Making Layoff Decisions — 5 Questions to Ask Before Considering Layoffs

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In the midst of a crisis, you’re likely seeing dips in sales, possibly burning up your cash reserves, and having to revise your budgets and forecasts. With less revenue coming in and a continuously shrinking safety net, cutting costs becomes a necessity. And while there may be some obvious areas to trim, if things don’t improve fast enough, you may find yourself considering layoffs.

Letting employees go is an unfortunate reality of operating a business. But here’s the thing, layoffs often do more harm than good and should be avoided if at all possible. Sure, you may save some money in the short term, but you’ll likely end up spending far more to replace that position later on. 

What should you consider before a layoff?

If layoffs appear to be your only solution, here are five questions to ask yourself before you do.

1. Are there other areas to cut costs?

If you’ve gotten to the point where you’re considering layoffs, you’ve likely exhausted most of your options for minimizing costs. But it never hurts to check again. 

In a crisis, your financial situation can change from month to month and even week to week. Something that you identified as a vital cost one week, upon further review may no longer be required. 

Focus on the core processes of your business and what’s necessary to maintain operations. Consider anything else to be on the chopping block. This can help you make more drastic cost-cutting decisions that you may have avoided earlier on.

2. How will this affect team morale?

While your financial situation is likely at the front of your mind when considering layoffs, you also need to consider the people that will be left behind. You’ll have employees that continue working despite having friends and colleagues being let go around them. 

A mass layoff, or even a single employee being let go unexpectedly, can have negative effects on the rest of your staff. Additional stress, concern over their own position, and a disruption of the status quo are just some of the possible difficulties your employees will experience. Which is only compounded by the already difficult situation of working through a crisis.

If you’re considering layoffs, be transparent with your employees, don’t blindside them. Make the difficulties clear, why it’s come to this, and include them in the conversation. By involving them upfront, it increases their trust in you as a leader and potentially leads to more cost-cutting solutions that you may have overlooked. 

3. Consider alternatives to layoffs

While eliminating positions may seem like the best way to reduce payroll costs, there are alternatives to consider that can help you retain your full staff. 

Limit the use of external contract work

Sometimes the best way to take care of those in-house is to limit the amount of work that you outsource. Start by limiting, or pausing any contract or freelance work until you feel your business is in a healthy position.

Offer extra days of unpaid leave

Before committing to required reductions, it may be best to offer optional unpaid time-off.  

Institute shorter work weeks

If you have hourly employees, you can always reduce the workweek for a period of time or even shorten days.

Furlough periods

You can institute optional or required furlough periods, time-off without pay, that still allow employees to retain their benefits even if they aren’t working. If your business has to shut down, for instance, this can be an ideal way to keep employees on for when you reopen.

Work share programs

Access to work share programs completely depends on the state where your business operates. If it is available, it acts as compensation for reduced hours through unemployment insurance.

Go fully remote

In our current crisis, going remote for some businesses was a necessity, but it can become a long-term solution. If you’ve found remote work to be viable, you may want to consider doing it permanently and save on in-office costs in the process.

Voluntary layoffs or retirement

If you have employees willing to leave the company with a reasonable exit package, it can be a way to reduce overhead. It can be a massive short-term cost but will benefit you in the long run.

Wage cuts

Cutting wages is likely one of the last things you’ll want to consider, but it still remains a viable option. You can look to cut by a certain percentage across the board, have managers or leadership take a cut first or even eliminate costly benefits such as covering gym memberships. 

4. Are there financing options available?

Taking out a loan or other financing may have not been on your roadmap for this year, but it may become necessary. In our current crisis, you’ve likely heard plenty about PPP and SBA loans, which have become notoriously hard to get. But there are other options available.

Just be sure to go through the process of developing a crisis plan and ensuring that a loan makes sense for your business. You may find that the payments are too steep, or by going through previous steps in this process, that there are better alternatives that don’t require taking on debt.

If you already have loans that you are paying off, contact your lender to see what kind of options they may offer for delaying or reducing payments for a period of time. If you can get some loan relief, you may be able to avoid layoffs.

