Restructuring and layoffs: Rules and regulations

Many businesses have been hit hard over the last few years, first from the impact of the pandemic, followed by soaring interest rates, restricted consumer spending patterns, and the high costs of raw materials. For many, the ongoing Red Sea shipping crisis is a bridge too far, threatening product availability and impeding productivity.

It is not surprising that many American businesses are looking to tighten their belts and find efficiencies where they can. For some, this means restructuring their operations, closing branches and converting facilities. For others, letting workers go is the only way of saving money.

Hopefully, your franchise is in a healthy position, but it is always useful to understand the rules and regulations that govern how a business can implement restructuring and layoffs to ensure that cost-cutting measures do not break the law.

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Restructuring

Under Chapter 11 of the Bankruptcy Code, businesses that are experiencing financial difficulties may submit a restructuring plan that outlines how the proposed changes to their business' operation will alleviate their problems.

Restructuring is designed to prevent a business from collapsing, and following the law means that some creditors or shareholders may be forced to concede some of their rights for the benefit of the continued operation of the business.

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Layoffs

Employees who do not have a formal employment contract can have their employment terminated at will, although most businesses will offer a notice period, if possible, to allow their employee time to find a new job and prevent them from falling into personal hardship.

There is no specific layoff protocol that American businesses must follow, but most will offer contracted employees a severance package to ease the disappointment of losing their job. Employees who are typically eligible for a severance package are those who have been continuously employed for at least 12 months. Their package will normally be calculated based on a basic severance allowance plus an age adjustment allowance, recognizing that older workers may find it harder to secure new employment.

The basic severance allowance is usually calculated based on a week's pay per year of service, up to 10 years, plus two weeks' pay per year for time served over ten years. The age adjustment increases this value by 10% for every year that the employee is aged 40 years or more.

Restructuring and layoffs are two ways of quickly saving money, but they have far-ranging implications, including reputational repercussions, and they may incur high upfront costs, so they should only be considered after all other cost-saving measures have been eliminated. Franchises facing financial difficulties should always seek specific legal and financial advice prior to enacting any cost-saving plans.