Beyond Layoffs: Controlling Payroll Costs in Creative and Legal Ways Bob Blackstone Holly M. Hearn Lawton Humphrey Holly

1. Beyond Layoffs:Controlling Payroll Costs in Creative and Legal WaysBob BlackstoneHolly M. HearnLawton HumphreyHolly Wylam KleinMarch, 2009

2. Overview 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?

3. Effects 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”) • Employers with more than 100 employees: • must provide 60 days advance written notice • of impending plant closing or mass layoff • to employees, union (if any), state and local government officials • Penalty:backpay and benefits for each day of violation • Up to 60 days • Up to $500 per day civil fine • “Baby” WARN Acts in states usually more stringent (e.g., New York 50 employees / 90 days notice)

4. Laws/Considerations Affecting Salary Expense Reduction Efforts • WARN • OWBPA • Wage and Hour Laws • Discrimination Laws • Labor Relations Considerations • Contractual Obligations/Promissory Estoppel • Employers with more than 100 employees: • must provide 60 days advance written notice • of impending plant closing or mass layoff • to employees, union (if any), state and local government officials • Penalty:backpay and benefits for each day of violation • Up to 60 days • Up to $500 per day civil fine • “Baby” WARN Acts in states usually more stringent (e.g., New York 50 employees / 90 days notice)

5. Reduced Hours and Pay • Reduce hours worked • Reduce number of work days • Shut down facility temporarily • Reduce pay without reducing hours

6. 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 Hours

7. 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 Reduced Pay

8. 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 Legal Issues To Watch For

9. Strategies: Reduced Hours Non-Exempt Employees • Shorter days • Reduced work week (individual or company-wide) • Voluntary personal days

10. Strategies: Reduced Hours Exempt Employees • Eliminate entire work week (“Furlough”) • Adopt reduced work week schedule • Voluntary personal days off

11. Strategies: Reduced Hours For All • Check agreements, handbook, offer letters • Document new arrangement • Check impact on benefits coverage

12. 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

13. Mandatory/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

14. 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 Mandatory/Voluntary PTO Use

15. 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.

16. Strategies: Mandatory PTO Use (II) • Exempt employees: • Deduct PTO only in full day or week increments • Consult counsel before taking any partial day deductions

17. Job 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

18. 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 Job Sharing Arrangements

19. 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

20. 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

21. WA ESD Shared-Work Program Allows hourly employees to obtain unemployment benefits when hours are reduced in times of temporary economic downturn

22. 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 ESD Shared-Work Program

23. Shared-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

24. 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

25. ESD Shared-Work Program Information and application available at: http://www.esd.wa.gov/uibenefits/faq/shared-work.php

26. Employee Benefits: Opportunities 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

27. Opportunity: 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

28. 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: Reduce Employer Contributions

29. Opportunity: Plan 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

30. Opportunity: Relief from Minimum Distribution 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

31. Challenge: 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

32. 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, especiallyamong long-time employees ► May decrease productivity if allowed to phase out use ► Must comply with state laws that protect accrual of PTO as “wages” Opportunity: Reduce or Cap PTO Accruals

33. Challenge: Comply with New Code Section 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

34. Opportunity: Severance 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

35. 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 Voluntary Buyouts and Early Retirement Incentives

36. Legal 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

37. 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

38. Layoffs 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

39. Layoff 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

40. Questions?Thank you!