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Layoffs: Intended and Unintended Consequences

Employee Layoffs

By Deborah H. Petito, Esq. and Leonard Brazil, Esq.

Layoffs based on business necessity are permissible, but problems arise when an employer does not properly implement a layoff. It is equally important to understand how layoffs may affect existing or subsequent claims raised by other employees.

 A. Follow A Two Step Process When Implementing A Layoff

  1. Demonstrate Business Necessity

Unfortunately (in a business sense), these days employers may find it far too easy to establish that a layoff is based on business necessity. The need to reorganize or to reduce the number of employees due to a downturn in business should be well substantiated by internal company documentation.  This is also true when a position is eliminated.  Employers should document why the particular position was chosen for elimination prior to the actual layoff.

  1. Layoff Selection Process

While there may exist a clear and compelling business necessity to implement a reduction in force, the employer may face liability if it does not carefully analyze which employees are to be included in a layoff. Courts have found that an employer was justified in implementing a reduction in force, but concluded that the selection of the actual employee(s) laid off was motivated by an illegal reason such as the person’s age. The employer should do the following to minimize the likelihood of such a claim:

a. Identify the list of employees being considered for a layoff (“Target Employees”) and document the business reasons why those particular individuals have been identified, such as lesser seniority, performance, relative skills of the employees and other reasonable business criteria.

b. If there are other employees in the same or similar positions who are not being laid off, the employer should document why the Target Employees are being considered for layoff while the others have not been selected.

c. If only some of the Target Employees are ultimately selected to be laid off, there should be documentation which expresses the company’s reasoning as to the selection of those actually laid off.

d. When the employer has identified those to lay off, an evaluation should be made as to whether the layoff affects a disproportionate number of employees in a “protected classification,” such as age, race, gender or other classifications which may raise the issue of discrimination, harassment or retaliation. For example, if 8 of the 10 employees laid off are over age 40, the employer must be able to clearly articulate and establish the legitimate business reasons why those particular employees were selected.  If there is a concern of being able to establish such business justification, the employer should reconsider those to be laid off.

Senior managers and executives often rely on lower level managers to select the individuals who will be laid off. Senior management should make sure they review that process and the individuals selected to avoid claims of discrimination, harassment or retaliation.  Ultimately, the decision rests with senior management and trusting lower level management, without questioning who is chosen for layoff and why, could create liability and reflect poorly on senior management.

Also, keep in mind that if you are implementing a group layoff and are presenting the employees with a release of claims in return for a severance package, the release agreement proposed to employees over age 40 must include certain information about those being laid off and those employees who will not be impacted by the layoff. Additionally, if the layoff is part of a plant closing or mass layoff, the employer may be subject to the state and/or federal Worker Adjustment Retraining Notification Act which requires advance notice to employees of such a layoff.

B. How A Layoff Or Termination May Affect Other Employee Claims

The layoff or termination of an employee may have significant and unintended negative consequences to existing or future claims filed by other employees. An employer should consider the following when deciding to terminate or lay off an employee:

a. The departing employee may be an important witness in potential or existing litigation.  If so, it is critical for the company to apprise counsel of potential terminations or layoffs when such action is first contemplated.  Such employees may be hard to later track down, their memories may fade or they may become hostile to the company.

b. If a departing employee has relevant information regarding litigation, consider obtaining a declaration under penalty of perjury to memorialize the employee’s knowledge before it becomes faded or the employee becomes hostile to the company.  If the departing employee is being offered a severance agreement, consideration should be given to tying any installment payments to the departed employee’s continued cooperation in any litigation or potential litigation.

c. Implement safeguards to ensure that the departing employee’s e-mails, to the extent potentially relevant in litigation or potential litigation, are not deleted. The company should issue an internal records hold notice to identify files and electronic documents which are not to be deleted. Such a records hold notice should be periodically reissued within the company to account for new hires while such litigation is pending or threatened.

d. Obtain from the departing employee information as to where important files or e-mails may be located. Advise the departing employee to not delete any e-mails, discard any documents or remove anything from the company’s premises.

C. Conclusion

While employers have valid reasons for layoffs, they often fail to review the list of laid off employees in detail and are unaware that those chosen all fall within a selected category or that individuals present specific issues that may lead to litigation.   Also, employers often fail to consider the impact that an employee’s departure may have on current litigation.  Looking at the details before implementing a layoff and documenting why specific employees have been chosen, can help employers avoid litigation.


Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions about employee layoffs or terminations, please feel free to email Deborah H. Petito at DPetito@ClarkTrev.com or Leonard Brazil at LBrazil@ClarkTrev.com, or contact our office at (213) 629-5700.

Clark & Trevithick is a full service Los Angeles-based law firm that has been representing clients throughout California for 40 years. The firm’s attorneys have broad expertise which permits Clark & Trevithick to provide its clients with the comprehensive legal advice necessary to operate in today’s business environment. For more information, visit www.clarktrev.com

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Commercial Landlords in Bankruptcy – More Ways to Protect Payment Rights

Bankruptcy Payment

By Kimberly S. Winick, Esq.

