Articles
From time to time, I will post articles or links to articles of interest on employment law topics. Below, is one such recent article.
November 2008
“FEEL THE BURN”
(Healthy Ways To Tighten The Corporate Belt)
Amy Hartman, Esq.
Hartman Employment Law Practice
Thanks on a macro level to our friends in the banking industry and on a micro level to the slide deck of a certain venture fund that now sits on the desk of every CEO I know, the mantra to “reduce the burn” is once again being chanted throughout the land. As investors pressure companies to tighten waistbands and companies feel compelled to respond, what are the lessons to be learned from our last foray into the equivalent of Jenny Craig ™ for corporations or, for some, the full on corporate “cleanse?” What follows are a few thoughts from one employment lawyer with experience in “feeling the burn.”
1. Crash Diets Are Not Always Best
Companies sometimes approach me with the proverbial hat in hand, only the hat is filled with the names of all of the employees in the company’s organization. “We need to reduce our burn rate by 20% which equates to [X] employees, so we are going to pick names and eliminate the positions of [X] employees.” Problem solved? A randomized across the board reduction to achieve a particular financial objective is not healthy for your organization. You inevitably lose people you want to keep and keep people you want to lose all for some mythical perception of objective fairness. Cuts should be strategic and help the overall short -and long- term goals of the organization. It can hurt your organization and potentially increase costs if as a result of downsizing the company is actually understaffed (you may increase costs by paying overtime, having to outsource certain activities to third parties with premium pricing, or recruiting for a replacement on an emergency basis) or lacks the institutional knowledge to move forward in an effective and efficient manner. Any headcount reductions should be carefully measured and discussed and should result in the elimination of positions that are using resources and not generating results. As with any weight loss plan, it’s a combination of diet AND exercise – not one or the other. It may be that staffing reductions alone will not get you to that magic number that your investors have identified for you. If that is the case, as discussed below, you can think creatively about other forms of exercise to lose those last few pounds.
2. Measure Twice, Cut Once.
Another common mistake is that companies do not cut deep enough either because a) they are overly optimistic about that big contract that is right around the corner or b) the remaining employees on the “short list” are such lovable folks that the office just won’t be the same without them. Your investors are right; you need to make your cash reserves last as long as possible. Hope -- that your big contract is going to get signed tomorrow or that your investors are going to have a sudden change of heart -- is not a viable business strategy. Sit down and think about what projects and personnel are mission critical for the next six months. How are you going to get those projects accomplished and which employees does the company need to make that happen. Next, there should be no “saving” of Bob the Engineer or Derek the Sales Guy because a) they really liven up the Friday afternoon happy hours; b) they’ve been with you at your last three companies and you just can’t let them go; c) if the economy does turn around someday, you are going to need them; d) they just had their third child and/or your kids play soccer together; or e) insert other non-business related excuse of your choice. Keeping employees around that are not critical to the current go forward strategy of the organization for any of the above reasons is a mistake. If Bob and Derek spend their days playing Internet poker and poking their friends on Facebook, chances are they already are anxious about their continued employment because they are not performing essential functions for the company. If they come home at 3:30 to spend time with the kids when before they used to get home at midnight, their spouses also know that something is going on. Finally, their fellow employees who are actually still working very hard on critical tasks are resentful of the fact that they are still taking up space in the next cubicle. They have to either go on the list or you can look at alternatives.
3. Communication is Key – It Needs Truthful.
“We are going do a layoff/downsize/eliminate headcount to reduce our burn rate. How long do we have to wait before we can start to rehire?” Hello, McFly? It’s not a layoff or position elimination if you already have plans to replace the employee(s) in question. Clients often come to me and claim they are going to do a “layoff” when only a few positions are really being eliminated. Other positions are being restructured and employees are going to be promoted from within or, as in so many cases, employees simply are poor performers being included in the layoff to avoid an awkward conversation or the lack of any prior documentation. In the latter situation, a replacement already has been identified and waiting in the wings to start. While all of these actions are valid, they are not properly identified as being part of a “layoff” which has a specific meaning that positions are being eliminated and will not be filled in the foreseeable future. The difference between a layoff and a reorganization or restructuring may seem like a mater of semantics but communications to employees needs to reflect the reality of the situation in order to avoid possible claims of misrepresentation or discrimination down the road. Develop a communication message that is truthful in its essence. Develop FAQ’s for managers to use when communicating with departing and remaining employees so that your messaging is clear and consistent throughout the organization. Be compassionate but firm, fair and above all CONSISTENT regarding end dates, access to or retaining company property such as laptops, mobile phones, email and voicemail, references, and the like. The ins and outs of actually conducting a successful layoff or restructuring require more space than we can do justice in this brief overview. If you have questions, consider contacting legal counsel.
4. Salary Cuts, Hours Reductions and Temporary Shutdowns.
It is possible that you have evaluated the workforce and determined that you can only really afford to terminate six full time employees when the magic number was supposed to be eight. Now what? Back to the sorting hat? No. There are alternatives to across the board staffing reductions including, cutting salaries, putting employees on reduced work weeks for reduced pay and even implementing rolling shutdowns by department or of the entire organization for set periods of time. Each of these concepts does require careful evaluation and consultation with legal counsel in order to be implemented effectively and legally. For example, it is imperative that if you decide to cut salaries, you man (or woman) up and make it a salary cut and not a “deferral” A deferral equates to a legal obligation to accrue and repay that deferred compensation at some future date. Deferred compensation in the eyes of many state laws is equal to earned “wages” which must be paid out at termination even if the company has yet to reach the trigger date for repayment of the deferred salary. A cut, is just that, a cut in salary with no future promise of repayment or going back to the old salary. Often, companies will accompany a salary cut with option or restricted stock grants or even a retention bonus if the employee is still employed at the next financing or other event.
Hours reductions are also possible. Employees can be reduced to part time or converted from exempt to non-exempt status and paid on an hourly basis and told that they are not to work more than twenty hours per week. Again, there is a right way and a wrong way to approach this. It cannot be a wink and a nod where the employer and employee “agree” that the employee is only going to work and get paid for 20 hours of work when in reality the employee is still working 40 or 50 hours a week. The government doesn’t like it and at some point the employee or the employee’s cousin the lawyer won’t like it either and will claim all of the hours and overtime she claims to have worked. Part time or reduced hours means just that.
Temporary shutdowns by department or for the entire organization are another cost saving alternative. For most companies with exempt employees the shutdown must be for a full week and the employees in that department must perform no work at all during that week. These shutdowns are unpaid but employees should be encouraged to use any accrued PTO or vacation, thus further reducing the company’s accrued liability by reducing the amount of accrued vacation on the payroll. Be sure to record any and all vacation and PTO hours that are used!
5. You Can Do It, We Can Help.
If the last two weeks of my practice are any indication, you are not alone in having received the imperative from your investors to “go forth and get lean.” Plenty of companies of all shapes and sizes share your pain in the need to reduce their burn rate by any means possible. Come up with a plan that makes sense for your organization and talk to your investors. Commiserate with colleagues about approaches that have succeeded, but remember, when it comes to companies, one size does not fit all.
Finally, if you need someone to honestly answer the question “do these employees make my balance sheet look fat?” I’m here to help.