When your business is struggling, you may find yourself looking at laying off employees -- a dark day for any small business owner. In a big company, a CEO can order 10,000 job cuts without ever meeting anyone who gets laid off. But reducing a small workplace entails the excruciating task of laying off people you know well and are on friendly terms with. It's so hard that some businesspeople watch their business fail rather than wield the axe.

But to survive, you must accept the proposition that your duty to your employees is limited by economic reality. Remember, you hired employees in an effort to make a profit, not to pay them in all circumstances forever. And although nobody's happy about it, employees understand that layoffs may be necessary when times are tough. After all, they read the newspapers and see the stories of layoffs in businesses from the small factory across town to multinational retailers.

If you have been in business some time, it may help to keep in mind that over the years you've provided employment for lots of people, some of whom moved on when they found a better opportunity. The fact that forces outside your control are now causing your business to contract doesn't make you a bad employer or a bad person. And the longer you resist or delay necessary layoffs, the more you put at risk your business and its ability to provide jobs in the future.

Where to Start

Cut jobs, not people. In other words, focus on the tasks that need to get done -- and those that no longer need to get done -- instead of on the personal needs of your employees. Things are likely to go downhill further and faster if you base your cuts on personal situations, sparing those you like best or those with the most sympathetic personal problems. If you keep them, then it means you'll be cutting those who are more efficient or needed. Far better to look at the work that needs doing and the people who can do it best.

Make a Plan

When it comes to layoffs, a common mistake is to start the process without first adopting a systematic plan to shrink the business. Before you start cutting your payroll, create a new budget and then start looking for expenses to cut until they match your reduced income projections. Employee layoffs should be handled as a crucial component of this plan, not in a vacuum.

Your layoffs must eliminate the positions not needed to achieve your new slimmed-down financial plan. For instance, if you are suspending new software research and development, you can eliminate a certain number of programmers and project managers. If you still need to cut more expenses, and those cuts must come in the form of jobs, you'll have to figure out what jobs your company can live without.

Hold on to Your Best People

Although your focus should be on eliminating jobs, you might want to shift some job responsibilities. If an employee in a position slated to be cut is more efficient and qualified than someone occupying a position you plan to keep, make the substitution.

Unless yours is a very small enterprise, it's extremely important to solicit managers' help in deciding who you should lay off. They, not you, probably have the best frontline knowledge of which tasks are essential and which expendable. And because they are the ones who will be responsible for accomplishing the essential work with a smaller staff, they are highly motivated to hold onto the most talented workers who can do the most for the company.

Don't Discriminate

Once you've got a tentative list of employees to let go, make sure your layoff plan doesn't discriminate (or appear to discriminate) for an illegal reason such as race, age, or gender. Normally, where you first identify job slots that you can eliminate and then cut the people occupying those slots, you'll have little to worry about, because you'll end up laying off people of different ages, genders, race, and so on. But if after making your list, you find that most people on it are, say, women over 40, rethink your plan or talk to an employment lawyer. (You can find an attorney in the Employment & Labor Relations area of Nolo's Lawyer Directory.)

For even more information on layoffs, see Nolo's article How to Conduct a Layoff. For more information managing your business in tough times, see Save Your Small Business: 10 Crucial Strategies to Survive Hard Times or Close Down and Move On, by Ralph Warner and Bethany K. Laurence (Nolo).