As communities continue to be shocked at the gas pump, soaring inflation and whispers of “recession,” we have noted an increase in layoffs in certain industries — particularly technology, retail and food. Given the economic uncertainty, our regional developers and builders could also feel the adverse impacts. These impacts could, unfortunately, require companies to consider layoffs or reductions in force (RIFs). While there were temporary layoffs at the outset of the pandemic, the construction industry rallied quickly and navigated the challenges COVID-19 presented. Now, the construction industry may need to navigate the more traditional economic pressures of the market: fewer projects, more competition and less overall work.

RIFs, if done correctly, can help companies ease financial constraints. But, if done incorrectly, RIFs can lead to significant legal liability that will further distract and burden the company. For example, Company A determines it needs to let go of 20 employees in a RIF. Company A could employ a lawful, nondiscriminatory method to decide which individuals to let go. But, instead, Company A’s owner decides to finally get rid of the folks he doesn’t like — the employees who don’t look like him or speak like him. In other words, he made termination decisions based on the employee’s gender, national origin, race, etc. As a result, Company A will likely find itself in a world of legal hurt.

Employers who see the need to make a RIF (like Company A) should follow these key steps to ensure that the RIF does not unfairly impact individuals who are in protected classes.

Develop a strategy. Prepare a plan identifying the future vision and organizational structure that will most effectively meet the company’s continuing needs. A few questions you might ask include: What locations, departments, and divisions will be involved? How many full-time equivalent (FTE) positions do you need to reduce? What is your budget for severance agreements, attorney’s fees, unemployment claims and other associated costs? What is your timeline for the reduction in force? Does the company have to comply with a collective bargaining agreement?

Consider other options. Consider whether other options exist to ease the financial crunch before planning terminations or layoffs. A few options to consider include: Is it possible to have employees move to a job-share arrangement or part-time schedule or participate in a work-share program? Would a temporary shutdown be possible? Would your employees consider a pay reduction? If you decide on a pay reduction, consider fairness issues and making reductions from your C-suite on down. Do you want to ask volunteers to take early retirement or voluntary separation before the involuntary reductions? Have you frozen your current open positions?

Analyze application of WARN and any mini WARN Acts. The federal Worker Adjustment and Retraining Notification (WARN) Act applies to employers of 100 or more employees and requires that employers provide employees and certain governmental agencies with 60 days’ advance notice of a plant closing or certain types of mass layoffs. Many states also have “mini” WARN Acts and specific rules about contacting the state employment division and providing notice of a mass layoff. Washington’s WARN Act tracks the federal requirements. Washington employers, subject to WARN, must submit a WARN notice to the Employment Security Department, the chief elected official in the community where the layoff or closure will occur, and any affected bargaining unit. The notice must contain very specific information including whether it is a layoff or closure and is temporary or permanent, the total number of employees and their job titles or positions.

Determine the objective nondiscriminatory criteria for the layoff. Regardless of whether a WARN Notice is required, companies should work carefully with in-house or contracted human resource experts or legal counsel to establish the objective criteria it will use to choose which employees will be subject to a layoff. Generally, you will want to keep your best performers and most versatile employees. You may also decide to give consideration to loyalty and long-term employees. If the business is a closely held family business, then whether the person is a family member is relevant. To the extent a company is subject to a collective bargaining agreement, make sure any criterion or process used is consistent with that agreement.

Examples of specific nondiscriminatory criteria for selection can include:

• Temporary employees.
• Past performance.
• Positive teamwork.
• Versatility (ability to perform more than one job or function).
• Department or project-specific closures.
• Elimination or consolidation of specific jobs.
• Relative ability of the employee.
• Training, certification, education and experience.
• Any non-discriminatory, objective criteria that you decide are relevant.

Apply the objective criteria. The company should next apply the objective criteria to all employees (including employees on a leave of absence for other reasons). A company may rank or weigh certain criteria differently — e.g., strong attendance and performance can count more than the number of years with the company — so long as the company applies the criteria consistently among the employees. One way to do this is to give each criterion a set amount of points to rank all employees. For example, for past performance reviews, if the employee received excellent reviews, they get 5 points; if they received “meets expectations,” they get 3 points; and “needs improvement overall” gets no points. The company must be careful not to consider any compensation, injuries, disabilities, age or any other protected characteristic when ranking employees.

Review for bias and disparate impact. After selecting the employees, the company should work closely with human resources or legal counsel to evaluate whether there could be evidence of bias or disparate impact related to a protected class of employees. Disparate impact occurs when a particular protected class of employees, such as age, disability, or sex, is disproportionately represented in an otherwise seemingly neutral application of criteria for the RIF. This can be identified by running a statistical analysis. If there is a disparate impact or potential evidence of bias, reconsider the inclusion of those employees in the group or how the criteria is applied.

