Rethinking Workforce Reductions: Considering Voluntary Separation Programs

Voluntary separation programs can provide benefits to employees and employers alike, including, for the former, empowering workers to make informed decisions about their employment status and, for the latter, strategically reducing the workforce while mitigating litigation risk—but VSPs must comply with the Age Discrimination in Employment Act, Older Workers Benefit Protection Act, ERISA, and applicable state laws to achieve these goals.

KEY TAKEAWAYS

• Poorly designed VSPs can trigger or exacerbate risk of age discrimination claims, ERISA retirement plan complications, and regulatory scrutiny.
• The OWBPA imposes strict waiver, disclosure, and timing requirements for offering benefits conditioned on a release of claims to separating employees age 40 and over—even when those employees have voluntarily elected to separate.
• Employers should document business justifications, ensure true voluntariness, and carefully coordinate communications and disclosures.

OVERVIEW

VSPs frequently offer enhanced separation benefits to employees in exchange for their agreement to voluntarily separate within a defined election window and execute a release of claims. Employers often use VSPs to reduce headcount or costs, avoid involuntary layoffs, or comply with collective bargaining obligations, while mitigating risks of potential claims exposure from the affected population.

VSPs can be especially effective where employers wish to retain talent but recognize that some employees may prefer to exit. For example, mandatory return-to-office or relocation initiatives, or large-scale changes to job duties, may prompt employees to reconsider their roles. In these circumstances, a VSP can help provide business certainty during periods of transition.

Equal Employment Opportunity Commissioner Andrea Lucas recently stated that the EEOC remains focused on involuntary reductions in force (RIFs), paying particular attention to potential age bias and disparate impact concerns. In light of this continued regulatory attention to RIFs, employers may wish to explore whether a VSP can accomplish business objectives while managing risk.

Furthermore, voluntary separations (as part of a VSP or otherwise) generally will not count as employment losses or layoffs under the federal WARN Act and analogous state and local laws. Right-sizing an employee workforce via a VSP instead of an involuntary RIF can therefore mitigate or eliminate the risk of triggering WARN laws’ advance notice provisions (to employees and state and local government and agency recipients), potential agency inquiry, and ramifications.

While often viewed as less disruptive than an involuntary RIF, VSPs require careful design to best defend against challenges alleging coercion, discrimination, or regulatory noncompliance.

DESIGNING AND ADMINISTERING A COMPLIANT VSP

Below we highlight some of the key considerations for designing and administering a VSP that complies with the ADEA, OWBPA, ERISA, and applicable state laws.

Ensuring True Voluntariness

Participation must be genuinely voluntary. Employers should avoid short decision windows, “first come, first served” caps, or managerial pressure—especially toward employees age 40 and above.While employers can (and, depending on the circumstances, may be best advised to) communicate that a future involuntary RIF could involve less favorable terms, employers and managers should not suggest that any particular individual will be targeted for separation in a RIF if the offer is declined.

ADEA and OWBPA Compliance

The ADEA and OWBPA impose detailed requirements for waivers of age discrimination claims by employees who are age 40 and above who separate as part of a group termination program, applicable to both involuntary (RIF) and voluntary (VSP) programs.

For such employees, employers must:

• Provide written disclosures with the employees’ release and waiver agreements that describe program eligibility requirements, explain time limits for accepting the offer, and list the job titles and ages of all employees within the recipient’s relevant decisional unit and identify which employees are selected and not selected for—or eligible and ineligible for—inclusion in the program and an offer of consideration (i.e., separation benefits) in exchange for waiving claims
• Properly identify the “decisional unit,” which is that portion of the employer’s organizational structure from which the recipient employee (and other employees) is chosen to be offered consideration in exchange for a waiver; the exact contours of the relevant “decisional units” will depend upon the facts and circumstances of the specific program
• Allow at least 45 days to consider the offer and a seven-day revocation period after execution of the release and waiver agreement
• Ensure waivers are knowing, voluntary, and free from coercion
• Avoid using participation caps based solely on age, diminishing benefits based solely on age, or excluding employees based solely on age

ERISA Considerations

Many VSPs are structured as ERISA-governed plans to provide a variety of protections for the employer, including a well-defined claims and appeal process and preemption of state law claims.

When drafting severance plans, it is generally preferable to design the plan as an ERISA welfare plan, rather than an ERISA pension plan or “retirement plan,” to avoid a variety of pension plan requirements, such as funding and trust requirements and annuity distribution and spousal consent obligations.

ERISA welfare plan design considerations include:

• Avoiding conditioning benefits directly or indirectly on “retirement”
• Limiting benefits to no more than twice-annual pay and ensuring payout within two years
• Defining eligibility classes and window program duration in advance
• Avoiding labeling the program as an “early retirement” plan
• Using combined age-and-service criteria rather than age alone

Selection, Eligibility, and Design Considerations

In designing a VSP, employers may decide to:

• Exclude critical roles from the VSP-eligible population
• Put in place caps that are not based solely on age (for example by role, department, or overall participation)
• Reserve discretion to reject VSP applications, but ensure there is an appropriate nondiscriminatory process in place for deciding which applications to reject and which to accept

However, these types of design decisions should be clearly disclosed to eligible employees at the launch of the VSP. Moreover, objective criteria—such as tenure—should be used to reject applications and/or apply caps as opposed to “first to elect” or similar limits that may appear coercive.

Employers should anticipate potential over- or under-subscription (and plan next steps in the event of either), identify mission-critical roles, and determine ahead of plan implementation how bonuses, equity, and benefits will be treated.

Communications and Required Disclosures

Clear documentation is essential to a successful VSP, including:

• Program announcements
• Plan documents and summary plan descriptions (SPDs)
• Release agreements and required OWBPA disclosures
• FAQs and any confidentiality or other restrictive covenant terms
• Human resources and/or call center talking points

Coordination among legal, HR, finance, and any involved third-party administrators is critical to ensure consistent documentation and compliance.

PRACTICAL RECOMMENDATIONS

Employers should:

• Document legitimate business reasons for the program
• Carefully structure eligibility and benefits to mitigate disparate impact risk and inadvertent classification as an ERISA pension plan
• Comply with OWBPA disclosure and timing requirements
• Train HR and management to avoid any appearance of coercion
• Plan contingencies for staffing needs and higher-than-expected take rates
• Carefully prepare the plan document and SPD to maintain ERISA-compliant procedures for claims, appeals, and disclosures

CONCLUSION

When thoughtfully designed, VSPs provide a flexible workforce management tool that can help to reduce litigation risk from workforce changes and preserve employee relations. In a regulatory environment where involuntary RIFs may receive heightened scrutiny for age bias and disparate impact, employers may wish to assess whether a carefully structured VSP can offer a lower-risk alternative. Proactive planning, rigorous compliance, and disciplined communication remain essential to achieving those objectives.

HOW WE CAN HELP

Morgan Lewis advises employers on designing and implementing compliant voluntary separation programs (including all relevant communications), conducting disparate impact analyses, preparing OWBPA disclosures, drafting ERISA-compliant plans, and advising on benefit implications. We also counsel on RIF strategy, WARN compliance, and risk mitigation in light of evolving EEOC enforcement priorities.