503425© 2009 Murphy, Hesse, Toomey & Lehane LLP. All Rights Reserved.1 1 Cape Cod Human Resources Association You and Your Business: Cost-Cutting Strategies

503425 © 2009 Murphy, Hesse, Toomey & Lehane LLP. All Rights Reserved. 1© 2009 Murphy, Hesse, Toomey & Lehane LLP. All Rights Reserved. 1

Cape Cod Human Resources Association

You and Your Business: Cost-Cutting Strategies and Legal Considerations

During a Recessionary Economy

June 25, 2009

Presented by Katherine A. Hesse & Thomas W. Colomb

Murphy, Hesse, Toomey & Lehane, LLP

503425 © 2009 Murphy, Hesse, Toomey & Lehane LLP. All Rights Reserved. 2

The Recessionary Economy: Where Are We?

Recession by many accounts started in December 2007

Heavy effects on business Decreased access to capital Declining value of assets Some costs still rising (e.g., health care)

What are some legal strategies to help business deal with the financial pressures of the recession?


Strategy: Cutting Costs While Minimizing Legal Risk

Financial Discipline – Make smart choices about where to cut costs Do not fail to make required tax payments Do not use employee 401k or health deductions for business

purposes Renegotiate Existing Contracts

Leases Vendor contracts (pricing, terms (e.g., time to pay, interest rate

on delayed payments)) Credit card rates Payroll Costs Insurance Coverage


Strategy: Negotiation Options

Everything is negotiable Prioritize Be realistic – Don’t be overly optimistic nor unduly

pessimistic Have goals and strategies in mind from the start, but be

flexible Think about what the other party needs

What do you bring to the table? How can you make it mutually beneficial?


Example: Real Estate Lease

Rent – Reduction in rate? Term – Consider an extended term? Scope – Consider opportunity to buy out at discounted

rate? Subleasing options? Purchase or expansion options? Reallocation of responsibility for or deferral of

maintenance and repairs? Personal guarantees? Pass through charges?

Also consider common area charge audit.


The Recessionary Economy

Job Losses at the National,

State and Local Level


Employment: National*

Unemployment rose from 8.9% in April 2009 to 9.4% in May

14.5 million unemployed in May 2009 – up 787,000 from April

7.0 million jobs lost between December 2007 and May 2009 – unemployment rate almost doubled, rising 4.5% in same period

“Involuntary part-time workers” currently 9.1 million (up 4.4 million since December 2007)

* All statistical information in this presentation drawn from published reports by the U.S. Department of Labor, Bureau of Labor Statistics and the Massachusetts Department of Workforce Development, Division of Unemployment Assistance.


Employment: National, cont.

Widespread losses across major industry sectors: Steep losses continue in manufacturing Rate of decline moderating in construction,

professional/business services, retail Health care has added approximately 25k jobs/month in

2009


Employment: Massachusetts

Unemployment rose to 8.2% in May 2009 from 8.0% in April 2009 (May 2008 Mass. Unemployment at 4.9%)

4,900 Jobs added in May 2009 – First monthly increase since May 2008 and largest monthly increase since January 2008

Sectors gaining jobs in May 2009: Professional, Scientific and Business; Education and Health; Leisure and Hospitality; Financial; Trade and Transportation (in order of gain)

Sectors losing jobs in May 2009: Construction; Government; Manufacturing; Information (in order of loss). Losses in manufacturing and information are modest and reflect smaller monthly declines. (Information down 6.3% from one year ago; Manufacturing 5.4% from one year ago)


Employment: Massachusetts, cont.

Massachusetts Regional Unemployment April 2009*

Boston/Cambridge/Quincy unemployment consistently below state average (6.7% vs. 8.0% in April 2009)

Brockton/Bridgewater/Easton unemployment consistently above state average (8.8% vs. 8.0% in April 2009)

(Town of) Barnstable unemployment above state average (8.4% vs. 8.0% in April 2009)

* Comparisons made using April 2009 data. Regional data for May 2009 will be released June 30th.


