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Avoiding legal claims when downsizing during a restructuring

On Behalf of | Apr 14, 2023 | Business Law

Businesses may find themselves struggling for many reasons. Perhaps they expanded too quickly during a time of high sales but can no longer generate enough revenue to maintain all of their facilities and staff obligations. Maybe the industry in which they operate has experienced contractions, or there is a new competitor that has reduced overall market share for the business.

Companies may recognize that they have overextended themselves while remaining optimistic about their chances for recovery. Chapter 11 bankruptcy or restructuring is a viable option for organizations that want to remain operational despite their current financial struggles.

Unfortunately, restructuring often necessitates difficult choices about staff members that can lead to anger and feelings of betrayal by those who cannot keep their jobs. Downsizing and large-scale layoffs are common during a Chapter 11 bankruptcy. Making difficult decisions about who to let go can be particularly nerve-wracking because the wrong choice could potentially lead to discrimination lawsuits filed by upset former workers.

Large-scale reductions require careful planning

Organizations that need to eliminate a significant number of workers at one time have to be careful about how they select those workers. Even after the initial selection process takes place, they will typically need to conduct a secondary review to ensure there won’t be claims of discrimination or wrongful termination.

Analyzing the list of workers that the company will terminate or lay off to determine if certain groups have disproportionate representation is very important. Otherwise, if many of the workers belong to the same religion or are over the age of 40, the workers terminated could potentially claim that the company’s decisions were the result of discrimination. They might pursue wrongful termination claims that could cost the company thousands of dollars and damage its reputation.

By conducting a secondary review to make sure that there isn’t a pattern among those terminated and that the decisions made reflect appropriate reasoning on the behalf of management or human resources, an organization can protect itself from facing expensive employment law claims at a time when it will not have the resources to absorb those expenses.

Avoiding common mistakes that can complicate Chapter 11 bankruptcies can help a business that is attempting to restructure increase its chances of successfully keeping the company solvent. Working with a legal professional to navigate these risks and challenges is usually a good first step forward.