Employer Liability for Employee Cell Phone Use on the Rise

Employers are facing increasing liability as a direct result from their employees’ cell phone use. So why is this the next legal frontier? The number of lawsuits involving employer liability for traffic accidents caused by employee cell phone usage is steadily growing, as well as lawsuits based on health problems associated with cell phone use.

The principal of vicarious liability states that an employer is responsible for the harm caused by its employees if the employees are acting within the scope of their employment at the time an accident happened. In this situation, a company can be held accountable by a third party for auto accidents caused by an employee’s cell phone use if the company provided the phone or if the cell phone is an integral part of the employee’s job. The company can even be held liable for incidents resulting from personal calls made by employees on company-issued cell phones, or phones inside company cars.

There is also an emerging trend establishing that an employer can be found directly negligent if it allowed employees to use cell phones for business without proper training or in spite of safety issues, and an accident results.

Another exposure resulting from employee cell phone use is the rise in the number of claims brought by employees for health problems associated with their cell phones. Employees who consistently use cell phones as part of their job are filing workers’ compensation claims and lawsuits alleging that radio frequency radiation from cell phones causes brain cancer.

The scientific evidence concerning whether or not cell phone use increases the risk of cancer is inconclusive. There are two studies that are most frequently quoted, and their results are contradictory. A study conducted at the Danish Institute of Cancer Epidemiology, whose results were released in December 2006, followed the health of over 420,000 cell phone users over the course of 21 years to determine if cell phone use causes cancer. The researchers concluded that the radio frequency energy produced by cell phones did not increase the risk of contracting brain cancer. However, a April 2006 study conducted by the Swedish National Institute for Working Life, examined the cell phone usage of 905 adults who developed malignant brain tumors. They found that people with more than 2,000 hours of total talk time had 3.7 times the risk of developing brain cancer as compared with non-users. The study also found an increase for tumors specifically on the side of the head where the cell phone was used.

While there is no way to alleviate all potential liability arising from cell phones in the workplace, companies can offer employees training on the safety issues and possible health risks associated with using cell phones. Promoting a safe workplace is a simple way to reduce the number of accidents and health risks associated with cell phones.

Key Considerations When Obtaining Builders’ Risk Insurance

Savvy contractors understand the key points of workers’ compensation, especially on controlling losses and managing the premiums. They are also likely familiar with commercial auto and general liability insurance, as construction contract issues tend to center around these coverages. But builders’ risk insurance is often a little more daunting for contractors because it’s not top of mind.

Builders’ risk policies cover property during the course of construction and may cover materials in transit to the job site and in temporary storage awaiting installation. When considering the purchase of a builders’ risk policy, a contractor should weigh several factors, including contract requirements, the property and locations in question, the parties who need coverage, and loss exposures that are time-sensitive.

The construction contract should contain the insurance requirements for the project. For example, it may specify that the builders’ risk policy cover certain causes of loss, such as earthquake and flood damage, that the insurer’s standard policy will not cover without modification. It may also require that coverage be on a replacement cost basis and that the insurer must waive subrogation rights against the project owner. The contractor should carefully review the contract and discuss the coverage requirements with his insurance agent.

The contractor must also determine what property he needs to cover. If he is building a new building, he will need insurance on the building materials, foundation, temporary walls and their supports, scaffolding, and other equipment. If the project involves rehabilitation or renovation of an existing building, such as the conversion of an old office building to condominiums, he will need coverage for the old structure as well as the improvements. How the insurance company will determine the existing structure’s value is an important question – some companies may subtract depreciation from the building’s replacement cost which could leave the contractor with a large uninsured exposure. As such, he should negotiate for replacement cost coverage whenever possible.

The construction contract will usually require the policy to cover the project owner, general contractor and even some or all of the subcontractors. The contractor should determine whether the policy covers material suppliers. If not, he should consider additional insurance to cover loss of income in case one of the suppliers shuts down temporarily due to property damage. He should also determine how the policy will respond if faulty work by a subcontractor causes damage to other parts of the building. Not all policies will pay if a sprinkler subcontractor installs a pipe fitting improperly and an entire floor gets flooded.

