Unemployment continues inching upward, hitting 5.5% in June, as cash-strapped U.S. businesses queasy with uncertainty are forced to reduce headcounts. Reductions in force are never a pleasant experience and often set the stage for discrimination and retaliation lawsuits.

While layoffs are at times a necessary part of doing business, they require legal savvy and a sensitive human touch. The two considerations go hand in hand, sources say, as a hasty or impersonal layoff can create resentment and trigger litigation.

Employers should be clear about the business reasons for layoffs, use objective criteria in a consistent manner, document all decisions, treat outgoing employees with dignity, pay attention to the morale of existing staff and have a plan in place before handing out a single pink slip, say human resources experts.

"When it comes down to managing a layoff, it's much more than just a packet of materials," says Wendy Nice Barnes, vice president of human resources for eHealthInsurance Services Inc., based in Mountain View.

Thoroughly Prepare

The most important thing an employer can do before initiating a layoff is to be clear about the specific reason or reasons for a RIF, says San Francisco attorney Marc Koonin. From a legal standpoint, being able to tie the departure of employees to purely business reasons makes it easier to defend against claims, he says.

"Nobody likes being laid off; but if the company puts out a presentable, verifiable reason for the reduction in force and then they implement in that way, then they're taking away 90% of the potential claims," says Koonin, an associate with Sedgwick, Detert, Moran & Arnold LLP.

He says once the goal of the reduction in force is established -a refocusing on sales through the minimization of middle-management, for example - the company can then determine which positions contribute to that goal, and which should be eliminated. Unintended consequences, however, could include disproportionate layoffs of older workers who had worked their way up to management positions.

"Maybe you didn't mean to discriminate against the older folks, but that was the outcome," says Koonin. "You'll probably pass the test if you used consistent criteria in line with your goal."

California's Worker Adjustment and Retraining Notification (WARN) Act requires employers with 75 or more employees to give 60 days warning before commencing a reduction in force. Penalties for non-compliance include the payment of 60 days worth of wages, plus benefits, for all affected employees. But that doesn't mean small businesses, exempt from WARN, should proceed with abrupt layoffs.

"When you add it up, I think it's important to give a notice even if you're not WARN covered, and to have dialogue and good relationships with employees," says Los Angeles attorney John Zaimes, a partner with Reed Smith LLP. After all, he says, disgruntled ex-employees are the ones most likely to look for a reason to sue.

But before making an announcement, employers should have an implementation plan in place, says Shelley Canter, president of San Francisco-based leadership and executive coaching firm RJC Associates. That plan would include communication strategies and resources for outgoing employees, she says.

Be Objective, Consistent & Document Everything

With a clearly articulated reason in mind and in writing, managers involved in a force reduction should work with counsel to develop objective criteria for where the cuts are to be made, attorneys say. These criteria may include so-called "soft skill" considerations, such as the ability to work well with others and must be consistently applied.

It is a mistake to keep people simply because they are well liked, or to tie layoff decisions to individual considerations, says Los Angeles attorney Margaret Rosenthal, a partner in the firm Baker & Hostetler LLP. It all comes back to basing decisions on your force reduction objective, which usually means you'll want to keep your income-generating employees. So you want to look at things like experience and written evaluations, but always base the decision on clear objectives.

Attorney Phyllis Kupferstein, partner in the Los Angeles office of McDermott Will & Emery LLP, tells clients to make sure they don't cut employees based on salary, especially since older workers are the ones most likely to fall into that category. And the layoff of anyone in a protected class, a racial minority or a woman for example, must be double-checked to make sure there is no appearance of bias, she says.

"You do have to think through what the likelihood of litigation is," says Kupferstein. "If you end up with a lot of lawsuits, then it's not going to help you financially."

If someone who filed a discrimination claim earlier is on the layoff list, Koonin says, employers want to be very careful not to trigger a retaliation claim. But the rule of thumb, he says, is to be ready to justify any potentially risky layoff as an objective business decision. Zaimes suggests going one step further and hiring an outside statistician to make an adverse impact analysis, which would expose unintended consequences before it's too late.

Proper documentation, as well as the absence of emails or other records indicating bias, is the best way to defend against claims, attorneys say.

"It's horrible to have some email flashed up in court that basically says that whatever we said was our goal is a lie, that we're actually pulling out the dead wood," Koonin says.

Proper documentation begins with well-kept employee records, which indicate employee performance and overall contribution to the company, Kupferstein says. Beyond that, she adds, perhaps a one-page document showing the thought process at the time an employee was laid off is enough to defend such decisions.

Be Compassionate & Helpful, While Maintaining Morale

Barnes, who says she has experienced both ends of a layoff in her 12 years working in Silicon Valley, recommends an empathetic approach. Not only will laid-off employees who are nevertheless taken care of be less likely to file a lawsuit, but such practices also reflect favorably on the organization.

"I look at it as if I'm in those shoes myself," she says. "How will I pay my bills, first of all?"

Employees who suddenly find themselves unemployed will need to know how to apply for benefits through the Employment Development Department, how to apply for a COBRA health benefit extension, and may need help polishing their resumes, Barnes says. Severance is fairly common in California, she says. Los Angeles-based arbitrator and mediator Barbara Neal suggests that companies offer a transfer when possible or provide outplacement services.

Kupferstein also suggests a severance package and believes it is a cost-effective investment toward minimizing lawsuits by disgruntled ex-employees, as well as a strategy to help maintain harmony among existing staff. Another option is to offer a release, which is essentially an early retirement.

"Whatever you can do to show some goodwill toward outgoing employees would reduce the likelihood of lawsuits and would help morale of the remaining employees," Kupferstein says.

The treatment of laid-off employees affects existing staff in a number of ways, including their loyalty to the company, Canter says.

"The best employees can always get good jobs elsewhere - and they will, if you mistreat others," Canter insists.

Ultimately, the point of any layoff is to improve the company's performance. So without careful attention to details - particularly in the areas of legal risk and HR management - companies may find themselves worse off than before the layoff.

California Executive © 2008 Providence Publications, LLC All Rights Reserved. - Patents Pending