Downsizing Alternatives? Quirky Question # 71

Quirky Question # 71:

The country is in a recession.  The Bureau of Labor Statistics reported that U.S. employers reduced the size of their workforces by more than 500,000 employees in November alone, with an eleven-month total of more than 1.5 million.

Like every company, we’re considering whether to reduce the size of our workforce sometime during 2009, assuming the economy remains flat.  I’d like to present our management with some reasonable alternatives to laying off significant numbers of our employees.  Do you have any recommendations?

Dorsey’s Analysis:

Your question is not particularly quirky, but it certainly is timely.  There are a number of pragmatic ideas every company should consider as alternatives to substantial layoffs.  Set forth below are ten approaches your firm could consider.  They are organized from the least to the most disruptive, for both the company and the employees alike.  Of course, some of these options may not be appropriate in your particular situation.  Moreover, regardless of the economic impact of these alternatives, there may other factors, unique to your firm’s circumstances, that make the option inapplicable to your situation.

Stop Hiring.  One of the first steps that a company should consider is a hiring freeze.  This has several potential benefits.  It demonstrates to the existing employees that you are committed to them and making an effort to preserve their jobs.  In the event that layoffs are later necessary, and these layoffs result in litigation, this simple step also will enhance your arguments that your workforce reduction was driven by economic necessity.  At times, employers engage in layoffs while simultaneously hiring other employees.  This not only is damaging to employee morale, it raises the question of whether the layoff truly was an economic necessity, or merely a pretext for the company to rid itself of certain employees.

Notwithstanding the legitimacy and uniform applicability of a hiring freeze, there may be circumstances where you make an exception.  For example, assume that you have been trying to recruit a key employee from your competition for some time without success.  If that individual lost her job and approached you about potential employment, you may want to make an exception to your general hiring freeze.  Similarly, if you had a chance to hire an individual whom you felt would significantly expand your business (a great engineer, a terrific salesman, a physician with a unique specialty), disregarding the opportunity to hire this individual may be foolish and short-sighted.  But, if you elect to make an exception to the “freeze,” document your reasons for doing so.  At a later date, you may need to explain your actions to a judge or jury and you will want to have an accurate record of the reasons for your decision.

Don’t Replace Departing Employees.  Another step that can be implemented, closely correlated to the hiring freeze, is simply to refrain from replacing employees who are departing from your organization.  Employees voluntarily leave companies for various reasons, including retirement, changed interests, better offers from other companies, personal circumstances (such as a spouse’s relocation), etc.  If possible, don’t replace those individuals.  Instead, simply redistribute the work they are performing to other employees..  Again, this approach is likely to have a positive impact on employee morale.

There will be times, of course, where you have no choice but to replace the employee who has departed.  There may be individuals within your organization who can step into the shoes of the departing employee.  But if not, you will need to fill the vacant position (especially one critical to your company’s long-term success) with a qualified individual from outside your organization.  Again, document the reasons for your decision.

Reduced Workweek.  One concept that could be considered as an alternative to laying off significant numbers of your employees is to reduce the time commitment expected from each of your employees.  Switch, for example, from a five-day to a four-day workweek.

There are pros and cons to this approach and, to some extent, it is difficult to predict the likely outcome of this business/social experiment.  In a smaller organization, the employees may find this approach far preferable to seeing co-workers and friends lose their jobs.  The risk, however, is that your employees will not be able to afford a reduction in their workweek, with the corresponding reduction in their compensation (a five- to four-day change also represents a 20 percent salary reduction).  Therefore, you may find yourself losing talented employees.  In the current economic climate, that may not be all bad, although as discussed further below, you don’t want to lose the wrong employees (your high performing, highly productive contributors).

As with each of the other ideas addressed, one of the important themes to keep in mind is to communicate clearly to your employees.  If employees understand that your best estimate of the duration of the reduced workweek is three months, that might be a far more palatable scenario than a reduced workweek lasting twelve months.  But, don’t over-promise.  Make a realistic appraisal of how long you anticipate this situation will last and share that estimate with your employees.  If circumstances change and the economic downturn proves more severe and more consequential for your business than you first expected, keep your employees in the loop.

Salary Freeze.  Another way to weather a tough economic climate is to impose an across-the-board salary freeze.  Calculate how much this approach will save your firm on an annual basis and evaluate whether those savings will be sufficient to prevent your company from the alternative of laying off some of your employees.  Of course, you also will have to make your best prediction of how such a freeze might affect your company.  This highly individualized calculus is likely to have different impacts on different companies.  For example, let’s assume that you operate a high-tech firm that is dependent on a highly educated engineering workforce.  Let’s assume further that your engineers are regularly receiving calls from engineering headhunters, who routinely try to lure them away to your competitors.  If an across-the-board salary freeze would likely result in the loss of a significant number of these employees, you will have to evaluate carefully whether such an approach presents a practical solution to your current financial woes.  You may conclude that while an across-the-board freeze is impractical, a targeted or select freeze focusing on certain categories of your employees would benefit your company.  Conversely, however, you may conclude that your company is not dependent on any particular group of employees and if a freeze incentivized certain employees to depart, that outcome would have the beneficial effect of saving your company additional funds.

