Reducing your workforce: what you don't know can hurt you

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Authors: Dennis M. Kuhn and David E. Stout
Date: May 2004
From: Strategic Finance
Publisher: Institute of Management Accountants
Document Type: Article
Length: 2,197 words

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While cost cutting may be at the heart of "reduction-in-force" decisions, legal issues come into play as well. One way to make sure former employees don't become plaintiffs is for managers to fully understand federal statutes that create implications for these decisions (see Table 1) because what decision makers in this area don't know can hurt them. As management accountants, you can play an important role in reducing the risk of expensive lawsuits.

"Litigation can easily rise to six figures," employment attorney Tacita Mikel Scott, a partner with Morris, Manning & Martin law firm in Atlanta, says. "Damages vary depending upon the facts, the size of the company, and other factors," she adds.

For example, Apex Corporation (a fictional company) is considering reducing its workforce by 10% by terminating workers with low performance ratings and frequent absences, plus those with the highest pay. Its managers should first consider federal laws that prohibit discrimination against employees in certain protected classes as defined by:

* Title VII of the Civil Rights Act of 1964, which prohibits an employer from discriminating against an employee because of race, color, religion, national origin, or gender.

* The Age Discrimination in Employment Act (ADEA), which, for those employees who are 40 and over, prohibits discrimination because of age.

* The Americans with Disabilities Act (ADA), which prohibits discrimination against disabled individuals who, with or without reasonable accommodations, are qualified for their positions.

A terminated employee who feels his or her rights have been violated per the above statutes will typically bring a legal action using the theory of disparate treatment or disparate impact.


In disparate treatment cases, the employee is essentially charging the employer with discriminating because of race, disability, age, and the like. The individual can establish legal claim with direct evidence, such as a memo from the president telling Human Resources to terminate all workers born outside the U.S.

Direct evidence is rarely available, so the plaintiff usually must produce evidence from which it can be inferred that people were treated less favorably because they belong to a protected class. For example, if 30% of Apex's current workforce is African-American, but 60% of the laid-off workers are in this group, it would give rise to an inference that these workers were selected based on race.

Apex could show a legitimate business reason for the decision, such as that it was based on merit or a legitimate seniority system. It could also show that employees who kept their jobs had the highest performance ratings and that those ratings were based on objective criteria.

The plaintiff could still prevail by showing a discriminatory motive, such as prior discrimination against workers in a protected group, e.g., national origin.

What if Apex decided to terminate workers with the highest compensation? The affected workers are likely the oldest employees. Could these individuals challenge the decision?

Evidence in one case indicated a 62-year-old worker was terminated to prevent having his pension rights vested. In 1993, the U.S. Supreme Court found that...

Source Citation

Source Citation
Kuhn, Dennis M., and David E. Stout. "Reducing your workforce: what you don't know can hurt you." Strategic Finance, May 2004, pp. 41+. Accessed 6 Dec. 2022.

Gale Document Number: GALE|A118951744