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The Global Hospitality Advisor

Avoiding Liability for Lay-Offs

The Hospitality Labor Corner
December 2001
As the downturn worsens, the hospitality industry slashes costs to remain viable. Layoffs often beget litigation as former employees sue their former employers in a scramble to maximize cash and get retribution. In this fray, hospitality employers need to understand the complex web of state and federal laws that govern their liability or face big losses that offset sought-after savings sought from workforce reductions.

The WARN Act:

Key WARN Act issues were listed in our last Global Hospitality Advisor, but are so important in the context of layoffs, that we felt compelled to reference them again, and to tell our friends that JMBM has a complimentary summary of the WARN Act available upon request.

Remember, WARN recognizes a number of exceptions to the notice obligation which may help employers, under certain circumstances. For example, the “faltering company” exception may reduce the notice period if the employer can show that at the time the 60-day notice otherwise would have been triggered, the employer was trying in good faith to stay in business by seeking new customers or additional financing.

Another exception to the notice obligation under WARN is the “unforeseeable business circumstances.” Under that exception, the notice may be reduced if the events giving rise to the terminations or lay-offs were not “reasonably foreseeable” for 60 days. However, employers must understand that all WARN exceptions are strictly construed and require the employer to sustain the evidentiary burden.  To best utilize the exceptions contained in the federal law, employers are advised to consider what employment reductions they foresee in the next six months and consult with labor counsel to best plan and implement these reductions.

Discrimination, Harassment and Retaliation Claims

Employers making lay-offs should expect discrimination, harassment and retaliation claims. Some employees may claim that they are being singled out because of past issues involving harassment or discrimination or because they are being “targeted” for the lay-off or termination based on age, race, national origin, religion, disability, gender or anynumber of other “protected categories” under the law.

Unfortunately, it is not a complete defense for the employer to argue that “business necessity” required the adverse action. For example, in a claim involving retaliation, the employer will have to demonstrate that it properly dealt with the discrimination or harassment claim originally and that such claim had no causal connection with the decision to lay-off or terminate the individual later. Similarly, in a discrimination claim involving the allegation that certain employees in a protected category are “targeted,” the employer will have to demonstrate that there are solid business reasons for choosing one employee or group of employees over others.

To minimize claims of this nature, employers should have enforceable arbitration programs in place that comply with recent Supreme Court guidelines for enforceability. Also, employers should analyze all lay-off or reorganization decisions with counsel to ensure that no workers in protected categories — such as individuals over 40 — are disproportionately affected by the adverse employment action. Personnel files should be reviewed to flag possible issues involving past claims of harassment or discrimination that could lead to retaliation claims. Employment policies and procedures should be reviewed and updated to ensure that the adverse employment action is in compliance with existing policies and procedures. In addition, all actions which result in lay-offs or job reductions should be appropriately documented and reviewed by counsel. 

Labor-Management Relations 

Hospitality industry employers with unionized work forces have additional contractual and legal obligations which affect the employer’s right to eliminate jobs. Most labor agreements contain lay-off clauses which typically obligate the employer to paying severance, benefits and, in some instances, early retirement incentives. Lay-off clauses may also restrict both the elimination of certain jobs and the number of employees that may be laid off. In some instances, they may mandate that the employer follow a specified order in the lay-offs. In addition to contractual obligations, the National Labor Relations Act imposes a duty on employers to engage in “effects bargaining” with a union whenever there are unionized workforce reductions. During effects bargaining, unions often make additional demands regarding the payout of severance and benefits and the application of seniority with respect to lay-offs. 

Typically, unions will demand that seniority — not qualifications or competency — be the determining factor in lay-offs. This may not be in the best interest of an employer who wants to maintain the highest level of customer service while streamlining its operations. Where the employer has cash flow problems, it may be difficult to pay hefty severance packages. Some labor agreements contain “force majeure” or other emergency clauses which employers may invoke, under the right circumstances, to circumvent onerous contractual obligations. Indeed, several air carriers denied furloughed airline workers severance pay and other lay-off benefits when the airlines invoked force majeure clauses immediately after September 11.

Hospitality employers faced with the prospect of reducing a unionized workforce should consider the cost and operational implications triggered by adherence to union demands or contractual obligations. Alternatives, such as loopholes in the collective bargaining agreement or the possible renegotiation, mid-term, of certain contract provisions should be considered. 

