, 74 F.3d 1459 (4th Cir. 1996). In an unreported age discrimination case, a federal district court in New York has also recently found ratification of a release by an employee who accepted and failed to return its benefits. This was despite claims of undue influence and duress. Reid v. IBM Corp., 1997 Westlaw 357969, 74 FEP Cases 332 (N.D.111. 1997) (release found to meet requirements of the OWBPA).

The federal circuits are divided on whether employees must tender back payment in order to pursue statutory claims. Both the Third and Sixth Circuits have recently ruled that an employee could pursue ADEA claims when the release he signed failed to comply with the provisions of the OWBPA. Long v. Sears Roebuck & Co., 105 F.3d 1529 (3d Cir. 1997); Raczak v. Ameritech Corp., 103 F.3d 1257 (6th Cir. 1997). Likewise, the Seventh Circuit has held that a release which failed to comply with the legal requisites of the OWBPA was void and could not bar a subsequent ADEA suit, even though the plaintiff had not returned the payments he had received in exchange for the release. Oberg v. Allied Van Lines, Inc., 1994 Westlaw 494704, 63 FEP Cases 470 (7th Cir. 1994). The Eleventh Circuit also rejected a tender-back requirement as a prerequisite to challenging the validity of a release in an ADEA case. Forbus v. Sears Roebuck & Co., 958 F.2d 1036 (11th Cir. 1992).

Nevertheless, in jurisdictions which have favored tender-back requirements, employers may now wish to put terminated employees on notice that they have something tangible at stake if they wish to renounce a waiver of claims which are facially addressed in a release. Ratification of even a defective release may become a basis upon which to seek a motion for summary judgment. See Somervell v. Baxter Healthcare Corp., supra, 966 F.Supp. at 21-23.

Mandatory Arbitration

Arbitration agreements have long been recognized as legitimate tools for limiting costly litigation. The Federal Arbitration Act sanctions arbitration agreements as "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."

9 U.S.C. §2. In 1991, the United States Supreme Court ruled that a predispute arbitration agreement was enforceable to preclude litigation of an ADEA claim. In Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the Court noted that the would-be plaintiff had "made the bargain to arbitrate" and found that in the absence of fraud or overwhelming economic power, the mere inequality of bargaining power did not undermine the validity of the bargain. 500 U.S. at 33.

For mandatory arbitration of employment disputes, courts often distinguish between employees who are subject to collective bargaining and those who are exempt. When federal statutory protections are implicated, the validity of arbitration clauses in collective bargaining agreements has often been broadly challenged unless individual employees have themselves expressly agreed to arbitrate. This is in keeping with the concern voiced by the Supreme Court in Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974), that collective bargaining agreements cannot barter away an individual employee's right to sue under federal statutes, like Title VII. See Brisentine v. Stone & Webster Engineering Corp., 117 F.3d 519 (11th Cir. 1997) (claims of disability discrimination); Pryner v. Tractor Supply Co., 109 F.3d 354 (7th Cir. 1997) (allegations of race and age discrimination); LaChance v. Northeast Publishing Inc., 965 F.Supp. 177 (D.Mass. 1997) (ADA claim); Varner v. National Super Markets Inc., 94 F.3d 1209 (8th Cir. 1996); Darby v. North Mississippi Rural Legal Services, Inc., 1997 Westlaw 88241 (N.D.Miss. 1997) (blind attorney allowed to pursue ADA claim).

However, the law is in flux and jurisdictions differ as to the validity of such clauses. There are a number of recent decisions that have allowed litigation to go forward despite collective bargaining agreements containing mandatory arbitration clauses. The Fourth Circuit initiated this change last year by holding that arbitration of an employee's Title VII and ADA claims can be binding under a collective bargaining agreement. In Austin v. Owens-Brockway Glass Container, Inc. 78 F.3d 875 (4th Cir. 1996), the collective bargaining agreement specifically provided that claims of gender discrimination were subject to the grievance procedure. See also, Moore v. Duke Power Co., ___F.Supp.___, 1997 Westlaw 392494 (W.D.N.C. 1997), which followed the Austin court's line of reasoning and held that a collective bargaining agreement barred the would-be plaintiff's wrongful termination and disability discrimination claims. See also, Almonte v. Coca-Cola Bottling Co. of New York, Inc., 959 F.Supp. 569 (D. Conn. 1997) (race discrimination lawsuit barred by collective bargaining agreement which specifically provided for arbitration of claims of violation of federal law).

Whether or not employees are subject to collective bargaining agreements, mandatory arbitration clauses are more likely to be found valid if they follow guidelines similar to those suggested above in connection with releases. First, the arbitration agreement should be in writing and signed by the employee. Second, there should be a knowing and voluntary waiver of an employee's right to pursue his or her case in court. Mere acknowledgement of the receipt of an employee handbook that contains an arbitration procedure may not constitute a knowing waiver of a right to sue under federal statutory schemes. See Nelson v. Cyprus Bagdad Copper Corp. 119 F.3d 756 (9th Cir. 1997). Similarly, there should be clear disclosure that employment disputes, including statutory civil rights claims, are subject to arbitration. Many employers will specify, without limiting, the kinds of statutory schemes that are subject to arbitration (e.g., claims under Title VII, the ADEA, or ADA). An arbitration agreement should also disclose the claims and remedies which would otherwise be available in a judicial forum, but which may not be available through arbitration (e.g., punitive damages, attorneys' fees).

Third, there should be mutuality of rights and obligations on the part of both the employer and the employee, and an opportunity to negotiate how the arbitration will be conducted. For example, the arbitrator should be impartial and selected by all parties with an equitable allocation of costs. All parties should be afforded a reasonable amount of discovery and the employee should have the opportunity to be represented by an advocate of choice.

Conclusion

Reductions in force are a disruptive, but necessary, fact of life for many companies today. They should be conducted with particular care so that they maximize the employer's needs and minimize claims of wrongful termination. Predispute agreements like releases and mandatory arbitration contracts can also help curtail costly litigation.