The tariffs imposed in 2025 created significant economic disruptions, leading to higher prices, supply chain instability, and widespread uncertainty. These pressures have led to job losses in the first half of 2025. Many CEOs have indicated plans to reduce headcount further as they grapple with increased operational costs and declining demand.
In addition, as government grants are being cut at the federal level, many not-for-profit organizations may be tightening their belts.
When implementing workforce deductions, employers face a range of legal risks that can result in costly litigation or regulatory action if not managed properly. Key concerns include compliance with federal and state labor laws, such as the Worker Adjustment and Retaining Notification (WARN) Act, ensuring adherence to nondiscrimination requirements, and honoring contractual or union obligations. Employers must also properly document the business rationale for reduction in workforce and communicate decisions in a way that minimizes misunderstandings. Failure in any of those areas can lead to allegations of wrongful termination, breach of contract, or discriminatory practices, adding legal and financial challenges to an already difficult business climate.
Below we outline key steps employers can take to navigate reductions in force while minimizing legal exposure:
- Start with Strategic Planning
Before initiating a reduction in force (RIF), employers need to define the legitimate business reasons driving the decision. Whether it is financial necessity, organizational restructuring, or a shift in serve offerings, the rationale should be clearly documented. This step not only ensures internal alignment but also supports your position if the decision is later challenged.
Work with legal counsel to design objective selection criteria. Factors such as performance metrics, tenure, skills, or business unit elimination are defensible when applied consistently. Avoid criteria that may appear subjective or inadvertently affect protected groups.
- Evaluating Discrimination Risk
One of the most common legal pitfalls in terminations is unintentional disparate impact where a neutral policy disproportionately affects employees based on race, age, gender, disability, or other protected categories.
Conduct a disparate impact analysis before finalizing selections. This may involve reviewing demographic data to ensure no protected group is overrepresented in the termination pool. If disparities appear, revisit your selection criteria and consult legal counsel to mitigate exposure to discrimination claims.
Also, be mindful of age discrimination risks under the Older Workers Benefit Protection Act (OWBPA). If employees over 40 are affected, specific notice and waiver requirements apply, including disclosure of job titles and ages of employees selected and not selected for termination.
- Understand Notice Obligations
Federal and state laws may impose advance notice requirements depending on the size of your company and the scale of the terminations. Under the federal WARN Act, employers with 100 or more employees must provide 60 days’ written notice of a mass termination or plant closing affecting a certain number of employees.
Some states, like California and New York, have their own laws with stricter thresholds or additional obligations. Failing to comply with these notice rules can result in significant penalties, including back pay and benefit.
Employers not covered by WARN should still consider providing reasonable notice where possible to demonstrate goodwill and reduce the chance of conflict.
- Handle Severance and Releases Carefully
Severance pay is not required by law but can be a useful tool to soften the impact of terminations and reduce legal exposure. If offering severance in exchange for a release of claims, the agreement must be clear, knowing and voluntary.
Avoid overly broad or confusing language and allow adequate time for employees to review the agreement.
- Communicate with Compassion
Clear, respectful communication is key during any workforce reduction. Prepare leadership and managers in advance on how to deliver the message, and be ready to answer questions about final pay, benefits, COBRA, unemployment and the organization’s policy on professional references.
Avoid making statements that could be interpreted as admissions or promises. Stick to the script, focus on business reasons, and avoid discussing individual performance unless it directly factored into the decision.
Also, ensure that final paychecks (including any unused vacation pay) are delivered on time and in accordance with applicable state laws.
Takeaway
A workforce reduction is never easy but mishandling it can make a difficult situation worse. By planning carefully, applying decisions consistently, and working closely with legal counsel, employers can minimize legal risk while treating affected employees with dignity and professionalism.
If you are considering a reduction in force, now is the time to review your policies, prepare your communications, and seek legal guidance. Taking proactive steps today can protect your business and preserve your organization’s reputation.