Consider communication of the RIF decision. It is always difficult to inform employees that their jobs are ending as the result of a RIF. Consider how you will communicate the RIF to your workforce and whether you will offer separation agreements to the affected employees. Separation agreements must be carefully drafted. It is best to obtain legal help with this task. Most RIFs are “exit or other employment termination programs offered to a group or class of employees” under the Age Discrimination in Employment Act (ADEA), as amended by the Older Worker Benefit Protection Act, and require specific waiver language and time for the employee to consider the separation package.

A lot can go wrong in drafting an ADEA release, and courts are willing to invalidate them if done incorrectly. We strongly urge companies to work with their legal counsel closely to ensure compliance.

RIFs are always stressful but often necessary to enable a business to keep its competitive edge. RIFs require careful advance planning and documentation to provide the best protection to the company. Following the recommendations above and obtaining legal counsel will put you at a distinct advantage and help to protect your RIF from claims of discrimination.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.

and are lawyers at Schwabe, Williamson & Wyatt, P.C. Contact Jean at 503-796-2960 or jback@schwabe.com, and Stephanie at 206-689-1235 or sberntsen@schwabe.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

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Effective Jan. 19, companies with federal agency contracts that involve “personally identifiable information” (PII) have new obligations. Federal contractors must identify employees who handle PII, or who have access to a government system of records, or who design, develop, maintain or operate a government system of records on behalf of the agency and then provide employees with annual training on protecting the privacy of this information. This new rule was added to Subpart 24.1 of the Federal Acquisition Regulation (FAR) by the Department of Defense, the General Services Administration and the National Aeronautics and Space Administration. In addition, there will be a new standard clause added to all federal contracts to implement the new regulations.

What does this mean for federal contractors?

Contractors accessing, handling or using a government system of records must identify employees who have access to PII and provide them initial training on protecting and safeguarding the information, and must continue thereafter to train their employees annually. Contractors must keep records of the privacy training provided to employees.

Does this apply to all contractors?

The FAR requirements apply to all contracts and subcontracts that involve the handling of PII or any access to a system of records maintained by a federal agency. This includes commercial contracts, contracts below the simplified acquisition threshold (SAT), and contracts for commercial available off-the-shelf (COTS) items.

What is PII? 

Part 24 of the FAR describes “personally identifiable information” as “information that can be used to distinguish or trace an individual’s identity, either alone or when combined with other information that is linked or linkable to a specific individual.” PII includes information such as an individual’s name, date and place of birth, or mother’s maiden name; biometric data such as a fingerprint, a cornea scan or a hand scan; Social Security number, driver’s license number, passport number, etc.

Which employees must be trained?

The rule is actually very broad. It covers any employee who:

• has access to a group of records under the contractor’s control, known as a “system of records”;
• designs, develops, maintains or operates a system of records containing PII;
• handles personal records (includes creating, collecting, using, processing, storing, maintaining, disseminating, disclosing or disposing of a system of records).

Subject employees likely include human resources specialists; payroll specialists; managers; supervisors; IT personnel involved in the management, design, development, operation and use of IT systems; or other staff who work with PII.

When must the training occur?

Training must occur when an employee is initially hired, ideally before he or she has any access to PII. Training should be provided in the initial employee orientation or on-boarding, along with the initial anti-harassment training. Contractors must then provide additional training annually. The contractor may provide its own training or may use the training of another agency, unless the contracting agency specifies that only its agency-provided training is acceptable.

What is the training requirement?

Contractors must provide “role-based” training that is specific to the employee’s exact job functions and access of PII. For example, training for a human resources employee will cover, among other topics, the handling and protection of employment records that contain PII, access to those records, retention of the records, and the proper response to unauthorized access to such records. Training for employees will emphasize different areas appropriate to their role and access to PII. Another example: training for IT personnel will emphasize technological safeguards for online sources of PII, issues such as protection from hacking, and password requirements for sensitive computer files.

Training must cover basic and advanced topics. The regulations set out key elements that must be covered, including:

• the Privacy Act of 1974, including penalties for violating it;
• the appropriate way to handle and safeguard PII;
• the authorized and official use of a system of records or any other PII;
• restrictions on the use of unauthorized equipment to create, collect, use, process, store, maintain, disseminate, disclose, dispose of, or otherwise access PII;
• prohibitions against unauthorized use of a system of records or the unauthorized disclosure, access, handling or use of PII; and
• procedures in the event of a suspected or confirmed breach of a system of records or unauthorized disclosure, access, handling or use of PII.