The last two major considerations are the locations to be covered and coverage for extra costs resulting from a construction delay, which was caused by a covered peril. In addition to the project site, the contractor should inquire about coverage for property in transit to the site and property stored off-site. Building materials could be damaged if a supplier’s location is damaged by fire or if the train carrying them derails. Extra costs resulting from a delay, known as “soft costs,” can be a significant exposure. For example, leases may need to be renegotiated or replaced, construction loans may have to be extended, or additional equipment may have to be rented. If the contract makes the contractor responsible for these costs, this coverage can be critical.

Because builders’ risk insurance has so many unique considerations, contractors should address them before starting work on the project. These policies will differ from one insurer to another, so careful review is essential. Attention to details before work begins will reduce the chances of uninsured losses and contractual disputes.

Tips on Spotting Workers’ Comp Fraud

Spotting the red flags that indicate possible workers’ compensation fraud by employees is the best way to prevent fraud from occurring. Knowing how to spot the red flags is a proactive way to nip a potentially costly but false workers’ compensation claim before it begins.

Most instances of workers’ compensation fraud occur when the claimant:

  • Deliberately falsifies information about how an injury occurred, such as claiming the injury was work-related when it was not,
  • Deliberately amplifies the seriousness of an injury to falsely prolong the claim, or
  • Deliberately continues to collect entitlements while working on the sly for their own purposes or with another employer.

Common Signs of Workers’ Compensation Fraud

  • Lack of witnesses – The majority of people claiming false work-related injuries usually do not have witnesses to support their claim. Vigilance is especially necessary when the employee normally works with other co-workers who should have witnessed the injury but did not.
  • Contradictory accounts of how the injury occurred – This can be particularly blatant when any of the doctor’s, employer’s, or witnesses’ reports contradict the employee’s report of the incident. Another red flag should be raised when the employee is deliberately vague about how the injury occurred.
  • Dissatisfied employees – Unhappy employees can be motivated to make a false workers’ compensation claim, especially if a recent incident such as a reprimand, changed responsibilities, or a possible demotion has occurred.
  • Time occurrence of the injury – Many false workers’ compensation claims are submitted before a potential strike, project conclusion, strike, or possible layoff. Many false claims also happen to be submitted on either a Friday or a Monday.
  • Inconsistent injury – The nature and extent of the injury is not consistent with their duties or type of job performed.
  • Inconsistent reporting procedures – Occurs when there is an inexplicable gap between when the injury occurred and when the employee reported the injury. Be alert if crucial injury data is absent, such as no definite time reported when the injury happened or if other vital dates are absent.
  • Lack of contact – The employee cannot be easily contacted by the claims rep or employer. Continuous lack of contact might be indicative the employee is working elsewhere while receiving ongoing entitlements. Another red flag should be raised when the employee immediately moves to another state or foreign destination after going on workers’ compensation.
  • Lack of cooperation – The employee deliberately delays or avoids medical treatment or medical diagnostics needed to clarify the medical condition of the employee’s alleged injury.
  • Physical signs – The employee exhibits physical signs of working such as dirt or grease on their hands or fingernails, work clothes that exhibit traces of work, or scrapes or bruises.
  • Newer employee – From a statistics vantage, new employees are more likely to commit workers’ compensation fraud than senior employees. The most proactive means to counter this is to carefully screen all new employees in the hiring process beforehand.

Although red flags can help minimize potential workers’ compensation losses from fraud, your best strategies to counter this problem should include:

1.   Implement a Zero Tolerance policy for workers’ compensation fraud and be sure your employees know about it.

2.   Take a hands on approach with all workers’ compensation claims and become especially vigilant when red flags appear.

3.   Keep in regular communication with your injured employee.

4.   Have a consistent new employee screening process. Offer new employees a thorough orientation and communicate a comprehensive explanation of the workers’ compensation process along with the employee’s rights and responsibilities.

