Beyond Layoffs:Beyond Layoffs:

Controlling Payroll Costs in Controlling Payroll Costs in Creative and Legal WaysCreative and Legal Ways

Bob BlackstoneBob BlackstoneHolly M. HearnHolly M. Hearn

Lawton HumphreyLawton HumphreyHolly Wylam KleinHolly Wylam Klein

March, 2009March, 2009

Overview of ProgramOverview of Program

Introductory Comments

Reducing Hours, Pay and PTO

Job Sharing and Work Share Programs

Benefit Issues: PTO, COBRA

Voluntary Buy-Outs, Early Retirement and Key Lessons Learned from RIFs

Questions?

Effects of the Economic DownturnEffects of the Economic Downturn

Management Distraction

Rapidly Changing Priorities

Risk of Losing Focus

Limitations on Resources

Strain, Stress, and Uncertainty in Workforce

Increased Complaints, Claims, Charges, and Lawsuits (“Leave v. Grieve”)

Laws/Considerations Affecting Laws/Considerations Affecting Salary Expense Reduction EffortsSalary Expense Reduction Efforts

WARN

OWBPA

Wage and Hour Laws

Discrimination Laws

Labor Relations Considerations

Contractual Obligations/Promissory Estoppel

Reduced Hours and PayReduced Hours and Pay

Reduce hours worked

Reduce number of work days

Shut down facility temporarily

Reduce pay without reducing hours

Reduced HoursReduced Hours

Pros

► Reduction in payroll

► Alignment of labor and demand

► Retention of talent

► All share in pain

► Reduced work load mitigates lost pay

Cons

► Employee morale lowered

► Risk loss of strong performers

► Reduce ability to serve customers

Reduced PayReduced Pay

Pros

► Reduction in payroll► Alignment of cost

and revenue► Retention of talent► All share in pain ► Increase ability to serve

customers

Cons

► Employee morale lower

► Risk loss of talent

► No extra time off to mitigate the pain of lost pay

Legal Issues To Watch ForLegal Issues To Watch For

Wage & Hour

► Non-Exempt: Minimum wage

► Exempt: Salary basis test -

impermissible deductions

Breach of Contract

► Written agreements

Individual contracts

CBAs

► Implied agreements

Handbooks

Commission plans

Benefit plans

Strategies: Reduced Hours Strategies: Reduced Hours

Non-Exempt Employees

Shorter days

Reduced work week (individual or company-wide)

Voluntary personal days

Strategies: Reduced Hours Strategies: Reduced Hours

Exempt Employees

Eliminate entire work week (“Furlough”)

Adopt reduced work week schedule

Voluntary personal days off

Strategies: Reduced Hours Strategies: Reduced Hours

For All

Check agreements, handbook, offer letters

Document new arrangement

Check impact on benefits coverage

Reduced Pay (Same Hours)Reduced Pay (Same Hours)

Check agreements, handbook, offer letters

Confirm at-will employment

Consider fluctuating work week method for non-exempt employees

Consider retention bonuses &deferred compensation

Mandatory/Voluntary Use of PTOMandatory/Voluntary Use of PTO

Reduce PTO accruals and accounting liabilities Use to mitigate effects of wage loss from salary

reductions, reduced number of workdays or work hours

Mandatory/Voluntary PTO UseMandatory/Voluntary PTO Use

Pros

► Reduces employer’s accounting liabilities► Mitigates employees’ pain from furloughs, reduced workweeks and hours’ reduction► May allow for less than full workweeks for exempt employees if PTO covers guaranteed salaries

Cons

► Does not help employees with no/low PTO accruals► Employer loses productivity without recognizing any immediate “savings”► May negatively impact morale if employees forced to use PTO

Strategies: Mandatory PTO Use Strategies: Mandatory PTO Use

Check agreements, handbook, offer letters

Adopt a written leave/PTO bank policy if you don’t have one

Clearly document dates and circumstances when PTO use will be required

Consider reducing workweeks/hours and mandating PTO use when employees typically take time off, i.e. holiday weeks.

Strategies: Mandatory PTO Use (II) Strategies: Mandatory PTO Use (II)

Exempt employees:

Deduct PTO only in full day or week increments

Consult counsel before taking any partial day deductions

Job SharingJob Sharing

Employees who would otherwise work part time in separate jobs instead share a single full-time position’s duties and responsibilities

Allows employer to retain skilled employees while reducing salary and benefit costs

Job Sharing ArrangementsJob Sharing Arrangements

Pros

► Allows employers to cut payroll expenses without cutting jobs

► Many employees desire part-time schedules and flexible work schedules

► Employer maintains skilled workforce for when business improves

Cons

► Presents unique challenges to administer

► Potential loss of productivity caused by need for increased communication and some duplication of efforts

Strategies: Job Sharing Strategies: Job Sharing

Consider trial period at start

Look for incumbents who are good team members, consultative and have strong communication skills

Create position description showing shared and individual responsibilities of each job sharer

Define work hours

Consider physical restrictions and possibility of telecommuting

Strategies: Job Sharing (II)Strategies: Job Sharing (II)

Employ a workable communication system

Consider how performances will be evaluated

Document circumstances under which job sharing arrangement will automatically end

Confirm employers’ discretion to modify or end job sharing arrangement

WA ESD Shared-Work ProgramWA ESD Shared-Work Program

Allows hourly employees to obtain unemployment benefits when hours are reduced in times of temporary economic downturn

ESD Shared-Work ProgramESD Shared-Work Program

Pros

► Allows employer to reduce payroll costs while retaining a skilled workforce

► Employees to recognize more income than if they were laid off

Cons

► Hourly employees only

► Must be adopted on a company-wide or division-wide basis and apply to at least 10% of employees in that unit

