Important Considerations when making Layoff Decisions

During these turbulent economic times, many companies are starting to weigh the pros and cons of scaling down their workforce. When money is tight, employers often look to their biggest expense – their employees – in order to cut costs. Expenses relating to employee wages, benefits, and other employee overhead can have a significant impact on the bottom line.

Because layoff decisions aren’t often as cut and dry as other types of terminations, many employers faced with the decision are challenged with some tough questions related to the process; questions like, “How do we decide who to layoff and who to keep?” or "Which state agencies must be contacted?" and “What legal risks should be considered?”

The steps outlined below will help to answer some of these very questions and provide guidelines to follow when faced with a layoff situation:

1.    Consider the alternatives. A knee-jerk reaction may result in a quick layoff and a quick buck, but it may not be the best solution long-term. Before making a layoff decision, always consider the alternatives. Layoffs should typically be a last resort, after other cost-cutting measures don’t pay off. Work sharing, for example, is one option that may help the company save some money and still allow employees to retain their jobs. Work sharing allows two employees to share the responsibilities of a full-time employee. Company-wide pay cuts may be another feasible alternative to a layoff. Although not appealing to most employees, for some, it’s better than having no job at all. A reduction in pay works best if it is shared by all employees, including management. Another option is to offer those nearing retirement exit incentives if they choose to resign early. Employers want to be cautious with this approach, however, to avoid claims of age discrimination.

2.    Layoff criteria. It is recommended that prior to layoff employers develop objective and justifiable criteria for selecting employees to let go. Some factors you may want to consider in making a layoff decision include seniority, job performance, leadership potential, and one’s overall value to the company. Just remember, any decision you make must be supported by a legitimate business need.

3.    Seniority. When seniority is considered to be the criteria for making layoff decisions, an employee’s tenure will determine his or her susceptibility to a layoff. Although length of service is recommended to be part of the layoff decision, it should be coupled with other factors such as an employee’s performance history.

4.    Performance and skills. The knowledge, skills and abilities (KSA’s) needed for a company to survive after downsizing, and to ultimately remain competitive in the marketplace, may also help guide a layoff decision. Competencies such as resiliency, leadership and organizational commitment, for example, may all be particularly valuable to the company. It may be wise to retain employees possessing the skill sets that are desired company-wide. In addition to specialized skills, job performance is often used to make layoff decisions. When performance is used during the decision making process, be sure to review past performance appraisals and other records of performance history before making a layoff decision.

5.    Voluntary layoffs. To avoid making the difficult decision themselves, some employers offer “voluntary layoffs” by informing employees of their options. For example, an employer may approach their employees and offer them to either remain with the company and take a pay cut or allow them to resign and take a severance package. Offering attractive exit incentives, such as severance pay, continued health insurance, and pay for unused paid time off, may encourage employees to make the decision to leave the company voluntarily. However, this approach may also have some drawbacks; most notably the potential for star employees to take you up on your offer.

6.    Severance packages. Although employers typically have no obligation to offer severance packages to exiting employees, some employers may decide to. Severance pay usually equates to a week or two of pay for each year of service and can be provided in a lump sum or paid over a period of time. In some instances, a severance package may also include other extended benefits such as continued health insurance or outplacement assistance.

7.    Outplacement services. Employers may want to consider providing affected employees with outplacement services. These services are designed to help terminated employees prepare for a new job and typically provide assistance in resume writing, interview skills, job placement, and career counseling.

8.    Ensure employees are informed. Employers can help make the transition between jobs a bit easier by providing employees with helpful information on income support assistance programs such as unemployment compensation, and health insurance continuation options, such as COBRA.

9.    Paychecks. Each state may have their own requirements relating to issuing an employee’s final paycheck. In some states, employers may be required to provide employees their final paycheck at the time of layoff; other states may allow employers to provide the final paycheck at the next scheduled payday. Check your state requirements in the Layoffs section of our State & Federal Laws database.

10.  Legal considerations. As with any employment decision, employers want to tread carefully before following through with a layoff. To avoid discrimination claims, all decisions should be made based on objective criteria and supported with documentation. It’s recommended that equal employment opportunity (EEO) implications are considered in order to ensure that employees of a protected class (i.e., minorities, those over the age of 40, the disabled, or veterans) are not disproportionately impacted by a layoff decision. Further, when large number of workers are laid off at once, state law may require that employers notify their state Department of Labor. Check your state requirements in the Layoffs section of our State & Federal Laws database.

If downsizing is the best option for ensuring the company stays afloat during tough economic times, there are a variety of considerations employers should make in order to protect themselves. Establishing criteria that will be used when making layoff decisions should always be your first course of action, followed by considerations relating to whether or not to offer severance packages, outplacement assistance, or exit incentives.

Trish Dougherty has greater than 25 years of successful leadership experience and is Senior Vice President & Principal for The Weston Group located in Sioux Falls,SD. Dougherty has a background in executive human resource management and is also a licensed Registered Nurse. Dougherty also served as an Officer in the United States Army Nurse Corps for 10 years. Dougherty travels and speaks nationally to assist small to medium size organizations with organizational effectiveness involving their most important asset – their employees. Trish can be reached at Trish@TheWestonGroup.com or 605-275-4747. www.TheWestonGroup.com