As discussed in the previous two installments of this series dealing with Voluntary Departure Programs and Global Reductions in effect, workforce reorganizations can take a variety of forms and, even in a particular scenario, there can be many shades.
One constant, however, is usually advance planning. The importance of this cannot be overstated, especially in a transactional context. But what happens when this is not possible?
In this final installment of the series, we use a fictional scenario to illustrate the types of issues that can arise in a transactional context where external factors such as the onset of a global recession cause parties to rethink their integration plans.
Covington’s Global Workforce Solutions team is well placed not only to help companies design and implement Force Reduction (“RIF”) in such circumstances, but also to manage complex employment issues, benefits and taxation that arise as a result of a change in management midway through an RIF.
The buyer and the seller signed a share purchase agreement in January 2022 whereby the first would acquire all of the share capital of the second.
The fence was fixed in the middle of October 2022subject to certain commercial and financial conditions being met by the end of September 2022.
As part of the integration of the Seller’s activity into that of the Buyer, the parties have provided that 5-10% of the vendor’s labor would no longer be required. An enhanced severance package has been agreed to for this group of employees under the GIR and their employment would be terminated at Closing. This was communicated to them after signing.
At the end of July 2022the impact on both companies of the impending fears of a global recession was such that the parties were now considering a 40% downsizing, in both groups and involving additional jurisdictions.
It’s not uncommon for integration plans to change between signing and closing, but it’s not uncommon for those plans to change so much in this scenario. We take a look at some of the common issues that can arise in such circumstances.
1. Employee consultation, consents and scheduling issues
As explained in the previous episode of this series, in many countries proposing to lay off several employees can trigger collective obligations and there is often a threshold number for such triggers.
In some countries, the need to further reduce the workforce could trigger the relevant thresholds. At the same time, the company may still need to retain some of the affected employees for a post-closure period, but require flexible retention periods. The rigidity of individual and collective statutory employment rights and the statutory regulation of pensions and other social benefits in some countries – coupled with the lack of time to prepare for this eventuality – can create a number of challenges.
Parties will likely need to consider ways to structure the new GIR in such a way as to avoid triggering collective requirements in certain jurisdictions. Such collective obligations would likely have an impact on both the timing and the achievement of certain business synergies within predefined timeframes. Additionally, if retention agreements had already been put in place with certain key employees and now needed to be reviewed, this could be a sensitive issue from a legal and employee relations perspective.
2. Communications with employees
Usually companies will have a comprehensive and coordinated communications strategy to ensure that all stakeholders receive the right communications at the right time. Employees, shareholders, public markets and potentially governments or other stakeholders will all likely be entitled to information about an FRR at some point.
But where employee “buy-in” is key to the success of an RIF, a change in messaging (e.g., from “most will continue as usual” to “the transaction will result in a number of job losses”) creates additional challenges and may even lead employees to question the reasons behind the RIF. Additionally, where collective consultation requirements have been triggered, in some countries the ability to consult employees individually is lost, limiting the means by which an employer can communicate with its employees and adding yet another layer of complexity.
In the above scenario, more information about the initial post-closure onboarding plan and the revised plan would likely need to be disclosed to employees than originally planned. Covington’s Global Workforce Solutions team has frequently helped clients navigate this process, particularly the potential pitfalls of group-wide communications with employees in different jurisdictions.
3. Challenges related to the “enhanced” severance package
The enhanced severance package originally agreed for the vendor employees who were affected by the transaction could of course be extended to the wider group of affected employees, subject to funds being available to cover the increased costs. . In most cases, while increasing the number of employees subject to the RIF will create an additional cost in the short term, this will be offset by the savings for the company (in salary costs) that the RIF will create over time. .
3. Challenges related to the “enhanced” severance package (continued)
A greater challenge arises when the value of this separation package does not match an enhancement of rights under local law. In most countries outside of the United States, employees are entitled to notice and sometimes statutory severance benefits upon termination, and in some countries the latter is calculated on both compensation fixed and variable (including the value of equity-based awards).
It is likely that there are various instances where “enhanced” severance pay either (i) amounts to less than an employee’s contractual and/or statutory rights under local law, or (ii ) exceeds the value of these only by a fraction and is not sufficient to persuade employees to sign separation agreements containing a waiver and release, since protection against involuntary dismissal exists under the local law.
Consider the scenario where employees have also already been informed that their vested and unvested equity would be cashed out at a particular price, or they would receive an onboarding-related cash retention bonus, in exchange for remaining in the company. employment until closing. In many jurisdictions, employees will be able to argue that these monies are already contractual, thereby preventing these “benefits” from being used to further improve severance packages with minimal cost to the employer.