Restructuring can invite lawsuits if companies aren’t careful. Following local, state and federal rules is critical, as is keeping the employee handbook current.
In April, Bristol Myers Squibb announced it was laying off approximately 2,200 of its employees. The following month, Bayer said it would cut 1,500 jobs. While the sheer number of people affected is notable, these moves represent less than a third of the layoffs seen in biopharma already this year, as many biotech and pharma companies strive to weather high interest rates and declining investor enthusiasm.
But while layoffs may seem like a surefire way to cut costs and extend a company’s cash runway, they present a hazard that executives may not have considered: that one or more of those laid off employees may go looking for grounds to sue the company—and find it. Whether the company wins or loses, defending against such suits is costly, and could even present an existential threat to smaller biotechs already struggling to stay afloat.
As the head of Founder Shield’s life sciences commercial insurance practice, I’ve worked with many companies undergoing layoffs and gained insight into the importance of risk management in planning restructuring, as well as how best to accomplish it. Even before the need for a restructuring arises, it’s important for leaders to be aware of the hazards they can present and take steps to avoid them in order to ensure a company’s longevity.
Why Restructuring Can Be a Lawsuit Magnet
One company to run into legal trouble recently around restructuring is Gro Intelligence, a New York-based agricultural insights platform company. Former employees launched a putative class action lawsuit against Gro in April, alleging the company violated the Worker Adjustment and Retraining Notification (WARN) Act.
The WARN Act requires employers with 100+ employees to give staff written notice of mass layoffs at least 60 days before. The lawsuit alleges that Gro Intelligence failed to adhere to this rule by abruptly terminating upwards of 90 employees—more than two-thirds of its staff.
Outside of the biotech industry, Gap faced a similar lawsuit in 2023 and The Messenger earlier this year, while Twitter was sued over severance pay during layoffs. Employees don’t target the biotech industry more than any other; however, the impact of lawsuits might be different in biopharma compared to other sectors, because biotech’s specialized workforce is irreplaceable, given the industry’s lengthy drug development cycle and high regulatory hurdles. While industries with faster and simpler product lifecycles and less specialized workforces might weather layoffs fairly well, biotechs can suffer years of hobbled progress due to restructuring or lawsuits.
Restructuring isn’t uncommon in the biotech industry, however, typically mirroring market demand’s unique ebb and flow. It’s critical to understand that when restructuring begins, employees start asking, “Can they do this?” The bylaws and employee handbook become popular reading material, and any mistakes in legal language are dissected. Naturally, these actions frequently snowball into employment-related lawsuits.
But restructuring need not be a lawsuit magnet. Rather, restructuring becomes problematic when employers color outside the lines, pushing legal limits.
The Right Way to Handle Layoffs
Restructuring is often viewed as two-sided—employers vs. employees—and it might be difficult for those laid off not to view employers as the “bad guys.” Yet layoffs can be the financial strategy that keeps a biotech company from shutting down.
The trick is following local, state and federal rules—and keeping the employee handbook current.
Companies should plan restructuring carefully and establish a risk management safety net, such as specific insurance policies that protect against employment-related lawsuits and safeguard an executive’s personal assets if someone sues them. (Full disclosure: My company sells these services, as do other providers, or companies can secure their own directly from insurance companies.)
Lastly, biotech companies opting to restructure must have a plan and resources to resolve employment-related issues quickly and painlessly. This involves communicating effectively, providing severance packages and building morale among remaining team members. For example, when Google underwent layoffs last year it appeared to prioritize clear communication, reassuring the remaining team about the company’s future plans as well as offering support to departing employees. By approaching layoffs with a risk management lens, biotech companies are more likely to make it to the other side.
