The following article originally appeared in Law 360’s Expert Analysis section on April 20, 2020.
Much has been written in recent weeks about reductions in force, furloughs versus layoffs, payroll cuts and other topics related to the employment consequences of the COVID-19 pandemic. Many employers have turned to these options of last resort out of financial necessity in light of shutdown and quarantine measures.
While painful for businesses, physical distancing measures seem to be working, leading many experts to see a glimmer of hope in today’s challenging circumstances. "As Social Limits Slow Virus’s Spread, Calls Grow to Ease Them," reads a recently featured headline in The New York Times. As the national conversation moves toward businesses reopening, many employers who have conducted furloughs and layoffs are beginning to think about restoring staffing levels.
Moreover, nearly $3.5 billion has been allocated to 1.6 million small businesses through the Paycheck Protection Program, or PPP, which offered loans under the Coronavirus Aid, Relief and Economic Security Act, before funding ran out on April 16.
The PPP, which is expected to reopen once Congress appropriates additional funding, contains a loan forgiveness feature for employers that fill positions that were eliminated at the start of the COVID-19 crisis. Loan forgiveness under the PPP may be reduced if an employer’s average number of full-time equivalent employees (or total wages) for a particular period of 2020 falls materially below the prior year’s average during the same period.
The PPP thus creates a significant incentive to return furloughed employees to their jobs or otherwise fill empty positions. To maximize access to loan forgiveness, PPP recipients must restore staffing levels to last year’s levels by June 30.
Employers may restore headcount in multiple ways, depending on the methods used to reduce staffing levels during the crisis.
Furloughs
For employers who conducted furloughs, which are, by definition, a temporary leave, calling back employees is a fairly straightforward process. The employer must simply notify employees to report to work and reactivate the payroll process for each returning employee. Of course, some furloughed employees may have found new jobs during the furlough, in which case the employer could have vacancies to fill.
On the other hand, the employer may determine that its business needs have changed during the furlough period. Such employers may face the difficult choice of permanently separating some furloughed workers. If so, the employer should review its furlough letters and other communications to employees to confirm that it did not inadvertently guarantee employees’ rights to return to work.
And, if the employer had previously laid off other employees in response to the COVID-19 crisis and offered severance benefits to those employees, the employer should consider extending comparable severance benefits to any furloughed employees that it permanently terminates. In such cases, any new layoffs may be considered part of the same employment termination program as the earlier layoffs for purposes of the information that employers must disclose when offering severance in exchange for a release of age discrimination claims.
Layoffs
Employers who conducted layoffs have the option of rehiring laid-off staff, bringing on new staff or some combination of both.
From a liability standpoint, the safest option for employers is simply to rehire the employees who were laid off. Depending on the terms of the employers’ separation agreements, employers might also be able to ask returning employees to repay any severance that they received at the time of the layoff . Doing so would, of course, entail voiding any releases of claims that employees signed in exchange for severance.
Rehiring laid-off employees might make sense for other reasons too. Former employees know the employers’ policies and procedures, and are able to hit the ground running without a long onboarding or training process.
They have relationships with existing staff, who were likely demoralized watching their colleagues leave and will be reenergized seeing their colleagues return. In general, rehiring laid-off staff is thought to have a positive impact on workplace culture, counteracting the negative feelings caused by the layoffs themselves.
However, decisions are rarely this simple. For example, where layoffs are based on performance measures, the lowest performers are the ones who are let go. Likewise, changing business needs sometimes necessitate new skill sets to fill evolving roles. In these and similar circumstances, employers might have good reason to hire new employees instead of the ones who were laid off.
While no law requires employers to hire back laid-off staff, employers should be aware of three potential sources of liability when making these decisions.
First, employers could create a perception of wrongful termination. If a laid-off employee is replaced by a new employee, the former employee might perceive an improper motive in the termination.
For example, consider a scenario in which an employer laid off two longtime, older employees and two recent college graduates. The employer then decides to hire back the two recent graduates, because they earn the lowest salaries, while filling the other two positions with new employees who earn less than the older employees once did. This hiring choice might create the appearance that the layoff was a pretext for terminating two employees based on their age.
Second, employers who fail to follow their own internal policies create legal risk. Some employers have layoff policies that prohibit rehiring laid-off staff, while other employers have recall policies that give laid-off staff preferential treatment in subsequent hiring. While the COVID-19 experience might cause an employer to revisit those policies, employers likely cannot apply new policies to employees who were laid off while the old policies were in place.
Third, employers must be mindful of any promises that managers made during the layoff process. If an employee was told that they’ll be hired back when the economy recovers, then the employer might have created a binding contractual obligation to hire back the employee.
To mitigate the second and third categories of risks, employers should begin the rehiring process by reviewing their layoff and recall policies, as well as any written communications provided to employees in connection with their separations. Employers should also speak to the managers who conducted the layoffs to explore if they (perhaps inadvertently) made any promises during the process.
In addition, employers should ensure that they do not create the perception of wrongful termination in their rehiring decisions. If an employer does not have a formal recall policy in place, it should implement a policy requiring decisions to be based on objective, justifiable factors, such as documented performance reviews, skills-related needs, seniority and similar considerations.
While performance-based rehiring is a common approach, and of ten the most important factor in an employer’s decision-making, performance-based decisions can be subjective and, consequently, susceptible to legal challenges. If this is the employer’s preferred strategy, the decision about who to rehire should be based on documented performance reviews; and ideally, the objective, numerical components of those reviews, rather than free-form narratives written by supervisors. Employers who do not have documented reviews take a more significant risk by using a performance-based rehiring strategy.
Employers should also avoid the temptation to make decisions based on an employee’s former salary, because older employees tend to earn more than younger employees. Rather than choosing not to rehire older employees, an employer can offer to rehire them at a different salary, leaving it to the former employee to decide whether to accept the offer.
By using objective, fairly applied and fully documented recall processes, employers will prevent the appearance of impropriety and help avoid some of the most common pitfalls of rehiring following layoffs. As curve-flattening efforts continue to have their desired outcome, and as more PPP loans are funded, we are hopeful that getting employees back to work will become employers’ primary concern.
To learn more about the issues raised by this client bulletin, please contact Isaac Mamaysky at imamaysky@potomaclaw.com or Wendy Fischman at wfischman@potomaclaw.com