► Reductions in hours must fall between 10 -50% and not more

► Employer must still provide full time benefits

Shared-Work Program – Key ProvisionsShared-Work Program – Key Provisions

Program designed to help employers avoid temporary layoffs

Can involve entire company or specific sections or divisions

At least 10% of employees in unit must participate; 100% can participate

Approved plan can be in effect for 52 weeks Full-time, hourly employees are eligible to

participate

Shared-Work – Key Provisions (II)Shared-Work – Key Provisions (II)

Employees workweek can be reduced by at least 10% but not more than 50%

Employee receives UI benefits in corresponding percentage to hours reduction

Employees receive benefits for maximum of 26 weeks

Health benefit coverage to participating employees must continue at full-time level

Union representing employees in affected units must approve plan in writing

ESD Shared-Work ProgramESD Shared-Work Program

Information and application available at:

http://www.esd.wa.gov/uibenefits/faq/shared-work.php

Employee Benefits: Employee Benefits: Opportunities and ChallengesOpportunities and Challenges

General Benefits Structure

Qualified Plans

Reduced Employer Match

Plan Loans and Hardship Withdrawals

Relief from RMD Requirements

Health and Welfare Plans

Compliance with New COBRA Subsidy Law

Compensation and Severance Arrangements

Code Section 409A Compliance

Severance and New COBRA Subsidy

Opportunity: Opportunity: Assess General Benefits Structure Assess General Benefits Structure

Review benefits structures for tax-advantaged enhancements

Examples: Cafeteria plans, Health Savings Accounts (HSAs), 401(k) plans, profit sharing plans

Maximize tax advantages of existing programs by:

1) educating employee participants, and

2) ensuring efficient administration

Opportunity: Opportunity: Reduce Employer ContributionsReduce Employer Contributions

Pros

► Potential for large reduction in employer cost► Employees willing to accept reduced or no match in lieu of other cuts

Cons

► Employee morale lower

► Remove plan from IRS “safe-harbor” 401(k) plan model

► Administrative burden of notifying employees and implementing change

Opportunity: Opportunity: Plan Loans and Hardship WithdrawalsPlan Loans and Hardship Withdrawals

Do your plans provide for loans and hardship withdrawals?

Advantage of providing support to employees at minimal cost

Compliance Issue: Ensure that loans/withdrawals are administered according to plan documents

Show support to employees by circulating notice of opportunities and procedures

Opportunity: Relief from Minimum Opportunity: Relief from Minimum Distribution RequirementsDistribution Requirements

For 2009, don’t have to make minimum distributions to individuals age 70 ½ +

Applies to defined contribution plans like 401(k) plans and IRAs

Allows older individuals to continue to accumulate savings without requiring cash-out near market bottom

Challenge: Health/Welfare PlansChallenge: Health/Welfare Plans Understand new COBRA subsidy rules effective

February 17, 2009

Employees only pay 35% of COBRA premiums for 9 months

Employer pays remaining 65% and is reimbursed by IRS

Must provide DOL notice by April 17, 2009

Resources at: www.dol.gov/ebsa/cobra.htm

Opportunity: Opportunity: Reduce or Cap PTO AccrualsReduce or Cap PTO Accruals

Pros

► Potential for large reduction in employer cost

► Company policy may already provide for this

► May quickly eliminate large liability on books

Cons

► Employee morale lower, especially among long-time employees

► May decrease productivity if allowed to phase out use

► Must comply with state laws that protect accrual of PTO as “wages”

Challenge: Comply with New Code Challenge: Comply with New Code Section 409ASection 409A

New law effective January 1, 2005 applies to all deferred compensation

Prohibits discretion to accelerate or further delay payments

Review severance payments and deferrals of bonus payments for compliance

Avoid harsh penalty tax of 20%: Structure compensation and severance agreements to comply

Opportunity: Opportunity: Severance and New COBRA SubsidySeverance and New COBRA Subsidy

Employers who pay COBRA premiums may be excluded from eligibility for reimbursement from federal government under new COBRA subsidy legislation

Restructure severance agreements to maximize employer reimbursement from IRS

Examples

Voluntary Buyouts and Early Voluntary Buyouts and Early Retirement IncentivesRetirement Incentives

Pros► Voluntary departures are better than involuntary departures► Less damage to employee morale► Can avoid restrictions on layoffs in labor contracts► Can legally secure voluntary departure of employees who would otherwise be risky to lay off

Cons► Uncertain savings – may not work► Can be harder to target► May lose good people► Potential discrimination issues► Potential fraud claims by previous retirees

Legal Issues to Watch ForLegal Issues to Watch For Constructive discharge - program not really

voluntary IRS discrimination issues under qualified

retirement plans Availability to persons on FMLA or other leaves? Potential misrepresentation or fraud claims Potential age discrimination issues under ADEA

Layoffs 2.0 – WARN Layoffs 2.0 – WARN

Federal and state WARN and “mini-WARN” Act concerns Examples:

• New York: 50 employee coverage threshold and 90 days notice

• Wisconsin: Applies to layoffs at single site or within same city

Layoffs 2.0 – Release AgreementsLayoffs 2.0 – Release Agreements

Release agreement issues Exclusion of claims that can’t be released Confirmation of being paid for all hours worked No knowledge of whistleblower issues “Covenant not to sue” issues Unique state law release requirements

Layoff 2.0 – OWBPALayoff 2.0 – OWBPA

OWBPA issues for release of Federal age discrimination claims: “Going bare” Definition of “decisional units” How much information do you give? Employees who are offered other positions Handling phased layoffs – aggregate data Correcting errors in statistical information Description of eligibility factors

Questions?Questions?

Thank you!Thank you!