Local Unemployment Rates( ) = Seasonally Adjusted Rate; All Other Rates are Unadjusted

Dec 2007 May 2008 Dec 2008 Jan 2009 May 2009

National 4.8 (4.9) 5.2 (5.5) 7.1 (7.2) 8.5 (7.6) 9.1 (9.4)

Mass. 4.3 (4.5) 4.8 (4.9) 6.5 (6.4) 8.1 (7.4) 8.0 (8.2)

Barnstable 4.6 4.2 7.5 10.2 7.3

Bourne 5.2 5.3 7.8 10.1 8.5

Brewster 4.6 4.0 7.2 10.3 6.6

Chatham 4.6 4.5 7.5 11.0 6.7

Dennis 5.9 4.7 9.4 12.4 7.3

Eastham 6.5 4.8 10.1 12.9 8.2

Falmouth 4.5 4.5 7.1 9.5 6.7

Harwich 5.8 5.0 9.2 13.1 8.1


Local Unemployment Rates( ) = Seasonally Adjusted Rate; All Other Rates are Unadjusted

Dec 2007 May 2008 Dec 2008 Jan 2009 May 2009

National 4.8 (4.9) 5.2 (5.5) 7.1 (7.2) 8.5 (7.6) 9.1 (9.4)

Mass. 4.3 (4.5) 4.8 (4.9) 6.5 (6.4) 8.1 (7.4) 8.0 (8.2)

Mashpee 4.6 4.8 7.9 10.0 7.5

Orleans 3.8 5.0 7.5 9.9 7.1

Provincetown 23.7 10.1 28.3 35.1 15.4

Sandwich 4.1 4.1 7.0 9.2 7.5

Truro 12.4 8.0 17.1 23.1 10.4

Wellfleet 9.8 5.6 13.8 17.7 9.2

Yarmouth 6.5 5.6 10.5 13.5 8.7


Strategy: Reducing Operating Costs Payroll and Employee Benefits

Wage Reductions Furloughs Pension/Retirement Health and Welfare/Insurance


Strategy:Reducing Operating Costs Workforce Reductions

Attrition/Hiring Freeze Exit Incentives Individual Separations Layoffs Facility/Business Closure


Wage Reductions and Furloughs

Where permissible – May Be Prospective Only Adequate Notice Reductions or deductions in pay and pay furloughs

can cause employer to run afoul of the “salary basis” requirements, so be careful to do it right

Careful and Thorough Communications Do Not “Defer” Pay


Exempt Employees:Salary Basis Executive, Administrative, or Professional

employee Compensated on a “salary basis” ($455/week or

greater) Subject to certain permissible deductions Beware of non-permissible deductions


Other Wage and Hour Issues

Timing – Advance notice of change required Vacation Pay and Commissions as wages Payment on Separation Individual liability Mandatory treble damages Offering employees the choice between a pay

reduction and layoff - communication is key

Practice Tip: Do not defer payment of wages.


Employee Benefits in a Recession: Introduction

Benefit costs may make up 25-40 % of payroll costs.

Cutting these costs is a necessity for many employers today.

What cost cutting can be done legally? Reduction/Deferral of Costs Administrative Simplification


Employee Benefits in a Recession: Different Plans – Different Rules Different rules apply to

“pension” plans (e.g., DB, DC, 401(k), 403(b), etc.) “welfare” plans (e.g., health, dental, vision, life,

STD, LTD) unfunded benefits (e.g., vacation, sick or personal

time, LOA’s) government mandated benefits (e.g., worker’s

compensation, unemployment insurance) Union plans vs. company plans Single employer versus multi-employer plans


Employee Benefits in a Recession: Pension Plans Defined benefit plans are subject to the “anti-cutback

rule”. Employers may not retroactively eliminate retirement benefits, however, future accruals may be reduced or eliminated.

Employers may not retroactively reduce or eliminate promised defined contribution retirement benefits. Future contributions may be reduced or eliminated. Mandatory employer match may be made

discretionary or eliminated.


Employee Benefits in a Recession: Pension Plans, cont. Do not be tempted to “dip into” pension monies.

They must be held in trust. Deductions from employee paychecks are held in

trust as well: do not be tempted to use the “float” on 401(k) contributions deducted from employee paychecks.

Hardship withdrawal provisions are available in some plans.


Employee Benefits in a Recession: Pension Plans, cont. If you take advantage of plan loan provisions in your

pension plans: Make sure any loans are documented. Make sure they bear a commercially reasonable rate of

interest. Make sure they are for the legally permissible time

period. Make sure they are paid back by payroll deduction. Beware of prohibited transaction rules for “parties in

interest.


Employee Benefits in a Recession: Welfare Benefits

A general rule of thumb is that, absent a contract to the contrary, employers are free to change or eliminate welfare plans (e.g., health, dental, vision, LTD, STD, Life) prospectively upon appropriate notice to participants.