Fraudulent workers’ compensation claims are a severe drag on the costs of any business. By being aware of how to spot potential problems and being proactive at the outset can help you reduce workers’ compensation fraud in the workplace.

Don’t Rely on Insurance to Cover Bad Work

Construction accidents often result in damaged property. Fires from faulty wiring scorch walls, paint sprays onto cars, and collisions dent earth-moving equipment. When something goes wrong, the contractor will look to his commercial general liability (CGL) policy to pay the costs of repair or replacement. However, while this policy covers many types of property damage claims, it will not cover every situation.

Before the CGL policy will provide any coverage for claims like these, three things must be true. First, the contractor must be “legally obligated” to pay damages. Liability insurance covers the contractor’s tort liability; that is, liability for negligent acts. Is the injured party claiming that the contractor was negligent in performing the work? If the answer is yes, then the CGL policy may provide coverage. If the claim is for failing to complete the work, however, there is no coverage.

Second, the damage must arise out of an occurrence, as the policy defines that term. The standard CGL form defines occurrence as, “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Therefore, for coverage to apply, the damage must be accidental. If the insurance company determines that there was no accident, it will not provide coverage. For example, the company would not cover a component that simply fails to work after installation.

Third, the accident must result in property damage. The policy defines property damage as “physical injury to tangible property, including its loss of use, and the loss of use of tangible property that is not physically injured. Damage to a third party’s building, for example, is property damage. Loss of that party’s computer data is not, however, because the data is not tangible property.

If property damage arose out of an occurrence and the contractor is legally liable, the policy may still not cover the claim if it falls within the category of faulty workmanship. The policy does not cover a contractor’s liability for property damage to “that particular part” of real property on which the contractor or one of his subcontractors is working if the damage resulted from that work. For example, assume a contractor is repairing the wiring to a chandelier in a banquet hall. During the installation, the chandelier falls and damages the hall’s hardwood floor. The policy will not cover the damage to the chandelier because it was “that particular part” of real property on which the contractor was working. However, it will cover the damage to the floor.

The definition of “that particular part” can be unclear. The insurance company may argue that there is no coverage for a roofing contractor who accidentally starts a fire and burns most of the roof. Is the entire roof “that particular part,” or is it just the one section of the roof where operations were taking place? The policy’s language does not resolve the question.

Another policy provision is much clearer. It states that there is no coverage for damage to “that particular part” of any property that must be restored, repaired, or replaced because the contractor performed his work on it incorrectly. This provision applies to both real and personal property. Therefore, the policy will not cover replacement of the chandelier if it does not work after the contractor repairs it.

A contractor should always address questions about insurance coverage with his insurance agent. An inland marine insurance policy can cover some types of property damage losses not covered by liability insurance. Other types of losses will have to be paid out of the contractor’s pocket. Be sure you know what you can expect from your insurance coverage in all situations on the job site.

Minimize Retaliation Claims by Your Employees

Far too many employers these days are facing retaliation complaints from their employees under a variety of federal and state laws. Whether it be the Title VII of the Civil Rights Act, the Family and Medical Leave Act, provisions under some workers’ compensation state legislation, or the Americans with Disabilities Act, lawsuits against employers are definitely on the rise. Clearly, preventative action is called for here.

Let’s examine a number of positive strategies that your company or organization can take to reduce these time consuming and expensive lawsuits.

Sensible Steps to Dissuade Retaliation Complaints

Taking certain basic steps can eliminate many of the causes for retaliation complaints. Consider the following:

