The downturn in the economy has forced many businesses to take serious steps to reduce overhead, including payroll costs. In some cases, costs can be reduced or at least contained by adopting hiring freezes, reducing staff by attrition, temporarily discontinuing pay increases, cutting back on hours, starting a job-sharing program, or offering unpaid leave while maintaining health benefits. Sometimes, however, the only alternative is to implement layoffs.

While layoffs are on the rise, so are employment discrimination claims filed through the EEOC and other administrative agencies, and in the courts. You should be aware that despite obvious economic reasons for reducing staffing, these claims continue to be filed, and defending them can be expensive. Terminated employees who have difficulty finding a new position in this economic climate are even more likely to seek legal advice regarding their termination, and raise claims alleging a discriminatory motive in their selection for layoff.

The following strategies will help you avoid those claims, and significantly reduce the costs of those that are filed.

1. Don’t give false assurances to employees about their job security. It’s fine to be optimistic about the future of your business, but you should avoid making promises that employees may rely on in turning down other job opportunities, only to find themselves out of work a few months later.

2. Consider other options first. Can you accomplish the necessary cost-cutting by less drastic measures? Some of the strategies mentioned above may work for your company. You can also consider changing the manner of paying employees – moving, for example to a higher commission rate and a lower base pay for sales staff, or utilizing another type of incentive-based compensation. (Make sure, however, that your pay practices remain in compliance with the federal wage and hour laws.)

3. Use selection criteria you can defend. Although it is legal to factor in performance in determining which employees to include in a layoff, you do so at your own risk. A safer approach is to first determine which job functions you can eliminate or consolidate, then terminate employees based on seniority (i.e. last in, first out). Resist the temptation to discard an older employee in favor of a newer employee who is more promising – especially if the “older” employee is over 40.

4. Once you’ve identified certain employees for layoff, don’t dredge up performance issues you failed to deal with in the past as a way to try to avoid an unemployment compensation claim. Employees who are laid off are entitled to receive unemployment benefits, and by contesting their claim you are opening the door for other claims against your company. Keep it simple.

5. Before implementing the layoff, look at the list of selected employees to see if there appear to be any patterns or “red flags” in your selections. Are all employees selected for termination over age 40? Have you included anyone who recently returned from a medical leave under the FMLA? Has an employee selected for layoff recently complained about any type of discrimination or harassment in the workplace, or objected to a company practice on the grounds that it violates a statute? If any of the foregoing is true, you may want to discuss your situation with an employment law attorney before making a final decision. Remember, even if your decision was made fairly and impartially, you need to be careful about giving the appearance of discriminatory or retaliatory employment action. Even a completely baseless wrongful discharge complaint can be costly to defend. If you cut $50,000 from your payroll but end up spending $50,000 in legal fees and costs defending your firing decisions, you really haven’t accomplished anything.

6. If your business employs more than 100 employees, you may have notice obligations under the federal WARN Act. Check with an employment law attorney to see if this applies to your situation.

7. Employees who are laid off are entitled to continuing group health insurance coverage under federal COBRA or Florida’s Mini-COBRA, which applies to small employers. Make sure former employees receive all required notices, and be careful not to provide inaccurate information about their rights.

8. Consider paying severance to terminated employees in exchange for them signing a release. The upfront cost of paying severance is a small price compared to the costs of defending frivolous claims. If you do decide to pay severance, either set a flat number of weeks that applies to all employees who have worked for the company for one year or longer, or establish a formula based on position and/or years of service. For example, you might pay line employees one week’s severance for every year of service, and pay supervisory personnel two weeks. Most companies also apply a cap on the total number of weeks of severance that will be paid to any employee. Make sure any release signed by an employee over age 40 complies with the requirements in the Older Workers Benefits Protection Act (“OWBPA”) for release of claims under the Age Discrimination in Employment Act (“ADEA”), and do not make signing the release of condition for receiving amounts that would otherwise be due under established company policy (for example, a policy of paying accrued and unused PTO to anyone terminated without cause).

9. Do not hold the employee’s last paycheck “hostage” pending return of company-owned equipment, etc. An employee who does not receive his or her last paycheck can file suit in federal court under the Fair Labor Standards Act (“FLSA”). Many plaintiffs’ lawyers representing individuals in “last paycheck” cases provide no notice or demand to the employer before filing suit. Under the FLSA, you will be liable not only for payment of wages due to the employee, but also for the attorney’s fees of the plaintiff’s lawyer. As a result of withholding a last paycheck of a few hundred dollars, you could end up owing thousands of dollars to the employee’s attorney, plus paying your own legal fees as well.

10. Provide references and any other “outplacement services” you can to employees who are being laid off. An employee who is able to move on successfully is less likely to harbor ill will against the company.