Avoiding Adverse Impact Claims in Times of Crisis
Managing the Legal Risk of a Reduction in Force (RIF) and Similar Employment Actions

By Amy Aukstikalnis and Valentin Estevez

adverse impact analysis for reduction in forceWith the COVID-19 epidemic forcing the majority of the US economy to shut down, many businesses are now facing the grim reality of having to reduce their labor costs or the size of their workforce in order to stay afloat.  These are difficult decisions to make in the best of circumstances; the fact that they now must be made during a crisis of this scale makes them even more unpleasant.  Even business decisions made with the best of intentions, or with the goal of simply ensuring survival, can have unintended adverse legal consequences.  A poorly executed reduction-in-force or decision to reduce employees’ hours or compensation can lead to litigation risk and costly lawsuits, just when a company can least afford them.

Under the law, employment decisions such as layoffs, RIFs, or furloughs cannot be based on protected characteristics such as age, race or gender.  Instead, these actions must be made based on legitimate business-related factors.  But even a facially neutral selection process based on legitimate business factors can have adverse consequences.  To minimize legal risk, we recommend examining the effect of employment actions for adverse impact before the decisions are made final, an approach that is also recommended by the EEOC.1

Basics of an Adverse Impact Analysis:  Layoffs/Reductions-in-Force and Furloughs

A basic Reduction-in-Force (RIF) analysis examines layoff selection decisions to see if a protected group of employees is more likely, from a statistical perspective, to be selected for RIF than their comparators.  However, not all adverse impact analyses are the same.

Consider, for example, the case of a national retailer that has reduced store hours because of the current crisis, but continues to fulfill online orders.  This retailer now needs fewer cashiers (an occupation that is 71% female in the US2), but about the same number of logistics specialists (an occupation that is 66% male in the US3), and plans to lay off a significant number of store-level employees–including cashiers–to meet this change in business needs.

The gender differences in representation across occupations and the differential impact of layoffs across jobs can cause a gender-neutral selection process in which, company-wide, more females than males are selected for layoff.  This outcome could be interpreted as the RIF process having an adverse impact on female employees.

If, instead, layoffs are studied by job function (e.g., store v. warehouse employees), the statistics look considerably different.  By accounting for differences in the likelihood of layoff by job function (a key factor in the RIF process), the layoff decisions are shown to be gender-neutral.  Understanding how RIF decisions are made is a key first step in any adverse impact analysis.

Furloughs and reductions in hours can also give rise to an adverse impact finding if the analysis does not reflect the decision-making process.  Continuing with the retail establishment example, hours reductions may impact part-time store employees more.  If there are gender or race differences between part-time and full-time employees (e.g., 64% of part-time employees in the US are female4), the decision to cut hours may show adverse impact if the analysis does not account for whether the employees whose hours have been reduced are part-time or full-time.  As before, it is key to understand how the decisions were made.

The following are other key considerations and recommended best practices for any business interested in analyzing employment decisions for adverse impact and legal risk:

  • Engage outside counsel. Studies are ideally done at the direction of counsel to provide legal advice and maintain attorney-client privilege.
  • Understand there is no one-size fits all approach. Since it is difficult to predict in what business unit, department, or job a claim may arise, we recommend looking at your data from multiple angles in order to minimize risk.
  • Beware of shortcuts and quick calculations. Informative analyses rely on complete data and reflect the selection process.  The majority of the analytical work in these cases is in organizing the data and formulating the models.  Hire an outside economist/statistical expert who is experienced in analyzing employment data and reductions in force (both as a consultant and in litigation).
  • Document, document, document. Collect and retain data and supporting documentation for the business-related reasons behind your selection decisions.  The best time to memorialize decisions is right when they take place, because the data used to inform the decisions are accessible, and those who made the decisions are still with the firm.

What do you do if you find a statistically significant disparity? 

If a significant disparity in layoffs to the detriment of a protected group is found, it does not necessarily mean the RIF is discriminatory or unlawful.  But it does mean that the RIF process is more likely to be challenged and may be more difficult to defend.  In these situations, we recommend examining the relevant selection decisions more closely.  Key questions to ask during the review include: Is there a legitimate business reason for the selections? Are there less impactful selection criteria that can be used that still meet the firm’s business and financial goals?  After your review, you may determine that no changes are warranted, but documenting these decisions is key.

Over the past 40 years, Welch Consulting has performed hundreds of RIF analyses and layoff audits, helping companies both large and small to evaluate their legal risk.   Click here to learn more about our capabilities in this area.  For more information contact:

Amy M. Aukstikalnis is a Principal with Welch Consulting, based out of Los Angeles.  You can reach Dr. Aukstikalnis at:  aaukstikalnis@welchcon.com, (310) 260-4876.

Valentin Estevez is a Managing Director with Welch Consulting, based in Texas and Washington D.C. You can reach Dr. Estevez at:  vestevez@welchcon.com, (979) 691-0747.

 

[1] https://www.eeoc.gov/employers/smallbusiness/checklists/avoiding_discrimination_in_layoffs.cfm

[2]  American Community Survey.

[3]  Ibid.

[4]  Ibid.

 

The opinions expressed are those of the author(s) and do not necessarily reflect the views of our firm or its clients.