How To Decide When to Make Layoffs

Letting workers go⁠—whether you're laying off a single worker or conducting a large layoff⁠—is one of the toughest tasks managers face. And because of the emotional stakes involved, it's also one of the tasks most likely to land a company in legal trouble. To ease the pain and avoid the courtroom, consider the decision carefully.

Laying off an employee is different from firing an employee. "Firing" means letting a worker go for any reason, whereas a "layoff" refers to an employment termination based on economics, usually involving more than one worker. (For information on firing, see Nolo's article Firing Employees FAQ.)

If layoffs are under consideration at your company, you need to make two decisions:

• Is it in your company's best interest to conduct a layoff?
• Which employees should your company lay off?

Though making the decision to let someone go is rarely easy, this article can help you feel confident you've made the best of a bad situation. (If you've already considered the below factors and feel a layoff is right for your business, read Nolo's article How to Conduct a Layoff.)

Deciding Whether to Conduct a Layoff

Companies that consider layoffs are usually trying to cut costs in order to dig the company out of a hole or make it more profitable. But keep in mind that layoffs can be costly in other ways. For example, the company may have to pay severance packages, remaining workers' productivity and morale may decline, and the company might even be faced with a lawsuit, depending on how the layoff is conducted.

Given the risks, companies should carefully consider whether they really need to conduct layoffs and whether they can do so legally.

Consider Alternatives to Layoffs

In some cases, less painful alternatives can do the trick. These might include:

• a freeze on hiring, promotions, or pay raises
• a freeze on filling positions left vacant when employees leave voluntarily
• cutting other costs
• pay cuts
• asking employees to take time off or reduce their hours
• reducing authorized overtime, or
• providing voluntary termination incentives to allow employees to decide whether to quit in exchange for a package of benefits.

Even if implementing these strategies won't eliminate the need for layoffs, by considering and perhaps implementing some of these alternatives before laying workers off, fewer workers will question whether the layoff was truly necessary.

How To Avoid Legal Problems While Making Layoffs

If you've considered the alternatives and a layoff is still your best option, make sure you are on solid legal ground before you do anything. In order to avoid legal trouble, you should:

Have a legitimate business reason. Your company should have valid, business-related reasons for the layoff. Otherwise, you invite lawsuits from disgruntled employees. A decrease in sales, loss of a credit line, or overstaffing are legitimate reasons for a layoff; trying to get rid of older workers or punishing union supporters are not.

Check written personnel policies. Some companies lay down their own specific rules as to when, and how, the company may conduct a layoff. Know the rules and follow them.

Review actual policies and past practices. Even if your company doesn't have written policies regarding layoffs, it may have established a company policy by actions or statements. For example, if a company has always paid severance to workers it laid off in the past, it may have to do so now.

Check employment contracts. If a worker has an employment contract with the company, check it carefully to make sure you can lay off the worker for economic reasons. The contract also might require severance.

Review collective bargaining agreements. If the workplace is unionized, check the collective bargaining agreement for limits or rules on laying off workers.

Consider offering severance or other termination benefits. Even if the company is not required to offer severance or other termination benefits, consider doing so anyway. It's a good way to show laid off employees, retained employees, and the general public, that the company values the workers' contributions and is concerned for their welfare.

How To Make Layoff Decisions

Once your company has decided that layoffs are necessary, it's time to figure out who gets the axe. If the company is getting rid of an entire department or outsourcing particular work tasks, the answer will be obvious.

However, if you need to make cuts across the board or reduce staff in some areas, you will have tough decisions to make. Following the steps outlined below can help you make the best layoff decisions for your business:

1. Decide what the company will need going forward. Before deciding whom to cut, the company will have to think about its future direction. Is the company shrinking in some areas and expanding in others? Is the corporate focus shifting? What are the essential positions that must be kept for this plan to succeed?

2. Figure out which departments or positions will be cut. Now that you know your company's goals, you will be able to figure out which areas need to be scaled back. For example, if the company is cutting back on direct sales to focus more attention on research and development, the sales department can be safely targeted for cuts. At this point, you should focus on jobs and positions, not on individual workers.

3. Establish the criteria for layoff decisions. Once you have a sense of what skills the company will need going forward, you can decide how to select workers for layoff. The safest course, legally, is to use objective criteria like seniority, productivity, or sales numbers. If you will consider subjective qualities like quality of work, willingness to learn new tasks, or communication skills, make sure everyone applies these criteria consistently.

4. Make a list. After the criteria are set, apply them to the workers in the targeted departments to come up with an initial layoff list. Some companies rate how well each worker meets the layoff criteria, then weed out those with the lowest scores.

5. Check it twice. Once the initial list is finished, look it over for potential problems. Make sure your layoff plan doesn't discriminate (or appear to discriminate) on an illegal basis such as race, age, or gender. For example, if you lay off the workers on your list, will the company be getting rid of a disproportionate number of women or minority workers? If, after making your list, you find that most people on it are, say, women over the age of 40, rethink your plan or talk to an employment lawyer.

6. Keep enough people to do the work. Make sure the workers who are left will be able to do the work that remains. Workers you don't lay off will quickly begin searching for new jobs if they are asked to do twice as much work.

To learn more about conducting layoffs, get the The Employer's Legal Handbook, by Aaron Hotfelder (Nolo). This handy guide covers hiring, firing, and everything in between.