Payment of Wages

Employers are subject to state and federal laws regulating the payment of final wages and other benefits upon an employee’s termination, even where there are no WARN Act or union obligations. The general rule is that employees who are discharged or laid off must be paid on the last day of work for all wages earned, including accrued vacation, through the end of their employment. In addition to accrued vacation, employers must pay terminated employees in cash for any accrued time off if set forth in a policy, whether the time-off was accrued under a paid time-off policy or by agreement to receive compensatory time-off in lieu of overtime hours worked.

“Wages” that must be paid upon termination may also include commission and bonus arrangements that were entered into with employees during more economically healthy times. While an employer’s failure to pay wages promptly to a terminated employee may result in waiting time penalties, in addition to the monies owed, there are certain circumstances in which employers may be able to forestall or avoid paying other types of compensation, such as commissions or bonuses. For example, depending on how the commission or bonus arrangement was structured with the employee, the employer may have a contractual defense that no commission was owed at all at the time of the employee’s termination.

Employers should review existing commission and bonus arrangements to determine their applicability to certain business risks and uncertainty. Once decisions are made with respect to employment terminations, it may be too late to rearrange commission or bonus structures. Before these decisions are made is the time for employers to review commission, bonus plans, vacation and other benefit policies, to redefine them in a manner more employer-sensitive to adverse economic conditions.


One often overlooked area of law applicable to employee lay-offs is the employer’s obligation to provide the opportunity for continuing health coverage to terminated employees. When an employer provides medical coverage to its employees, and it does so pursuant to the terms of a benefit plan sponsored and administered by the employer, the plan will be subject to regulation under ERISA. Such requirements usually include continuation coverage rights to employees and their dependents under COBRA. On the other hand, if the employer is going out of business or has been acquired by a successor, the COBRA obligation may be eliminated or passed on to a successor employer.

Employees on a Leave of Absence

Employers often wonder if lay-off decisions can affect employees who are on a leave of absence. For example, can employers institute job eliminations or reductions that will result in the termination of employees who are out on pregnancy leave, disability leave, workers’ compensation leave or family and medical leave? The answer will typically depend on a variety of factors, but most significantly the business reasons for the lay-off and whether the lay-off evenly affects both active employees as well as employees on a leave of absence.

To minimize the risk of retaliation claims by employees on a leave of absence whose positions are eliminated, employers must properly document the business reasons supporting the lay-off decisions and consult with labor counsel to consider the risks involved in such decisions.

Marta M. Fernandez is a senior member of JMBM’s Global Hospitality Group and Labor Department. As a management labor lawyer, Marta specializes in the representation of hospitality industry clients in all aspects of labor and employment, including implementation of preventative management strategies, such as executive training, arbitration enforcement, and policies and procedures; defense of administrative and litigation claims, such as employee claims of sexual harassment and discrimination; and labor-management relations including union prevention, collective bargaining for single as well as multi-employer bargaining units, neutrality agreements and defense of unfair labor practice charges before the NLRB. For more information, please contact Marta Fernandez at 310.201.3534 or at [email protected].

The Global Hospitality Group(r) is a registered servicemark of Jeffer, Mangels, Butler & Marmaro LLP

For more information:
Jeffer, Mangels, Butler & Marmaro LLP
web site:
Email Jim Butler at [email protected]
Or contact 
Jim Butler at the Firm
 Jeffer, Mangels, Butler & Marmaro LLP
  2121 Avenue of the Stars
 Los Angeles, CA 90067
     Phone: 310-201-3526 
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in a full-service law firm
Also See: The Worker Adustment and Retraining Notification Act: Impact on the Hotel Industry / JMBM 
When is an Apartment a Hotel ... and Who Cares? / The Global Hospitality Advisor / JMBM / September 2001 
The 'Perfect Storm' / The Global Hospitality Advisor / JMBM / September 2001 
Richard Kessler's Grand Theme Hotels - Interview with GHG Chairman  Jim Butler / March 2001
Stephen Rushmore's  Industry Trends / Top Markets, Predictions & Opportunities  / Jan 2001
Outlook 2001: A Roundtable Discussion The Global Hospitality Advisor / Jan 2001
Perspectives on Hotel Financing in 2001; Jim Butler, JMBM's Global Hospitality Group Chairman, Interviews Two Active Players in Hotel Finance / Jan 2001 
Robert J. Morse: Millennium’s New President / Interview with GHG Chairman Jim Butler / Nov 2000 
Special Reports / Jeffer, Mangels, Butler & Marmaro LLP

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