  • Develop a comprehensive anti-discriminatory and anti-retaliation policy. This may best be accomplished with the assistance and advice of an employment lawyer. The most proactive approach is to take a zero tolerance stance against any legally defined discrimination. Included in this policy should be a very clearly designed anti-retaliation section. To make this policy work, you also have to create a very specific procedure in how management will deal with both discrimination and complaints of retaliation.
  • Train your supervisors and managers. Supervisors and managers need to be fully trained in how to respond to retaliation complaints and know the process they need to follow. From the attitude they present to a complainant, and in how the complaint is investigated and managed, good training is key. Keeping both neutral and responsive to the complainant is the best way to contain a potentially explosive problem at the outset so it doesn’t blossom into a litigious mess later on.
  • Communicate your anti-retaliation policies to all your employees. The employee grapevine is a powerful and often under-utilized tool. A savvy employer knows how to keep their employees happy simply by keeping them included in the loop. If your workers believe you are a proactive versus a reactive employer, you stand a better chance in successfully resolving the employee’s retaliation complaint before it spirals outward into the legal system.
  • Act immediately. When a retaliation compliant is made to management, the initial person receiving the complaint should automatically advise the complainant of the company’s policy and what steps will be implemented.
  • Document the retaliation complaint and any action taken. Trained and designated management or human resource personnel should be utilized to obtain well documented facts and statements. These should be obtained from the complainant, the individual or department which is the recipient of the complaint, and any parties witness to the complaint. Pertinent information from work logs or diaries, and personnel files should be included. Describe what steps were initiated to address the complaint, what was discussed and any actions taken.
  • Be courteous and respectful to all parties. A defensive, indifferent or hostile approach will clearly undermine the best of any anti-retaliation procedure. All parties need to be treated with respect and courtesy at all times. Alienating or antagonizing either the complainant or the accused will surely be counterproductive in resolving a complaint internally.

Retaliation complaints against employers have doubled in recent years. The law is clear. Knowing how to approach and act towards retaliation complaints can go a long way in keeping you from going to court. Even if it comes down to a legal battle, your documentation and actions can greatly reduce or positively affect what decision might be rendered.

Five Workplace Trends That Can Lead to Employee Lawsuits

Employers in today’s marketplace face many formidable competitive and legal pressures. In addition to holding onto market share, they must comply with environmental, safety, and trade practice regulations. Increasingly, they must also worry about legal challenges from their own employees. The job security that employers offered for decades has given way to a dynamic and sometimes unsettling work environment. Rising job insecurity has brought with it more frequent lawsuits from employees sensitive to perceived discrimination. Several trends in the workplace indicate that this will continue.

The baby boomer generation is reaching retirement age in rapidly increasing numbers; the youngest boomers are now in their mid-forties. The sheer size of this aging portion of the workforce, coupled with increased corporate downsizing, is producing accelerating numbers of age discrimination claims. The Equal Employment Opportunity Commission reported that the number of age discrimination complaints increased 15 percent in 2007. Employers that focus on hiring and promoting young people to keep themselves innovative may become targets for discrimination lawsuits from older workers.

The U.S. economy lost 1.2 million jobs in the first ten months of 2008, and economists expect the job market to remain weak for the foreseeable future. The end of a recession does not necessarily mean a return to a strong job market; job losses continued for almost two years after the 2001 recession ended. Mass layoffs invariably produce lawsuits from workers who feel they were treated unfairly. A sustained period of falling employment should increase the number of such actions.

Computer technology and Internet applications have had major positive effects on firms’ productivity. They have also created new ways for employees to suffer harassment (sexual and otherwise), privacy invasions, discrimination, and hostile work environments. Uncontrolled Internet access can allow workers to download offensive material that’s then used to harass colleagues. Vulnerable computer networks can permit unauthorized access to private employee information. Modern software and equipment can allow employers to monitor virtually every move employees make. As a result, more workers will take legal action against their employers when they feel their privacy has been invaded or when they believe that technology was used to discriminate against them.

In recent years, gay and lesbian workers have sought increased protections against workplace discrimination. Newly enacted state and federal laws and local ordinances have made it easier for these workers to pursue claims against employers. At least 17 states have statutes or court precedents that prohibit discrimination in private workplaces on the basis of sexual orientation. Continuing success in the legislatures and the courts will encourage more discrimination suits.

In 2007, the EEOC issued guidance on how federal laws apply to workers with caregiving responsibilities. Working parents may be subject to a variety of unfair treatments, including assumptions about pregnant employees; discrimination against working fathers and mothers; and sex-based stereotyping about working mothers. The agency and courts expect employers to make reasonable accommodations for working parents. Perceived failures to do so or perceived discrimination in hiring and promotions may cause affected employees to take legal action.

