Because of the current global economic crisis, U.S. employers are downsizing in the U.S. and internationally. While reductions-in-force in the U.S. are not simple, layoffs outside the U.S. are even more complex and raise completely different legal issues. As a result, a U.S. employer implementing a layoff overseas can easily run afoul of local employment laws and incur significant legal liability unless the company proceeds with extreme caution.
Why Layoffs Are More Complicated Outside the U.S.
Reductions-in-force pose fewer legal problems in the United States because the U.S. is an employment-at-will jurisdiction; few laws beyond W.A.R.N (29 U.S.C. Section 2101), state equivalents and certain aspects of anti-discrimination laws regulate layoffs. Consequently, U.S. employers are free to make sweeping workforce reductions for any reason—as long as they do not discriminate or retaliate against employees—or for no reason at all.
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In contrast, jurisdictions outside the U.S. regulate reductions in force far more comprehensively. Overseas, layoffs (called redundancies or collective redundancies in Europe; retrenchments in India; and termination, change and redundancies in Australia) pose challenges because these jurisdictions subscribe to the notion of “indefinite” employment. Indefinite employment systems regulate, restrict or prohibit employee terminations and grant recourse to employees who do lose their jobs.
Five Tiers of Layoff Regulation
Countries outside the U.S. impose up to five tiers of laws affecting workforce reductions, and U.S. employers conducting layoffs in countries outside the U.S. must comply with these laws.
The first tier deals with employment contracts, which are often legally mandated for employees in Europe. Any termination must comply with termination-specific clauses in individual employment contracts, collective agreements, and company-issued benefit plans and severance policies. For example, pre-termination notice (or pay in lieu) clauses are standard in many employment contracts outside the U.S.
The second tier deals with individual severance pay requirements. Countries impose up to four types of individual severance pay requirements:
- pre-termination notice obligation/pay in lieu (that is, a duty to give sometimes lengthy notice before firing, or to pay in lieu.)
- mandated severance payout/end-of-service “indemnity” (that is, mandated severance pay.)
- wrongful termination cause of action or a so-called “severance indemnity” court award (that is, employees can sue for wrongful dismissal.)
- mandated “redundancy pay” (extra severance pay for someone who got laid off due to lack-of-work, including enhanced notice pay, extra employer-funded “indemnities,” job training and outplacement.)
The third tier requires employers to notify or negotiate with governments. In the Netherlands, employers must get approval from the government to do a layoff. If they don’t get approval, they can’t cut staff. Governments in Colombia, Venezuela, Japan, Korea and China can also block layoffs.
The fourth tier deals with collective bargaining obligations and requirements for employers to discuss layoffs with employees who may be affected by them. In Europe, for example, an employer merely considering a layoff has to talk to workers about it before making any decision. The European Union Collective Redundancy Directive (75/129/EEC; 92/56/EEC; 98/59/EC) requires employers to “consult” in good faith with employees—even if the employees aren’t unionized—to try to avoid, reduce and mitigate a layoff under consideration.
During these “consultations” with employees, the employer must demonstrate “economic, technical and organizational” reasons for the reduction in force. Worker groups and government officers may challenge the employer’s business case for job cuts. These consultations must address the decision to do a reduction in force—not merely the effects of a layoff—and employee representatives have the authority to review the decision to downsize. In other words, a CEO in the United States can’t dictate a layoff in Europe.
These consultations take time—75 days or more in Italy—and can be document-intensive. Enforcement can be serious: Belgium once launched criminal proceedings against executives of an automaker who shut down a plant without talking to employees first. Other jurisdictions beyond Europe have similar rules, especially where trade unions are involved.
The fifth tier addresses layoff-specific severance pay laws that regulate collective layoffs (that is, layoffs of more than a locally-established minimum number of employees.) Layoff-specific laws impose extra pay obligations for collective layoffs in addition to the severance pay that employers are required to pay for individual dismissals. These obligations may require employers to give employees advance notice of the layoff or to sponsor a “social plan” that mitigates the effect of the layoff. These obligations may also require employers to follow mandated procedures for determining who gets laid off.
How to Handle an Overseas Reduction-in-Force
A U.S.-based employer managing a layoff outside the U.S. must account for these five tiers of overseas severance laws. U.S.-based employers should also jettison most of the strategies they use to do layoffs in the U.S. because downsizing abroad differs so radically from downsizing in the States.
For example, statistical adverse-impact-selection models and other procedures that employers use in the U.S. to avoid discrimination when they determine who will get laid off are almost worthless in countries where workforce reduction selection laws require employers to factor age, marital status, number of children, or date of hire into their decisions. In short, laws overseas demand tailored compliance tools.
Therefore, any multinational employer considering global workforce reductions should come up with an overarching layoff project plan that consists of a U.S. component plus separate, local “field guides” that address the local rules for doing layoffs in each country. The field guides should include:
- A checklist of applicable local laws affecting layoffs.
- An inventory of applicable local individual and collective employment agreements and company HR policies that touch on severance.
- Local timetables and processes that outline who must be consulted, when and how early, and whose approval is required.
- A local consultation strategy that explains how to confer with employees, representatives and government agencies.
- Local selection criteria that highlight how to determine who will be laid off according to local laws and employment agreements.
- Severance pay and outplacement packages to be offered locally.
- A global and local communications strategy (e.g. never announce a RIF as already decided in countries that impose a duty to consult on the threshold RIF decision until consultation is finished.)
Consider the Bottom Line and Alternatives
Large, multi-country workforce reductions are always hugely expensive. They always seem to involve more costs, delays and problems than U.S.-based management anticipates. In fact, set-asides for restructuring costs can reach millions of dollars.
To avoid an expensive, chaotic and reactive multi-country layoff fraught with compliance problems, manage the global downsizing process in a proactive, well-informed way. And consider alternatives: With all the procedures and costs involved with conducting layoffs internationally, some multinationals reconsider the need to do a reduction in force outside the U.S. altogether. Instead, they occasionally opt for milder solutions, such as hiring freezes and incentivized voluntary reductions where employees are offered money to quit.
Donald C. Dowling, Jr. is International Employment Counsel at White & Case LLP in New York City. His law practice is dedicated exclusively to outbound cross-border employment law counsel for U.S.-based multinational employer clients.