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Prepare layoff rationale before handing out the pink slips

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in Small Business Tax Deduction Strategies

Sometimes, an employer needs to downsize its workforce. Maybe economic conditions dictate cutting payroll and asking fewer employees to do more with fewer resources. Or perhaps reorganizing the workforce will result in savings.

Whatever the reason, document why you need to cut staff before you announce the layoffs. You don’t necessarily owe every affected employee an explanation—in advance—of why his or her job is being eliminated. But you will need a clear, coherent and rational explanation later if one of the employees sues.

Recent case: Debra Sarpy and Linda Robinson, who are both black, worked for the town of Homer. Sarpy was the town treasurer and Robinson was the mayor’s administrative assistant. Then a white male was elected mayor of Homer. Shortly after the new mayor took office, an independent accountant said the previous administration had mismanaged funds and Homer was in financial trouble. 

The mayor recommended several cost-cutting measures, including a reduction in the town’s workforce. The town’s governing board approved the layoffs. Of Homer’s 30 employees (five white and 25 black), eight lost their jobs, including Sarpy and Robinson. Only one white employee was laid off.

Sarpy and Robinson sued, alleging they were targeted for termination due to their race and sex.

But the 5th Circuit Court of Appeals said they had no case, even though it was clear that the town had laid off more black employees than white employees.

The court said that neither Sarpy nor Robinson had come up with any proof to counter the town’s assertion that money, not race or sex, was the motivating factor for the layoffs. (Sarpy & Robinson v. Town of Homer, et al., No. 07-30904, 5th Cir., 2008)

Final note: Be sure the documents that spell out your layoff rationale bear a date stamp.

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