Salary Reductions.  If a salary freeze would not provide your company the savings it is seeking and you still hope to avoid layoffs, another option to consider would be a uniform salary reduction.  Perhaps the easiest way to calculate the potential benefits of this approach would be to consider a uniform percentage decrease for all employees.  You could easily determine whether a five percent (or a ten percent, or some other figure) would enable your firm to achieve the savings necessary to retain your workforce.  At some figure (different, depending on the health of the industry), however, you would risk losing employees.  They might simply conclude that they could not afford to remain employed with your firm, even if they wanted to continue working with you.  Of course, it belabors the obvious to point out that if some or all of your workforce is unionized, salary freezes or reductions could not be unilaterally imposed by your company on these collective bargaining employees.

Benefits Reductions.  A slight variation of the salary freeze and/or reduction ideas addressed above is a modification of the benefits provided to your employees.  This could be done as a stand alone approach (if it would yield the needed cost savings) or in conjunction with a salary freeze or reduction.  Here, too, special attention would have to paid to union employees, or employees whose benefits had fully or partially vested.  Decisions regarding these issues should be carefully assessed by in-house or outside benefits counsel.

Temporary Layoffs, with Defined Return Date.  Yet another option that might be worth consideration is a temporary layoff.  This could be done for a plant, a division, or some other non-essential segment of your business.  In all likelihood, the only way this option will be viable is if you can provide your employees some clarity regarding the duration of the “temporary” layoff.  In short, if you are hoping your employees will return to work at your company, the layoff cannot be indefinite.  Note, however, that if you in fact promise to re-employ these individuals at a specified time, you will need to carry through on your promise.  If you later extended the layoff, you may be confronting claims for promissory estoppel (i.e., lawsuits brought by individuals who stated that they relied, to their detriment, on your promise to resume operations at a specific date, only to see you later breach your promise to them).

Temporary Shutdowns.  A corollary concept to the preceding point is to consider the cost savings associated with a complete, though temporary, shutdown of your business.  There are a variety of difficult business considerations associated with this option, each of which becomes more complicated if the shutdown is protracted.  Will your employees stick with the company through the shutdown, or will they seek alternative employment?  What will your customers conclude about the long-term viability of your business?  What are the costs directly related to the shutdown and subsequent reopening of the business?  Does the shutdown trigger any financial obligations to your employees imposed either by state law or by contract (e.g., providing compensation for accrued, unused vacation)?  But, if these issues are thought through carefully and communicated clearly to your employees, this may prove to be a viable alternative for your company.

Employee Retraining and Reassignment.  Depending on the urgency of your company’s economic needs, you also may want to consider the possibility of retraining or reassigning some of your employees.  As noted in the preceding sentence, this option may not be viable if your company already is confronting an economic crisis.  But, if you merely are anticipating a downturn and have the flexibility to take proactive steps, retraining may be an attractive alternative.  There are a number of benefits associated with this approach.  First, taking this step in lieu of layoffs likely will engender a great deal of appreciation and good will among your employees.  Second, although this is not a cost-free option in the short-run, the long-term impact could be beneficial.  You will end up with a more diversified and talented workforce, employees who can perform in a variety of different capacities, depending on your company’s current and future needs.  Third, the increased knowledge associated with this cross-pollination could enhance the exchange of information within your business and improve efficiencies.  Fourth, if your efforts to retrain your employees are successful, you may find that your recruiting and hiring costs diminish.

Voluntary Layoffs.  If the ideas above are either unappealing to your company or simply impractical given the economic pressures your company is confronting, another option that may provide more immediate relief to your economic woes is a voluntary layoff.  Suffice it to state that my principal concerns about voluntary layoffs is that the wrong employees volunteer and the remaining workforce is diminished, not only in numbers but in skill, insight and knowledge.

If the ideas described above simply won’t work for your company, you always have the option of involuntary layoffs.  As the recent disappointing labor statistics illustrate, this is the option many companies are implementing in the current economic climate.

Dorsey & Whitney

Dorsey & Whitney

Dorsey is a business law firm, applying a business perspective to clients' needs. We make it our first priority to know the context in which you do business - your market, your competitors, your industry.

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