When a commercial tenant files for relief under the Bankruptcy Code, its landlord may have both prepetition and post-petition claims. Prepetition claims, including unpaid rent as of the petition filing date, and claims for rent that would have been paid if the lease were not rejected in bankruptcy, are often paid at pennies on the dollar.  Post-petition claims, for rent coming due under the lease during the bankruptcy case and prior to lease rejection, are entitled to payment priority as “administrative claims,” and usually must be paid dollar for dollar before the debtor tenant’s chapter 11 plan of reorganization (or liquidation) can be confirmed.

Claims for damage to the rental property may arise before or after the bankruptcy filing. These claims are not always covered by insurance.  Unless a landlord can show that the damage occurred after the petition date, the damage claim likely will be treated as a prepetition claim and the landlord will absorb the brunt of any uninsured loss.

A diligent landlord will conduct a thorough inspection of leased premises, and create a photographic record of the inspection, as soon as practicable after learning that a tenant has filed bankruptcy. Any post-petition damage caused in connection with the operation of the tenant’s business, such as damage to loading docks and bay doors, should then give rise to an administrative claim, payable in full in connection with confirmation of the debtor tenant’s plan of reorganization.

It is always worthwhile for a landlord to preserve and make the most of its administrative claims. Even if the case is filed as or converted to a liquidating case under chapter 7 of the Bankruptcy Code, a landlord’s administrative claims will still enjoy payment priority, although they will not necessarily be paid in full.


Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions relating to the blog article, please feel free to contact Kimberly Winick by email at kwinick@ClarkTrev.com or telephonically at (213) 629-5700.

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Commercial Landlords With Tenants In Bankruptcy? Increase Your Right To Payment

Petition to File for Bankrptcy

By Stephen E. Hyam, Esq.

Recently, Clark & Trevithick addressed some of the issues that commercial landlords face when a tenant files for bankruptcy. This week, we will talk about how a commercial landlord may strengthen its right to payment out of the bankruptcy.

Know where you are on the list of priorities

In bankruptcy cases, creditors are paid pursuant to a schedule of priority that is set forth in the Bankruptcy Code. Generally, creditors are paid in the following order:

First, unpaid United States Bankruptcy Court fees are paid.

Second, secured creditors, such the debtor’s mortgage holder are paid.

Third, priority unsecured creditors, such as child support or alimony, taxes, and administrative claims are paid.

Fourth, unsecured creditors, which is everyone else are paid.

Unpaid rent due and owing before the bankruptcy filing is an unsecured claim. Being an unsecured creditor is an unenviable position because not only are there higher priority claims that are paid first, but there is typically a large pool of unsecured creditors who are paid only their pro-rata share of whatever cash is left in the bankruptcy estate. However, if the debtor in bankruptcy remains in possession of the nonresidential leased premises, there are two potential ways for a commercial landlord to claim an administrative claim for unpaid rent incurred after the tenant’s bankruptcy case is filed.

While waiting for the lease to be assumed or rejected, your claim is an administrative claim

As discussed in the prior clarktalkblog article Commercial Landlords – Don’t Fear Tenant Bankruptcies!, leases of nonresidential real property must be assumed or rejected. Until the lease is assumed or rejected, the tenant’s obligations under the lease must be performed. As a result, if the debtor fails to pay rent on nonresidential real property that is incurred after the bankruptcy case is filed, the landlord can claim that the unpaid rent is an administrative claim until the lease is rejected. The lease does not need to provide a benefit to the bankruptcy estate. However, if the lease is rejected, the landlord has an unsecured claim dating back to the date the bankruptcy case was filed. The security deposit can be an offset to rent that was unpaid prior to the bankruptcy case, but is not an offset for administrative claims.

A creditor who provides a benefit to the bankruptcy estate has an administrative claim

A creditor has the right to assert an administrative claim for the actual and necessary costs and expenses in preserving bankruptcy estate assets. Although this alternative path is not specific to rent, there is an argument that the debtor’s post-bankruptcy use of leased nonresidential property forms the basis for a claim that the rent is an allowable administrative expense, so long as the debtor’s use of the leased property confers a benefit to the estate. For example, if the debtor remains in possession of a warehouse that contains estate assets, a landlord may argue that the unpaid rent confers a benefit to the estate by preserving estate assets, justifying an administrative claim for the post-bankruptcy rent.

Facts matter and so does prompt action

While no landlord wants a bankrupt tenant, commercial landlords may have arguments to strengthen their claim. Upon being given notice of a tenant’s bankruptcy filing, the landlord should act promptly to evaluate the facts and identify options for strengthening its position in the case.


Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions about how a commercial landlord may strengthen its right to payment out of the bankruptcy, please feel free to contact Stephen Hyam at shyam@ClarkTrev.com or telephonically at (213) 629-5700.