Takeaways

This rule affects only those government contractors and subcontractors whose employees have access to an agency or government system of records, or who must maintain a system of records as part of the contract. The best practice is to incorporate the training program as part of the employee on-boarding process for those employees who will have access to a system of records as part of their job functions. Ongoing annual training can be combined with other important employee training, such as anti-harassment training. To learn more about this requirement or receive applicable assistance, consult an informed attorney.

Jean Back, of counsel with Schwabe, Williamson & Wyatt, has substantial experience serving clients in the manufacturing and technology industries. She represents companies in a variety of employment advice and litigation situations. Contact her at 503-796-2960 or jback@schwabe.com.

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Imagine starting a business that specializes in building tiny houses. Potential new customers are contacting you daily. Two of your children have joined you, and the business has grown. So far, all business leadership aspects have been handled within the family; however, because the enterprise has grown so rapidly, no one really has the business acumen to take it to the next level. In addition, you are now 60 years old and wondering if the pieces are really in place for the tiny house empire to fund your retirement and continue to provide a means of support for family members.

This is a common problem for family-owned businesses in construction and other industries. It is not easy for many people running successful family-owned businesses to take those next steps because they don’t see a reason to break out of the mold that has brought them success. But regardless of whether the family’s intent is to position the business for an eventual sale or keep it in the family for years to come, succession planning is crucial.

A white paper published by Abbott Downing in 2012, “Preparing for Family Business Transitions,” evaluated successful transitions of family businesses and noted several key factors that they had in common. Owners of successful and sustainable family businesses realized the need for succession planning and began to develop a written business/succession plan at least three to five years before an expected business transition. They did not wait until the originating family member was on the verge of retirement. They communicated a clear vision and understanding of the succession plan with family members and other backers. The business owner evaluated all of his or her roles in the business and considered whether they could be absorbed by one person or should be assigned to multiple people. The families thought carefully about areas of possible conflict and developed methods of conflict resolution. Each family built a successful transition team and identified “next-level” managers able to move the business forward.

While all elements of these plans proved to be important, one key factor was the families’ choice of next-level managers. They are experienced individuals who have worked for entities at the next financial level and who understand what it will take to move a business forward. This is a difficult decision, especially when no clear choice exists for an individual with the business acumen necessary to advance the company. The best next-level manager or CEO may come from outside the family, and from outside existing management.

An option for a forward-thinking owner is to groom a family member or other manager within the organization to provide next-level leadership. One company that has been tackling these issues is Miles Fiberglass, a small family business whose next-level leaders are second-generation family members. Lori Miles-Olund, president and next-in-line CEO, and daughter of Lowell Miles, the company’s founder and current CEO, stated that succession planning has been one of the company’s greatest challenges. Miles Fiberglass is already working with third-generation family members to groom them for management positions in the company.

Making sure that leadership is passed to qualified individuals as opposed merely to family members who are next in line, getting the next generation ready to take over leadership roles, and viewing them as businesspeople with the leadership skills to do so (rather than as grown-up family members) can be difficult. Grooming younger family members for future leadership positions may involve providing them additional education or perhaps an externship with another organization to develop needed business skills.

Miles Fiberglass has a list of rules for younger family members before they can work for the company. They must have a four-year degree or an associate’s degree with two years of experience outside of the company. If the family member doesn’t have a degree, then he or she must have five years of successful work experience outside of the company. Family members cannot work for their parent, and younger members, regardless of their degree, must start at the bottom and work up.

Another company that is managing these issues is Interstate Roofing. Shelley Metzler and Brad Satran, sister and brother, purchased the company from their father, its founder, seven years ago. They grew up in the business and worked from the ground up.

Shelley worked for another roofing company while in college, and then for a manufacturing company that allowed her to gain insight into running a business. She served on the National Roofing Contractors Association’s board, and learned about an educational program called Future Executives Institute (FEI), which is a comprehensive educational course focused on leading and managing a roofing business. The extensive course offered through Northwestern University’s Kellogg School of Management includes course work in areas that are essential to running a small business operation, including management, leadership, strategic planning, human resources, financial management, sales and marketing, roofing industry issues, risk management, family relationship/succession and personal skills development.

Shelley attributes the educational opportunity to providing the groundwork that she and Brad needed to move into next-generation leadership roles in their business. Here in the Northwest, Oregon State University’s Austin Family Business Program provides education similar to what is offered at the Kellogg School.

In addition to choosing the next-level leader, successful and healthy succession plans for family businesses will also review the leadership pipeline for crucial lower-level management positions. These are key, difficult-to-fill positions in established departments. Miles Fiberglass has been working with Oregon Manufacturing Extension Partnership (OMEP) in its SMART Talent skills training program, in preparation for employees to take over some of the company’s lower-level management positions.