5. What about after the crisis?

In the midst of a crisis, you’re focused on survival – on keeping your business afloat and weathering the storm. But what about after the crisis?

You may find yourself so focused on the short-term that any long-term scenarios have been completely removed from the board. Yes, you may make it through unscathed, but find yourself in a more costly situation as you try to ramp things up back to normal. 

The best thing you can do here is continue to review and update your budgets and forecasts on a regular basis. Set up multiple forecast scenarios that consider best and worst-case scenarios and update them with actual data as each month comes to a close. You can then compare them to your expense budget and make decisions based on both short and long-term results.

Doing so gives you greater visibility into the unknown. It ensures that while you’re saving your business that you’re also planning past recovery. 

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What if layoffs are the only solution?

After asking yourself these questions, going through the process of updating and reviewing your financial statements, and even getting your employees involved in finding solutions; you may find that layoffs are still necessary. 

It’s an unfortunate reality, but by going through this process you’ve set yourself up to let people go gracefully. Here are a few final things to keep in mind as you go through the process:

Avoid legal problems

Hopefully, as you’ve gone through specific lines of questioning and explored alternatives, your employees won’t be blindsided and you’ve set them up with enough time to land on their feet. However, there are still things you’ll need to consider to avoid any legal trouble.

Ensure there’s a legitimate reason

If you’re exploring layoffs for any reason, you likely already have a potentially valid business reason. Cost reductions, staffing redundancies, relocations, decreased operations, and even mergers are all potential reasons why this may occur. Ensure that this reasoning is communicated clearly to avoid potential lawsuits for wrongful termination.

Review policies and contracts

Depending on your business you may or may not have written policies or contracts with workers regarding termination proceedings. If you do, be sure to review the specific statements and language you have established and be sure to follow it. If you don’t, then you’ll need to consider any precedent set by previous layoffs or terminations. For example, if you paid severance for layoffs before, you’ll need to likely do so again.

If this is your first time considering layoffs, then it may be wise to establish a documented process. Explore what other businesses in your industry vertical have done before and even include the document within your business plan appendix. The more cohesive and consistent you can make it, the easier it will be to clearly work through the process.

Consider termination benefits

While layoffs often extend from a financial need, you may still want to consider offering some sort of severance pay or other termination benefits. Not only will this still be potentially less expensive than retaining the employee, but it also ensures that your relationship with the employee ends on a good note. You want to show that you still value their welfare, even if it’s not sustainable for the time being.

This will also benefit current employees who are possibly concerned for their former colleagues or their own well-being. It even sends a positive message to the general public and your customers. Additionally, it can leave the door open for the possibility of the employee returning once your financial situation improves.

Determine what you’ll need moving forward

Part of initiating layoffs is also considering how your business will continue on after the fact. Your departments or teams are potentially shrinking, it may take an emotional or mental toll on the employees that remain, and it can even stretch their ability to work too thin. So, as you begin outlining which departments or positions need to be let go, ensure you’re thinking long-term.

Reinforce how you’ll support the rest of your team. Showcase long-term plans and how this will help your business stabilize or grow. Determine if you’ll explore other types of support to ensure your employees don’t become overworked. And, just as you did when exploring the need for layoffs, ensure that you and other members of your leadership team are available to talk and answer any questions. 

Take your time when considering layoffs

Situations that lead you to consider layoffs can seem dire, but it’s better to be cautious and explore your goals, financials, and alternatives. It can be helpful to leverage a financial management tool like LivePlan to quickly review your cash position. You can also run different forecast scenarios around what would happen if you let employees go, cut additional operating expenses, or even took on some sort of financing

The important thing is that you didn’t immediately jump to letting people go, but looked for every opportunity to eliminate costs, stabilize your business, and take care of your employees. 

*Editor’s note: This article was originally published in 2020 and updated for 2021.

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Kody Wirth
Kody Wirth
Kody currently works as the Inbound and Content Marketing Specialist at Palo Alto Software and runs editorial for both LivePlan and Bplans, working with various freelance specialists and in-house writers. A graduate of the University of Oregon, he specializes in SEO research, content writing, and branding.
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