To reduce the likelihood of employee lawsuits, employers must implement policies and enforced procedures to prevent unfair discrimination. Another essential component is employment practices liability insurance from a financially sound insurance company. Employers face enormous challenges to survival and prosperity in the modern economy. With careful attention to their employment practices and the right insurance, they can make those challenges a little more manageable.

Responding to Reports of Sexual Harassment

Sexual harassment is a serious issue for all organizations. It demeans and humiliates the targets, lowers workplace morale and reduces productivity as employees spend energy worrying about the latest offense rather than furthering the business. It can also inspire employee lawsuits, bad publicity for the organization, and criminal charges. Even the best of organizations may face incidents of sexual harassment at some point. If it happens, how the organization responds is of the utmost importance.

The organization must take every report of harassment seriously. Brushing off a worker complaint as frivolous could be the basis for future legal action. The person receiving the complaint must judge it by two standards. First, would a reasonable person be offended by the alleged conduct? Second, did the person making the complaint actually take offense at the alleged conduct? If the answer to both questions is yes, the organization should conduct a more in-depth investigation.

Harassment complaints fall into three general categories. In full-fledged complaints, the complainer firmly believes she has been harassed, wants it stopped, and is willing to provide details as to what happened. “For your information” complaints involve employees who don’t necessarily want the employer to do anything, and are unwilling to provide details. Anonymous complaints may provide great detail or none, may be legitimate or complete fiction, and may or may not be from employees. Regardless of the type of complaint, the organization should take it seriously and investigate thoroughly.

Once it has determined that harassment occurred, the nature of the organization’s response depends on the seriousness of the offense. Less serious offenses include jokes, teasing, off-color comments, cartoons and photos, and profanity. The offender may not have intended harm toward anyone. Unless he has habitually done these things despite warnings, a reprimand may be in order. More serious are uninvited and unwelcome physical contacts (hugs, kisses, pats on the butt, etc.), acts directed at a particular person or group of people (repeated comments about a woman’s clothing), and intentionally harmful actions or words (insults about a person’s sexual preference.) Some may require disciplinary action at the first offense (touching a woman’s breast), while others may deserve a reprimand unless repeated (insults).

The most serious offenses involve deliberate physical, mean-spirited and possibly criminal acts. Grabbing, forcible kissing, lewd exposure and attempted rape are all examples of this kind of conduct. These may warrant immediate disciplinary action and may require involvement from law enforcement officials.

The organization should assign the investigator based on the seriousness of the alleged offense. A supervisor may be sufficient for less serious offenses like e-mailed jokes or suggestive calendars. Acts like sexual insults, unwelcome advances and demands for sexual favors call for the involvement of upper management. The most serious offenses may require hiring an outside investigator or attorney; alleged criminal conduct will necessitate getting the police involved. In addition, the worker making the complaint may prefer speaking to someone of the same sex, of a certain age, or who shares the worker’s background. Organizations may want to have a group of people prepared to investigate claims so they can deal with such requests. However, all investigators must remain objective and free from bias toward either party.

A response appropriate to the situation is vital to an organization’s reputation, future employee relations, and vulnerability to lawsuits. The organization’s advance preparation will make this easier and may make it more attractive to insurance companies that provide employment practices liability insurance. Ultimately, the seriousness with which an organization treats the possibility of sexual harassment may discourage it from happening in the first place.

Does Contractual Liability Coverage = Additional Insured Coverage?

Construction contracts usually include many provisions aimed toward transferring legal liability from one party to another. In an agreement between a general contractor and a subcontractor, the sub assumes the general’s liability. The contract does this by inserting an indemnity agreement (also known as a hold harmless agreement) into the contract’s terms. The contract may also require the sub to have the general named as an additional insured on its general liability insurance policy. Though not all contracts do this, it is a mistake for either contractor to assume that the insurance company will provide the same protection to the general without an additional insured endorsement to the policy.