The reality is that many family businesses do not have viable family members to take over key positions at executive and other levels; help will have to come from outside of the family. Outside next-level leaders could become guardians while family members are groomed to eventually step into those roles. Thoughtful consideration now will strengthen a business and ensure that it is viable for future generations.

Jean Ohman Back, an employment attorney with Schwabe, Williamson & Wyatt, has substantial experience serving clients in the manufacturing and technology industries. She represents companies in a variety of employment advice and litigation situations. Contact her at 503-796-2960 or jback@schwabe.com.

The post OP-ED: Choosing the next-level leader for a family business appeared first on Daily Journal of Commerce.

Business owners spend years building their ideas into successful companies. They consider their business assets – their buildings, equipment, customers, copyrights and trademarks. But one of the greatest assets that sometimes goes unrecognized is the value that key employees bring to the workplace every day. When looking at long-term plans for a business transition, it is crucial to consider what can be done to make sure that key employees and trade secrets remain part of the business afterward.

This consideration is important because without all of the right agreements in place, a business could experience a situation where key employees learn of the business transition and decide to leave and open a competing business. Further, parties looking to purchase the business want to ensure that it retains employees who have key relationships with customers and a detailed understanding of the business operations.

A business’ employees are its hidden asset. Just as an owner would protect other assets, it is important for him or her to consider in advance what steps will be taken to ensure a successful transition with employees in place.

Utilizing one or all of several types of employment agreements can be a crucial first step in the thought process.

Employee retention bonus agreements

Employers that are concerned that their key employees will leave the business as it is sold should consider entering into specific employment agreements with them that will encourage them to stay through the business transition. Such an agreement can call for the employee to stay employed with bonus payouts over a period of time (employee retention bonus agreement), or it can call for a term of years with a specific severance clause.

Employee retention bonus agreements have their time and place. Many companies do not find this form effective, except in a situation where it wants to retain a key employee to stay on for a period of time during a business transition. There are many considerations about the timing of the bonus – whether it is paid on the front end or the back end. Of course, it is important to consult with an employment attorney who specializes in business transitions to evaluate the pros and cons of using this as opposed to another form of agreement.

A second option is to enter into an Employment Agreement for a term that provides financial incentive in the form of increase in salary for the crucial years during the business transition. This agreement might pay out a severance only if the employee stayed employed, and could include a noncompetition provision to prevent the employee from becoming employed with another employer in the industry.

Noncompetition agreements

Noncompetition agreements are either stand-alone agreements or a provision in an agreement that contractually restrains an employee from working for another employer in the same industry for a reasonable period of time, and in a reasonable geographic area. Oregon has a specific statute that governs noncompetition agreements, which requires that an employer notify an employee at least two weeks before the inception of employment that he or she will be required to sign such an agreement, or that is provided as part of a “bona fide advancement” of employment. A “bona fide advancement” requires not only a change in job title, and job description (i.e., a promotion), but also an increase in salary.

In addition, noncompetition agreements may be applied only to employees who are exempt under the Oregon wage and hour laws and who are paid at least $70,000 per year. Noncompetition agreements in Oregon currently can last for only two years; however, a new bill before the Oregon Legislature would further restrict the period for a noncompetition agreement to 18 months.

Noncompetition agreements that are part of an asset sale, as opposed to part of an employment agreement, do not have the same restrictions.

Non-solicitation agreements

An alternative to a noncompetition agreement is a non-solicitation agreement. These restrict an employee from soliciting customers or employees of the business after he or she leaves for a period of time. A well-drafted non-solicitation provision can provide similar protection to a non-competition agreement and is a lot easier to enforce.

Non-disclosure/intellectual property agreements

Employers who have trade secrets – including processes, formulas, client lists and intellectual property – that they wish to protect will want to include a non-disclosure/intellectual property provision in their agreement. This provision has no restrictive time period and prevents an employee from disclosing confidential, trade secret information.

A companion provision is the intellectual property provision, which can prevent employees who develop a product or idea while working for the business from taking that idea with them when they leave. It is the property of the business because it was developed while the employee was being paid by the company.

Each of these provisions, either in combination or as separate agreements, is a tool that a business can use to protect its assets. Companies that have these agreements in place at the time of a business transition will realize increased interest and value. Consideration to these forms of agreements should be made no later than five years prior to a business transition to ensure that they can be properly in place prior to the sale.

Jean Back is a management-sided employment lawyer with Schwabe, Williamson & Wyatt and a member of the Oregon and Washington State Bars. Contact her at 503-796-2960 or jback@schwabe.com.

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