Massachusetts employers may face penalties under the Massachusetts Health Care Reform Act for elimination of a health plan. Fair Share Contribution penalty. Minimum Creditable Coverage/taxation implications for

employees.


Employee Benefits in a Recession: Pension and Welfare Benefits

The regulations require that the plan and SPD specify the method in which a plan may be amended or terminated.

A formal plan amendment properly adopted by those with the authority to do so is necessary to amend or terminate the plan.

Changes to pension plans require the adoption of a plan amendment and notice to participants prior to the effective date of the change. This is also recommended for welfare plans despite regulatory wording on timing.


Employee Benefits in a Recession: COBRA Continuation on Termination When an employee’s termination or reduction in

hours causes the loss of health coverage, continuation and conversion options must be offered to eligible employees under COBRA for employers with 20 or more

employees, or state law for employer with between 2 and 19

employees. Remember that state law, unlike federal law, provides continuation coverage for same sex spouses.


When an employee is involuntarily terminated (except for gross misconduct), s/he and his/her qualified beneficiaries may be entitled to subsidized COBRA for up to 9 months with the employer picking up 65% of the cost until getting reimbursed through the payroll tax system if They were enrolled in the employer’s health care plan on

the date of termination and Their date of termination falls between September 1,

2008 and December 31, 2009. New COBRA notices are required - DOL has made

available on its website.

Employee Benefits in a Recession: COBRA Continuation on Termination


Employee Benefits in a Recession: Unfunded Benefits The general rule is that these benefits are at the

discretion of the employer provided the employer has not created a contractual obligation to pay them. Thus, these benefits can normally be changed prospectively upon notice. The length of a reasonable notice period will vary depending on the type of benefit.

Be careful of promises to pay contained in offer letters, employee handbooks, etc.


Employee Benefits in a Recession: Employment Issues

It is unlawful to suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right under ERISA or for the purpose of interfering with the

attainment of a benefit. Note potential ADA, ADEA claims as well.


Employee Benefits in a Recession: Employment Issues, cont. A pattern of abuse under a pension plan (such as

dismissal of employees before their accrued benefits become non-forfeitable) tending to discriminate in favor of employees who are highly compensated can have adverse consequences.

Do not misrepresent availability of coverage. Do NOT fail to remit timely employee

contributions to health or 401(k) plans – this is a big focus of EBSA enforcement!


Employee Benefits in a Recession: Summary Pitfalls abound for the unwary employer

attempting to cut benefit costs, but with the proper planning and advice, dramatic cost savings can often be achieved.

Know the legal and practical restraints on your actions and their consequences before making a decision – do your homework!

Remember that you may have two roles, that of fiduciary as well as employer/plan sponsor and act accordingly.


Employee Benefits in a Recession: Summary, cont. Seek qualified professional help well-versed in not

only in employment but also in ERISA, COBRA, HCR and other employee benefits issues.

Long range planning is essential to long term cost control, however significant savings can also be achieved in a short time horizon, in some cases almost immediately.

Creative benefits planning can also be used to improve morale and deal with issues created by layoffs, furloughs, etc.


Workforce Reductions: Strategic Considerations What options best suit our organization, fiscally and

operationally? Pre-existing obligations (employment contracts, CBAs,

policies) What benefits/incentives can we offer (if any)? Who will be eligible for exit incentives? Timeframe WARN and/or state notice requirements Modification/enforcement of restrictive covenants


Workforce Reductions: Strategic Considerations Ensure Proper Development and Legal Review of:

Exit incentive program Discrimination issues Releases (voluntariness, consideration)

Severance program Seek legal advice regarding ERISA issues

Layoff criteria Disparate impact analysis Severance agreements/releases


Workforce Reductions:Legal Considerations

Contractual/collective bargaining issues/employer policy Potential WARN notification requirements Discrimination: disparate treatment Discrimination: disparate impact Disabled employees Employees on protected leave (e.g., FMLA, MMLA,

USERRA) Caution with “problem employees”


Legal Considerations: Disparate Impact

Disparate impact = facially-neutral layoff program that has a disproportionate adverse impact on employees in protected classification(s)

Most common claim is age or gender


Legal Considerations: Severance Agreements

Common non-economic considerations: Rehire/reinstatement References Confidentiality and non-disparagement Restrictive covenants

Unemployment Benefits “Hot Button” issues

Attorneys fees/liquidated damages “Claw-back” or “tender back” provisions – per EEOC

regulations will invalidate release of age claim


Legal Considerations: Releases A release is a contract – it can be voided if not

supported by sufficient consideration. Beware of “boilerplate” – certain claims cannot be

waived. Employer may not restrict individual’s right to file

claim, participate in investigation or provide information to administrative agencies (e.g., NLRB, EEOC, MCAD).


