Rules for Laying Off Employees

New Rules for Laying Off Employees in a Recession: Consider the Long-Term Costs

With all of the news about rising unemployment and massive layoffs across the country, it would seem that reducing your workforce is essential to surviving in a down economy. While paying less into employee compensation does drop costs initially, more business leaders are recognizing that a reduction in force comes with some unpleasant, long-term side effects.

A Look at History

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During the dot com bust at the end of the 1990s, many large companies let employees go in record numbers. This behavior touched industries that had previously not experienced such dramatic cuts, namely technology, and brought forth new feelings of insecurity and restlessness among the workforce that remained.

This time around, companies are less willing to cut employees. Ravin Jesuthasan, managing principal at human capital firm Towers Perrin, was quoted in the MarketWatch article, “Employers More Likely to Cut Pay than Lay Off,” as saying, “The commitment to the retention of key talent is a significant shift from past national recessionary periods, when a slash-and-burn mentality reigned.”

For example, according to a recent AP article, “Layoffs Not an Option for Some Businesses,” Costco Wholesale’s profits are down 27 percent, year-over-year, but the box store giant has not laid off a single worker since the start of the recession. Instead, it has frozen hiring at its corporate offices.

Reasons to Choose Layoffs

There are some commonly held beliefs about why layoffs are necessary for a company’s survival.

Benefits of Layoffs

  • Lowered labor costs. When you look at most companies’ budgets, it’s easy to see that they spend a great deal on employee salaries and benefits. Stopping up that huge drain on the budget seems like a logical way to rein in costs.
  • Stock boost. For publicly traded companies, stock prices tend to jump up after a layoff. Investors are happy to see the company taking serious action to survive.
  • Reputation. It is said that many people in leadership think that laying off workers makes them seem tough and unflappable, even in the harshest economic conditions.

As you look at the list above, you can see that all of these benefits are immediate. They can help a company take pressure off their budget when profits drop. But, what are some other effects on profitability in the long run?

The Costs of Layoffs

Layoffs absolutely result in reduced expenditures on employee compensation – at least initially. But, depending on how long you wait to rehire for the positions you cut, you could end up spending a lot of your savings on recruiting and training new people. These and other realities are important to keep in mind:

Downsides of Layoffs

  • Lost expertise. Employees who have been at your company for a while have often gained levels of expertise in their work and an understanding of the company that will take a while to replace. When they leave, so does this capacity and knowledge.
  • Breaks in client relationships. Having new and even fewer people managing long-standing client relationships places stress on them, rather than maintaining or improving them.
  • Lowered employee morale. The employees left behind will feel under threat of losing their positions and it will be harder to keep them engaged with your organization.
  • Bad employer reputation. Word will get out on what companies are laying off. And when the economy picks back up, top performers will likely prioritize companies that avoided layoffs higher on their list than those who chose to make cuts.
  • Costs of rehiring and retraining. When business returns to normal, you’ll be spending significant amounts of time, money and energy to boost your numbers and expertise.
  • Costly severance and benefits payouts. Some employees who were earning higher salaries can have hefty severance packages and benefits payouts (including accrued vacation leave) and, especially if you turn around and replace them not long after, you won’t have saved very much money.
  • Decreased productivity. The amount and quality of work you’ll be able to produce following layoffs will inevitably drop. You’ll have less expertise to draw from and your remaining employees will only be able to work so fast and so hard for so long.
  • Slower to bounce back. When the economy does turn around, you’ll be rehiring before you can produce more while companies that managed to retain more workers will have an easier time of ramping up production.

Ways to Cut Costs Besides Layoffs

Even if you’ve decided that you’d like to avoid layoffs, you’re still likely under pressure to cut costs and wondering how to do so. Keep in mind that employee buy-in and a sense of ownership over what happens next will really help you succeed beyond the recession. Here are some ideas for layoff alternatives that you can vet with the company leadership and, hopefully, with your employees as well.

Alternatives to Layoffs

  • Lower or freeze retirement plan contributions
  • Limit travel and entertainment dollars
  • Give stock options in exchange for a voluntary pay cut
  • Shorten the work week to 4 days (consult with FLSA regulations for exempt-employees)
  • Offer early retirement incentives or voluntary layoffs
  • Extend unpaid holidays, or allow for sabbaticals
  • Freeze current salaries
  • Have company leaders take similar or greater pay and benefits cuts
  • Encourage employee ideas and solutions to build morale and trust rather than diminish it
  • Reward thriftiness

Taking the time to consider and act upon these more creative solutions requires patience and a commitment to protecting employees. But, keep in mind that if you’re a company that has emphasized trust and community building within your organization in the past, layoffs can be extra damaging to the morale of those employees left behind. By involving current employees and harnessing their ideas and enthusiasm, you will maintain your company’s ethic and boost its reputation in the market.

Companies that avoid layoffs are admired and sought after by both customers and top employees. People like to support trustworthy, resilient companies.

Stacey Carroll
Director of Customer Service and Education at

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