Although it’s not something HR relishes, sometimes an organization needs to cut personnel numbers. When faced with this daunting task, many employers use exit incentives. At the Ogletree Deakins 2019 Employee Benefits and Executive Compensation Symposium, employment attorneys Stephanie Smithey and Nonnie Shivers explored the ins and outs of designing a voluntary exit incentive program.
Smithey and Shivers began their discussion by noting that when considering the use of an exit incentive, an employer first needs to evaluate what business goals it wants to achieve. Then it may first want to determine whether a voluntary program will achieve those goals since many employers want to see if a voluntary plan will work before considering an involuntary option.
When deciding on the best plan design for your organization, it’s a good idea to compare the differences between involuntary and voluntary exit plans, according to Shivers and Smithey.
Under an involuntary exit incentive plan, an employer:
- Cannot consider age;
- Has a goal of reducing its headcount or eliminating positions and/or functions; and
- Can base selection on nondiscriminatory objective factors and, if needed, subjective factors.
An employer also has control over the size of the group and the employees selected, but must consider whether the plan has a disparate impact on protected groups.
Although involuntary plans are often used to decrease headcount and/or payroll, they may also reduce morale in your organization. They also are likely to increase concern over lack of job security in your remaining employees.
With a voluntary plan, an employer:
- Can consider age;
- Is not required to eliminate positions or reduce headcount; and
- Can base the incentive on eligibility criteria (e.g., age, years of service, grade, and position).
However, Smithey and Shivers noted that since there is limited control over size and no control over selection, you might still need a reduction in force (RIF) if your goal is headcount reduction. This means that you may still have to end up terminating employees who considered the voluntary exit incentive but decided to stay.
According to Smithey and Shivers, voluntary incentive exit plans are typically used to address changing skills that are needed to perform work or the lack of opportunity for employee advancement. They noted that voluntary plans are usually implemented when an organization wants people to retire or needs to initiate turnover in the workforce.
Voluntary plans are helpful because they reduce the likelihood of potential discrimination claims, and are usually well-received by employees. They are often good for morale because employees have control over their decision-making.
More Plan Design Considerations
Smithey and Shivers next discussed some other important plan design considerations, including:
- Whether the program needs to be established as an ERISA plan;
- How to incorporate retirement incentives; and
- How to coordinate health coverage incentives.
They stressed that it is important for an employer to think about the health benefits it is adding to its incentive program and make sure to consider:
According to Smithey and Shivers, one of employees’ biggest hang-ups about accepting a voluntary exit incentive is when they aren’t eligible for Medicare yet and are worried about their health coverage if they leave the organization. This means an employer may need to develop some kind of bridge coverage for employees until they can go on Medicare.
Additionally, employers that implement an exit incentive plan must also make sure it is compliant with the Age Discrimination in Employment Act (ADEA), the Worker Adjustment and Retraining Notification Act (WARN Act), and any other applicable federal, state and local laws.
Drafting Documents and Communications About the Plan
Once an organization decides to implement a voluntary exit incentive plan, it next must think about drafting applicable documents (e.g., a plan document, an election form and a waiver and release) and communicating the plan to its workforce. Smithey and Shivers noted that an employer will want to:
- Create a detailed timeline for rolling out the plan;
- Announce the plan to the workforce; and
- Hold a Q&A informational session for employees.
Finally, Smithey and Shivers provided the following key takeaways for employers considering an exit incentive plan:
- Really think about your business goals;
- Consider the pros and cons of a voluntary vs. involuntary plan;
- Establish eligibility around organizational goals;
- Determine what benefits are needed to incentivize participation in the plan;
- Design plan documents and communications considering both legal compliance elements and what will incentivize employees;
- Create a timeline with tasks and responsible individuals;
- Stick to the plan; and
- Remember that communication, planning and execution are critical.
Has your organization considered or used a voluntary exit incentive plan? Let us know by leaving a comment below.