Legal Considerations: Releases, cont. While employee can usually agree to dismiss most

pending court cases, approval is required for dismissal of most pending agency claims (e.g., EEOC, MCAD).

Certain agencies (e.g., NLRB) have specific requirements and broad discretion to approve/reject settlements

Workers’ compensation settlements require approval of administrative judge.


Legal Considerations: OWBPA Releases To obtain enforceable release of age claims under ADEA,

release must comply with all EEOC requirements. Must provide “additional” consideration. Must provide employee with 21 days to consider agreement.

45 days in connection with “exit incentive” or “program”. Employee may waive some or all of this period.

Must provide employee with 7 days to revoke agreement. This period cannot be shortened or waived.

Exit incentive: must provide information about program, including titles and ages of employees who are/are not selected or eligible to participate.


Workforce Reductions: WARN Act

Employer must give union, individual employees, state and local government at least 60 calendar days notice of a covered “plant closing” or “mass layoff”.

Employees may individually waive right to the 60 day notice; union may not waive that right for them.

Payment in lieu of notice is not recognized in the statute or the regulations, but Department of Labor concedes that pay in lieu of notice “effectively precludes any [judicial] relief.”


3 Exceptions to Providing WARN Notice

1. Where employer reasonably believes that giving notice would impair its ability to get needed business or capital infusion;

2. Closure due to business circumstances that are not reasonably foreseeable; or

3. Natural disaster.

In case of exceptions, the employer must give as much notice as practicable.


WARN Applies to:

Employers with 100+ full-time employees, defined as employees averaging over 20 hours/week. (Or employer with 100+ employees who work at least a combined 4,000 hours/week). WARN covers private sector employers and quasi-public entities (MWRA, for example), but does not cover governmental entities.


WARN Applies to:

A. A "plant closing," where an operating unit or plant at a single site of employment is shut down and at least fifty employees suffer an “employment loss”

B. A "mass layoff," where the operating unit at the single site of employment still operates, but either (1) 500 employees, or (2) at least 50-499 employees constituting at least 33% of the workforce, suffer an “employment loss” within any 30 day period.


WARN Applies to:

C. A "deemed" plant closing or mass layoff, which occurs when there have been a series of employment losses at a single site of employment involving a total of at least 50 employees who have suffered an “employment loss” over any 90 day period; these are added together, independently of any other plant closing or mass layoff that was over 50 employees, to "deem" that a plant closing or mass layoff has occurred. Beware of staggered layoffs or “winding down” operations.


What is an “employment loss”?

An “employment loss” is a termination of employment, a layoff from that employer of more than 6 months, or an hours reduction of 50% or more for any 6 month period.


What happens if I don’t give proper notice?

You will be liable for 60 calendar days of pay and benefits and possibly attorneys fees for failing to give notice to employees, and a civil fine of $500.00/day for failing to give notice to the local chief elected official unless back pay and benefits are paid within 3 weeks of the closing. Note that the 60 days does not begin to run until employee receipt of the notice, not when it is sent.


Workforce Reductions:Massachusetts Plant Closing Requirements Plant Closing law, G.L. c. 151A, §71A-H Requires

notice to state; no notice to employees is required. Certain provisions regarding unemployment and insurance benefits for displaced workers (charged back to employer). Subject to legislative approval. Has never been funded.

“Tin Parachute” statute, G.L. c. 149, §183: Mandates severance pay for employees losing jobs due to a “transfer of control” of the company. Federal courts have held that this statute is preempted by ERISA.


Questions?


Quincy Boston Springfield

Crown Colony Plaza 75 Federal Street One Monarch Place

300 Crown Colony Drive Suite 410 1414 Main Street 1310R

Quincy, MA 02169 Boston, MA 02210 Suite 1310RSpringfield, MA 01144

Tel: 617/479-5000 Tel: 617/479-5000 Tel: 888/841-4850

Fax: 617/479-6469 Fax: 617/338-1324 Fax: 617/479-6469

WWW.MHTL.COM

Documents

503425© 2009 Murphy, Hesse, Toomey & Lehane LLP. All Rights Reserved.1 1 Cape Cod Human Resources Association You and Your Business: Cost-Cutting Strategies