How to downsize after nothing else works
Last fall and winter, daily news reports announced round after round of massive layoffs. While these announcements focused primarily on the Fortune 500 firms, the reality is that layoffs have hit, and continue to hit, companies of all sizes.
In its “2001 Layoffs and Job Security Survey,” the society of Human Resource Management reported that the responding companies tried to avoid the forced layoffs by using attrition, employment freezes, not renewing contracts, and encouraging employees to take vacations or early retirement.
The survey demonstrates that companies of all sizes would be wise to develop strategies for dealing with the reality of the business cycle, which includes both economic growth and economic slowdowns. The best time to decide how to handle layoffs should be early on, when a company is growing and beginning to hire staff.
The firm’s leaders should decide simultaneously how to structure both the employment arrangements and the employee policies, wages and benefits. The latter need to be flexible enough so as not to hobble the company’s early growth, but also detailed enough to offer guidance for unexpected contingencies, such as a layoff or reduction-in-force or RIF.
As many business owners have (unhappily) learned, downsizing is rife with the possibility of litigation, especially with the strong emotions generated by letting workers go. Even with appropriate policies, the responsible business owner should undertake a RIF with care, analyzing in detail all of the legal and economic implications.
Here are steps you can take to avoid legal claims if you have to resort to a RIF:
- Review the personnel policies that were created at the time your organization began adding staff to ensure that they clearly outline the RIF process: i.e., how the affected employees are selected, the severance package, the early-retirement criteria, and
- If and when a RIF becomes the only option, your firm’s policies should clearly define the reason(s) for it. For each reason, list the goals you want the RIF to achieve.
- Before initiating a RIF, you should ask and answer this critical question: Are there any alternatives to the RIF, such as a hiring freeze, reduced hours, or cutting expenses
- Weigh the potential costs of the RIF; they could be much greater than you might expect. They include attorneys’ fees, unemployment claims, severance pay, diminished employee morale and productivity, potential litigation, the reduced quality of products and services, and customer and community impacts.
- Calculate the number of employees who will be displaced to meet the goals of the RIF. Put in writing the grounds for determining the number of position to be eliminated in
- Determine whether there are any contractual commitments or employee benefit plans that would limit your options as an employer.
- Encourage a voluntary RIF. Note that early retirement incentive plans typically offer enhanced severance packages or retirement benefits to employees in exchange for a release of all claims against the employer. Be aware, however, that such a plan may raise questions under the Employee Retirement Income Security Act and tax laws. You have a fiduciary duty to your participating employees not to compromise the existing retirement plan.
- Should an involuntary RIF become necessary, consider offering a severance package – in exchange for a release from the affected employees that complies with the waiver provision of the Older Workers Benefit Protection Act. Review the OWPBA regulation carefully prior to offering such a package.
- Review the criteria for which of the employees with be selected for the layoff. These criteria should already be set out in your company’s human resource policies and procedures manual – and possibly in other collateral document. To avoid Equal Employment Opportunity or Human Rights claims, use strictly objective criteria, such as seniority, lotteries, and measurements of production and performance quality.
- Under certain conditions, you are required to give your employees notice if the RIF is a massive layoff or causes a plant closing. If you have 100 or more full- or part-time employees, review and follow the requirements of the Worker Adjustment and retraining Notification Act.
- Remember that a legal and properly performed RIF still does not insulate an employer from liability in some circumstances. You should always consult a labor-law attorney or a human-resources officer who is knowledgeable about these particular issues.