The standard Insurance Services Office Commercial General Liability Coverage Form specifically excludes coverage for liability the insured assumes in a contract. However, it adds coverage back if the contract is an “insured contract,” as the policy defines the term. The policy’s definition includes hold harmless agreements where the insured assumes another’s tort liability. That would appear to take care of the sub’s obligations under the contract, but it is not the whole story. The coverage may still contain a potentially large gap for the general.

It is important to keep in mind that, in any liability insurance claim scenario, the parties fall into three categories: Insurance company; insured; and claimant. A claim may involve multiple insureds, multiple claimants, and even multiple insurance companies, but all parties will fall into one of the three categories. If a party is not an insurance company and is not an insured by virtue of an additional insured endorsement, then it must be a claimant. Therefore, a general contractor in this situation becomes a claimant along with all other claimants seeking damages.

While the general may receive the same recovery for damages that it might have received as an additional insured, it might not fare as well regarding the cost of its legal defense. The CGL policy pays for defense costs incurred by anyone who is an insured under the policy, and coverage for those costs is in addition to the policy limits. If the policy has a limit of $1,000,000 per occurrence and an insured is found liable for $1,000,000 and runs up $500,000 in defense costs, the policy pays for both in full. As a claimant, however, the general can recover defense costs only if the hold harmless agreement with the sub required the sub to indemnify it for defense costs.

Also, it is likely that coverage for those costs will not be in addition to the policy limits. The ISO CGL policy provides defense in addition to the limits for the general only if all of the following conditions are met:

  • The sub assumed the general’s liability in an insured contract;
  • The policy covers the loss;
  • The sub assumed the general’s defense costs in the contract;
  • There is no conflict of interest between the general and the sub;
  • Both parties ask the company to control and conduct the defense and both agree to the same counsel for defense; and
  • The general agrees in writing to cooperate with the insurance company in the settlement of the claim.

If any one of these conditions is not met, the company will pay the general’s defense costs only until the claim exhausts the insurance limits.

Coverage for defense costs is one of the most important benefits of being named as an additional insured on another entity’s liability insurance. An entity that needs this coverage should require the other contractor to provide the additional insured endorsement. Relying on the contractor’s contractual liability coverage is a major financial gamble.

Minimizing Pollution Liability for Truckers

Motor carriers (or “truckers”) are vulnerable to severe and costly auto accidents due to the size of the loads they often carry. These accidents may result in injury or death to occupants of other vehicles or pedestrians, or they may cause significant property damage. Even more ominous is the possibility of environmental damage caused by the release of dangerous substances that are part of the trucker’s cargo. Federal law regulates how these firms must meet their financial obligations for these accidents.

Congress enacted the Motor Carrier Act of 1980 to deregulate the trucking industry. In addition, the law established minimum limits of liability insurance coverage that certain motor carriers must carry. The coverage must apply to claims for bodily injury, property damage and environmental restoration arising from accidents that occur while the carrier’s vehicles are transporting property. The limits required vary by the type of property the carrier transports and whether or not the carrier operates for hire. For-hire carriers of non-hazardous substances must carry limits no less than $750,000; for-hire and private carriers of certain hazardous substances must carry at least $1,000,000, while other carriers must carry at least $5,000,000.

Unfortunately, standard policies for truckers are inadequate to meet these obligations. A trucker’s insurance policy typically does not cover liability arising out of the escape of pollutants that the insured is transporting. The policy will cover the insured’s liability for damage caused by fuel or fluid leaks from a vehicle’s systems and pollution damage arising from some vehicle maintenance, but this limited coverage does not meet a trucker’s obligations under the MCA.

