2015-Issue 12—There are a number of reasons why a company might consider moving its corporate headquarters, relocating key operations or outsourcing certain aspects of its business. Once the decision has been made to execute such a material organizational change, managing the human factor becomes paramount to a successful transition.
An impact analysis may help weigh the financial and legal implications. However, in addition to ensuring that any employee programs follow prescribed guidelines and market practice, an employer should also focus on the impact to the mindset of the employee base. It is not atypical to see a decrease in employee engagement and productivity during times of change. To the extent an employer can manage employee morale during the process, it can have a direct impact to the bottom line.
While the regulatory environment has not materially changed in recent years, employers have shifted their views on the usage of compensatory tools such as severance payments and retention bonuses. Alvarez & Marsal recommends that an employer create a thoughtful plan to address transferring and exiting employees during reorganization, while concurrently navigating the complex legal and regulatory requirements laid out below.
If operations are relocated, best practices dictate a thoughtful and structured plan be put in place and executed. In a corporate headquarters move, it is likely that a portion of the workforce will agree to transfer, while others may terminate their employment. Employees may be influenced by the options presented, including relocation and severance benefits. For example, all employees may be uniformly offered the option either to relocate with the employer providing financial assistance or to terminate and receive severance compensation. To the extent that a decision is made to exclude certain groups of employees, objective criteria should be applied to establish eligibility for the programs. For example, some employers will choose not to offer relocation to non-exempt or part-time employees.
For individuals whose employment terminates, an employer must first look to identify whether the individual is subject to an employment contract that governs termination payments. In addition, severance, required notice or additional benefits may be owed to employees through employee handbook provisions, a formal ERISA severance plan, a collective bargaining agreement or even an informal promise to employees, all of which should be carefully checked.
Once an inventory of the minimum requirements is taken, employers are often left to decide on a reasonable severance formula for employees. The market has shifted slightly from the generous formulas of the past. While practice still varies tremendously, it is not atypical to see an employer offer a lower formula than was previously used in prior reductions in force. A common structure for a severance plan currently would be 1 to 2 weeks’ pay per year of service, with a minimum of 4 weeks and a maximum of 26 weeks. Of course, executive payments vary more widely and are most commonly negotiated individually.
Salary continuation is still the most common form of payment rather than lump sums. However, an employer should consider the tax implications, as lump sum payments may result in lower FICA taxes to the extent the employee has already reached the Social Security wage base, whereas salary continuation could result in payments extending into a subsequent tax year.
In addition to compensation, the majority of employers will also offer some form of limited or comprehensive outplacement services, as well as employee assistance plans and change management programs. In almost all cases, prior to payment, individuals who receive severance are required to sign a release of all litigation claims. Such releases may also include non-solicit and non-compete provisions severance.
Employers are also bound by the 1964/1991 Civil Rights Act to ensure that any mass redundancy or layoff does not have a disproportionate effect on any one protected class of employees. The tests check for the effect on groups by age, sex, race or national origin. We highly recommend that an employer perform an analysis of impact to confirm the proposed selection criteria is objective; we also recommend that the employer consider engaging counsel in order to ensure all assessments are covered by attorney-client privilege, as any work product prepared internally would not be protected in a challenge. In addition to a disparate impact analysis, employers must also ensure they have considered the Older Workers Benefit Protection Act (OWBPA), which governs reductions for employees over age 40.
Under the federal WARN Act (Worker Adjustment and Retraining Notification), an employer must provide 60 days’ prior written notice to terminated employees in the case of a plant closing or a mass layoff (one-third of employees at a single worksite affected, with a minimum of 50 affected employees). There are 17 states with additional WARN Act statutes, which in some cases are more onerous than the federal regulations. To the extent any organizational change violates the WARN Act, an employer is potentially liable for back wages and benefits.
No federal or state statutes govern what, if anything, an employer must offer on relocation. Practices vary greatly and are often influenced by the need to retain institutional knowledge during an organizational change. If limited or no compensation is offered during a corporate move, it is unlikely that a substantial number of employees will voluntarily choose to move at their own cost. Thus, we strongly recommend that an employer consider its tolerance to business disruption before choosing not to offer relocation support.
With regard to relocation plan design, it is common practice for relocation programs to vary depending on the level of employee. Additionally, most relocation packages provide different allowances for renters vs. homeowners. While benefits can still be quite costly, the level of benefits provided in recent corporate moves has certainly decreased compared with programs offered in the past, which could include real estate buy-outs and home sale loss reimbursements. Some programs consider support for a “trailing spouse,” offering networking assistance or outplacement to help an employee’s spouse secure employment.
If designed correctly, the company can recognize a deduction for relocation expenses as long as the program is deemed a “qualified” move. Specifically, the distance between the employee’s new work location and home residence must be greater than 50 miles, and the commuting distance must have increased by 50 miles. The employee must further remain employed for 39 weeks in the following 12 months. However, certain exceptions apply for expenses such as transportation of household goods that are non-taxable.
When a change in operations involves a unionized population, there may be a number of additional considerations. Collective bargaining agreements typically require a period of consultation with the union and longer notice periods than typically required under WARN. Additionally, it is not uncommon to find contractual language regarding seniority that impacts the selection of employees for termination by length of service.
Lastly, but not to be overlooked, reductions in union employees in cases where an employer contributes to a multi-employer pension plan can result in significant and often unexpected costs. For example, if an employer ceases to participate in such a plan whose liabilities exceed its assets, the plan may assess the employer a pro rata share of the difference.
Alvarez & Marsal Taxand Says:
The design and execution of any organization change is very specific to each circumstance. However, we recommend that an employer take stock of the changes in the marketplace and current practices before implementing programs that are not in line with recent practices. It is critical to maintain a balance between the business objectives and the company’s relationship with its employees.
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The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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