Layoffs and executive risk — what employers must know

Anzen 101

Aug 9, 2023


Layoffs and their handling by business owners, executives, and directors and officers are front and center in headlines today, prompting employers to take a much-needed closer look at reduction planning and communications.

What are the dynamics at play in 2023?‍

Inevitably, some layoffs are a result of unavoidable economic conditions such as inflation, war, and supply chain crises; others unfortunately are the result of underperformance of a business or the inability to fundraise. But regardless of the cause, it is how leaders communicate and treat both departing and remaining employees key to maintaining business continuity and avoiding missteps that can lead  to lawsuits. 

It is critical to remember that any employer can be sued, regardless of guilt or liability, in a layoff situation—and that responding to any lawsuit is costly from both a financial and reputational standpoint. 

From an insurance liability standpoint, employee termination can most commonly result in claims brought against a business’s Employment Practices Liability insurance (EPLI), though sometimes D&O and Fiduciary coverage can also respond if a CEO or other officer were in breach of their duty to act in the best interest of the shareholders or other stakeholders. 

What are the types of lawsuits that can be brought against an employer during layoffs?

  • Wrongful Termination: An employee may file a wrongful termination lawsuit if they believe they were laid off for an unlawful reason, such as discrimination, retaliation, or a breach of an employment contract.

  • Discrimination Claims: If employees believe they were selected for layoff based on their protected characteristics, such as race, gender, age, disability, or religion, they may file a discrimination lawsuit against the employer.

  • Retaliation Claims: If an employee is laid off in retaliation for engaging in protected activities, such as reporting workplace violations or participating in a whistleblower complaint, they may file a retaliation lawsuit.

  • Failure to Provide Proper Notice or Severance Pay: If an employer fails to comply with legal requirements related to providing notice of layoffs or severance pay, affected employees may sue for breach of contract or violation of labor laws.

  • Violation of the Worker Adjustment and Retraining Notification (WARN) Act: The WARN Act, applicable in the United States, requires employers to provide advance notice of mass layoffs or plant closures. Failure to comply with WARN Act requirements can lead to lawsuits by affected employees or penalties imposed by government agencies.

  • Class Action Lawsuits: If a group of employees believes they were all laid off unlawfully or in violation of labor laws, they may join together in a class-action lawsuit against the employer. 

  • Under the Private Attorney Generals Act (or PAGA), an employee can sue the employer in California on behalf of other/all aggrieved employees for violations against California Labor Code. 

  • In a Wage and Hour lawsuit, employees can sue related to minimum wage and overtime disputes. 

Let’s take a look at some real-world Claims examples

Example #1: Twitter - Gender and Disability Discrimination Claims, Class Action Suits

Last week, Twitter Inc faced rulings on two separate lawsuits on the heels of layoffs in November: one alleging the company had unfairly targeted women in role reductions, and the other accusing Twitter of discriminatory practices against employees with disabilities (in requiring longer hours and required in-office presence for remaining staff after the layoffs). 

A California judge ruled in Twitter’s favor but indicated that the plaintiffs would be allowed to make amendments to the lawsuits, and refile. In the gender discrimination case, plaintiffs allege “Twitter laid off 57% of its female workers compared to 47% of men after Musk took over. The disparity was more stark for engineering roles, where 63% of women lost their jobs compared to 48% of men, according to the lawsuit.” 

In the disability case, “a former engineering manager and cancer survivor… claims that Twitter fired him when he refused to stop working remotely. [CEO Elon] Musk said in a memo to staff in November that employees should be prepared to work ‘long hours at high intensity’ or quit.” 

The judge may have ruled in Twitter’s favor this week, but the lawyer for the plaintiffs in both cases is refiling which will add time and legal fees to the prolonged battle between Twitter and 2,000 employees who are contesting the basis for their terminations across class action and other suits. ‍

Example #2: FGMC - Failure to Provide Notice

In Delaware in January, a federal bankruptcy judge granted relief to 425 employees who were laid off from First Guaranty Mortgage Bank without warning. The company informed more than 471 people in June of 2022 that they had lost their jobs over the span of a 10-minute phone call. According to the WARN Act, “businesses that employ at least 50 people to provide affected employees ‘60 days’ notice in writing’ of a mass layoff or plant closing — if they represent at least 33% of the total workforce —  or to pay the employees if they fail to give notice. The 471 employees laid off represented nearly 80% of FGMC's workforce at the time.”‍

Example #3: Northrop Grumman - Failure to Provide Severance

While the judge ruled last week in the employer’s favor in this appeal, in the case of Carlson v. Northrop Grumman, the legal battle has been waged over 11 years—an example of how steep legal fees can add up over time in just one case. An employee who was part of a layoff in 2012 “claimed a right to severance under Northrop Grumman’s severance plan. But the plan said an employee was not eligible unless they received a memo from a Vice President of Human Resources notifying them of their severance eligibility.  The employees at issue did not receive an eligibility memo.” 

Whether to offer severance packages and to whom is a decision to be made by the employer, but this case clearly illustrates how communication around severance—especially if it is only being offered to a portion of a laid off population—is key. ‍

How can Anzen help?

To help your organization be mindful of the dynamics at play in layoffs and in other offboarding situations, you can review Anzen’s “Offboarding Do’s and Don’ts,” and reach out to for a demo of our MgmtOps suite of risk management tools to help streamline, benchmark, and compliance-check your employee documentation. 

With awareness of the legal, compliance, and insurance landscape and a focus on communication planning, even layoffs can be handled with dignity, humanity, and mutual respect.

The modern marketplace for Executive Risk insurance

© Anzen Technologies, Inc

Anzen Insurance Solutions LLC

CA License 6004358

The modern marketplace for Executive Risk insurance

© Anzen Technologies, Inc

Anzen Insurance Solutions LLC

CA License 6004358

© Anzen Technologies, Inc

Anzen Insurance Solutions LLC

CA License 6004358

The modern marketplace for executive risk