The MCA, in addition to the minimum limit requirements, mandates that truckers have a special endorsement (form MCS-90, Endorsement for Motor Carrier Policies of Insurance for Public Liability) attached to their policies. This endorsement obligates the insurance company to pay for the trucker’s public liability regardless of whether or not the policy describes each motor vehicle and whether or not a regulator permits the trucker to serve that particular route or territory. The form defines “public liability” as including bodily injury, property damage and environmental restoration. “Environmental restoration” means restitution for the loss, damage, or destruction of natural resources arising out of the accidental release of any commodity transported by a motor carrier on the land, atmosphere, watercourse, or body of water. It includes removal costs and the cost of necessary measures to minimize damage to human health, the natural environment, and animals.

The MCS-90 endorsement does not expand the trucker’s policy’s pollution coverage; in fact, it requires the trucker to reimburse the insurance company for payments it makes that the policy would not require if not for the endorsement. To avoid having to make a large reimbursement to the company, the trucker should ask the company to add another special endorsement to the policy. The endorsement, titled Pollution Liability – Broadened Coverage for Covered Autos, reinstates coverage for the insured’s liability for the release of pollutants that the insured is transporting. Coverage does not apply to liability that the trucker assumed under a contract. However, the additional coverage brings the trucker into compliance with the MCA’s requirements and eliminates the possibility that the trucker will have to reimburse the company for losses.

Due to the potential for very large losses from pollutants, the number of insurance companies willing to offer this endorsement is relatively small. Motor carriers subject to the MCA’s requirements should work with insurance agents who have expertise in this area. They will be familiar with the coverage needs of trucking firms and may represent insurance companies that insure truckers.

Avoid Lawsuits When Laying Off Workers

With the U.S. economy in recession, companies are trying to make up for declining sales by reducing expenses. Workforce reductions, though they may improve short-run profits, may also cause long-term problems if the firm does not handle them with care. Angry former employees may look for justification for legal action. The employees who remain will take on extra work with no additional compensation, while they deal emotionally with the loss of colleagues and fear that the job cutting will eventually hit them. Consequently, companies must approach layoffs with caution.

The company must first determine whether a layoff is the best option. While it may quickly reduce costs, it may also cause the company to dismiss valuable workers. This will hurt long-term productivity, lower the morale of the survivors, and wipe out valuable institutional knowledge. There is also a risk that a layoff will unfairly affect older or minority workers, which could lead to discrimination complaints. Therefore, the company should look at alternatives such as hiring and wage freezes, adjustments to employee benefits, not replacing workers who leave or retire, and job sharing.

If the company decides that it must reduce its workforce, several careful steps are required;


  • Establish a specific goal for the layoff to achieve, such as a dollar amount of savings or number of positions.
  • Identify those job functions and skills that it will need to operate successfully after the layoff.
  • Set a timetable so that the reduction has a clear end.
  • Comply with federal and state labor laws.
  • Determine which jobs are unnecessary and eliminate them.

When determining which employees to dismiss, the company may legally use criteria such as length of service with the company, the necessity of a certain job classification, employee status (i.e., part-time or temporary), or employees’ performance records. Management should review candidates for dismissal to ensure that the cutback does not disproportionately impact classes of employees protected by law. If managers can find no other compelling business reason for terminating those employees, they must seek out alternatives.

Once managers have made selections and the decision to proceed, they must inform the affected workers in a professional manner. They should be able to clearly explain the reasons for the action; workers’ entitlement to benefits such as severance, health coverage, and others; and post-employment services available to the workers, such as outplacement. The workers may express emotions ranging from stunned silence to rage; the managers must be prepared to deal with their reactions in a businesslike manner. Remaining employees will have concerns about their own futures and the firm’s outlook. Management should, to the extent possible, explain the reasons for the layoff, the likelihood of additional job cuts, and the business goals the firm seeks to achieve through the layoffs.

The company must take particular care when the layoff involves older employees. Severance packages usually require the employee to waive his right to press a claim under federal law. However, regulations impose procedural requirements that an employer must meet before a court will consider the waivers valid. Companies must take special care to meet those requirements.

Shrinking a company is an unpleasant prospect that no manager relishes. Employee lawsuits may well result from a workforce reduction. However, if the firm handles the action with care and sensitivity, it can make such claims less likely and will be in a better position to defend itself against claims that do arise.