Managing Employment Risk in a Slowing Economy

Jun 2014 27 | Posted by naomi.whatley

A Roadmap for Public Entities

One only has to take a quick look at recent news stories to see the economy’s powerful effect on municipalities nationwide.  Earlier this year, Kansas City closed nearly 50 percent of the district’s public schools, eliminating more than 700 jobs, in an attempt to address a $50 million budget deficit.  Last summer, Jefferson County, the largest ever—a $3.9 billion deficit—and subsequently cut services drastically and laid off 25 percent of its workforce.  And, according to CNNMoney.com, in 2008 alone more than 45,000 government layoffs were announced.  And it appears to be just the tip of the iceberg.  This issue is not something that will be resolved in the short term.  Increasingly, public entities will require close scrutiny of the workforce; all entities should be reviewing documentation and personnel files in preparation of layoffs.

These recent events are the result of practicality and the diligent efforts of municipalities to stay in the black—even cities and towns need to cut back in tough times.  But the choice by governments to reduce staff is challenging and complex, as elected officials are beholden to those who voted then into office.  A variety of issues must be taken into consideration, such as the need for services mandated by law, while guarding against looming shortfalls in revenues.

Mitigating Risk

Workforce reductions are not only laden with emotion and subject to security issues, but also can open up an organization to possible claims of discrimination and the potential for lawsuits.  Even the most  well-reasoned layoffs can result in unintended consequences, particularly with involving departments where a large number of staff may be in a protected class.

For these reasons, prior to considering job eliminations, risk managers, in conjunction with legal and human resources, need to take a hard look at the services offered by the public entity they represent and make a decision: which benefits are absolutely essential and which are simply “nice to have”?  Finding the balance between public expectations of government programs and ever-growing budget deficits will help these entities continue to remain solvent, while reducing the need to drastically cut staff.  This audit of services encompasses an entity-wide look at staging programs and services currently provided, and ultimately helps build an organization-wide plan, making cuts the responsibility of the entity as a whole.  The process requires a combined effort from elected officials, legal counsel, human resources staff and department heads.

One consideration is to remove or reduce programs that are no longer federally funded.  Local governments may have assumed responsibility for services once sponsored by the federal government, such as daycare/latch key, parks and recreation, jail education or elderly transportation.  However, eliminating these programs entirely is not always the answer.  Just as individuals and families are developing creative solutions to save money in a tight economy, some governments have done the same, including combining services, such as parks and recreation in the summer with street and road cleanup in the winter; contracting with outside vendors; letting other agencies take responsibility; utilizing volunteers; and enlisting religious or civic groups to perform the service.  Furthermore, the level of services offered can be reduced, by providing joint city-county services, cutting some office hours and even closing during certain times or days.

Making the Hard Choices

But once services are reassessed, if a financial shortfall remains, it may be time to consider reducing staff numbers.  Though it may be tempting to use financial hardship as an excuse to clean out the “dead wood” in a particular group, remember that unless performance problems are well-documented and have previously been discussed with the poor performers, removing problem employees and economically based staff reductions are two entirely separate issues, and should be treated as such.

There are a number of appropriate ways to begin to decide which employees will be laid off.

  • Seniority.  This is a fairly easy practice to implement, as deciding who will be let go is as simple as reviewing his or her hire date.  Unfortunately, the seniority approach often results in the loss of new, good talent and leaves the organization vulnerable to large number of openings in several years.   It also could result in issues if disproportionate number of those employees are of a protected class.
  • Position needs.  More difficult to administer, this strategy involves working with department managers and assessing the needs for specific staff positions.  It’s a very cost-effective approach that helps maintain staff in areas where they are needed the most but is also very subjective and could be abused by managers.
  • Service reduction.  By reducing the availability of a public service, it follows logically that a staff reduction may also result.  While fairly easy to administer, there is significant risk of such an approach becoming a political hot potato, particularly if it is a service of interest to a large portion of the public.

Once the most practical method is determined, implementation can begin.  Some suggestions for making it as seamless as possible for both the public entity and employees:

  • Exhaust available options.  Prior to layoffs, ensure that all other alternatives have been explored.  Reduce the number of temporary and part-tine employees.  Offer early retirement buy-out options.  Establish an abbreviated work week.
  • Communicate early and often.  Tell employees as soon as possible of coming changes.  Hold individual meetings with affected employees.  Make information readily available to all staff members so concerns can be addressed and the spread of misinformation diminished.
  • Ease the transition.  If possible, make assistance available to employees.  Consider offering outplacement programs like vocational rehab, family financial planning and health care/benefits meetings
  • Document everything.  Document all actions and why these decisions were made.  Have a clearly written plan on staff reductions and be sure to follow it.  Each step of the process of employee reduction, termination or furloughs should be closely scrutinized by legal.  Prepare legal counsel with documentation and personnel files to ensure that there is not a violation of federal law or an unintentional appearance of discrimination.  Most insurance carriers are willing to provide assistance with employment practices and employment issues.
  • Make security a priority.  All it takes is a quick look at a newspaper to realize that workplace safety cannot be taken for granted—the recent case of a terminated employee of Connecticut beer distributor who returned to the workplace with a gun is one example.  Employing proper security practices can help ensure that your employees are protected from potentially dangerous situation.  Your entity should also train employees to recognize warning signs such as employees making threatening remarks about supervisors and other employees.  When layoffs do occur, ensure current employees are safe from retaliation.

Keeping Legalities in Mind

Layoffs come with a host of potential legal claims, stemming from a number of existing laws and government organizations: EEOC, state commissions against discrimination, the Family Medical Leave Act, Americans with Disabilities Act, Sarbanes-Oxley, Uniformed Services Employment and Reemployment Rights Act, Age Discrimination in Employment Act and the Civil Rights Act are just a few examples.  So it is important that risk managers ask themselves, do we have the right to reduce staff of employee hours of work?  The quick answer is yes, absent a contract, union agreement or other employment manual, and as long as staff or work hour reductions are not discriminating against a protected person or in isolation of a federal or state law.  All decisions regarding staff reductions should include the insight of experienced legal counsel, lest an organization risk putting itself into unforeseen legal position.

Though involuntarily terminating employees is never an easy task, it can sometimes be an unavoidable one.  With thoughtful consideration and careful planning, the risks associated with staff reduction can be greatly reduced, making the process as straightforward as possible.

The key to successful reduction is that of careful planning, documentation and review by legal and human resource specialists.  We must keep in mind the long-term impacts that these actions will have on individuals, families and the public entities.

Dennis Molenaar, Esq.  is vice president of risk control for OneBeacon Government Risks.  Article from October 2010 issue of PUBLIC RISK.