The first alternatives to layoffs that managers are likely to consider are those that intrude the least on the day-to-day management of the business. These alternatives usually focus on adjustments to employment policies.

The least disruptive way to cut labor costs is through attrition . By not filling job vacancies that are created by turnover, firms can improve the bottom line. When greater cost reductions are needed, a hiring freeze may be implemented. Other employment policies aim to decrease the number of hours worked and, therefore, the number of hours for which the company must pay its employees. Workers may be encouraged to take voluntary (unpaid) time off or leaves of absence, or they may be asked to put in a shorter workweek (for example, 35 hours rather than 40).

The strategic application of employment policies to provide job security for a firm’s full-time, core employees is called a rings of defense approach to job security. Under this approach, headcounts of full-time employees are purposely kept low. An increase in the demand for labor will be satisfied by hiring part-time and temporary employees or subcontracting work to freelancers. The advantage of this approach is that it provides some stability and security, at least for the core employees. This security can pay off in the form of workers who feel more comfortable and can, therefore, be more innovative—an important competitive characteristic in many industries. However, the increasing use of temporary, or contingent, workers as a strategy to smooth out variations in demand for labor means that more workers are vulnerable and treated as expendable by employers.

Managers can use their human resources more cost-effectively by changing job designs and transferring people to different units of the company. Alternatively, they may relocate people to jobs in different parts of the country where the cost of living and salaries are lower. The cost of relocating an employee plus the fact that some employees do not want to move sometimes make this alternative problematic. Another practice, common in unionized companies, allows a senior employee whose job is eliminated to take a job in a different unit of the company from an employee with less seniority. This practice is called bumping.

Companies can also use job sharing (which we discussed in Chapter 2) when it is possible to reconfigure one job into two part-time jobs. The challenge here is to find two people willing to share the job’s hours and pay. Finally, as a last resort, highly paid workers may be demoted to lower-paying jobs.

As one way of reducing costs, managers can enforce a pay freeze during which no wages or salaries are increased. Pay freezes should be done on an across-the-board basis to avoid accusations of discrimination. These policies can be augmented by reductions in overtime pay and policies that ask employees to use up their vacation and leave days. Many state governments have enforced annual pay freezes on their employees. Unfortunately, pay freezes often cause some top-performing, highly marketable employees to leave the company.

A more radical and intrusive pay policy geared toward reducing labor costs is a pay cut. This action can be even more demoralizing to the workforce than a pay freeze and should be used only if employees are willing to accept it voluntarily as an alternative to layoffs. Unions in several U.S. industries have accepted wage reductions in return for job security.

A long-term pay policy that may protect workers from layoffs structures compensation so that profit sharing (the sharing of company profits with employees) or variable pay (pay contingent on meeting performance goals) makes up a significant portion of employees’ total compensation (around 15 to 20 percent). When the business cycle hits a low point, the company can save up to about 20 percent of the payroll by not paying out profit sharing or variable pay, but still retain its employees by paying them the salary portion of their total compensation. Few companies in the United States use this approach, but it is very common in Japan.

By retraining employees whose skills have become obsolete, a company may be able to match newly skilled workers with available job vacancies. Without this retraining, the workers might have been laid off. For example, IBM has retrained some of its production workers in computer programming and placed them in jobs requiring this skill.

The Worker Adjustment and Retraining Notification Act (WARN) requires U.S. employers with 100 or more employees to give 60 days’ advance notice to employees who will be laid off as a result of a plant closing or a mass separation of 50 or more workers.26 This law, passed in 1988, was designed to give workers more time to look for a new job. Employers who do not notify their employees must give them the equivalent of 60 working days of income. Employers who lay off fewer than 50 employees have greater flexibility as to when they can notify the affected employees.

There are several arguments in favor of giving at least several weeks’ notice before a layoff. It is socially and professionally correct to extend employees this courtesy. Also, this treatment is reassuring to the employees who will remain with the company. But there are also arguments in favor of giving no notification. If the labor relations climate is poor, there is the potential for theft of or sabotage to company equipment. In addition, the productivity of employees who are losing their jobs may decline during the notice period.27

The criteria for dismissal must be clear. When the criteria are clearly laid out, the managers responsible for determining who will be laid off can make consistent, fair decisions. The two most important criteria used as the basis for layoff decisions are seniority and employee performance.

Seniority, the amount of time an employee has been with the firm, is by far the most commonly used layoff criterion. It has two main advantages. First, seniority criteria are easily applied; managers simply examine all employees’ dates of hire to determine the seniority of each (in years and days). Second, many employees see the seniority system as fair because (1) managers cannot play “favorites” under a seniority-based decision and (2) the most senior employees have the greatest investment in the company in terms of job rights and privileges (they have accrued more vacation and leave days and have more attractive work schedules, for example).

There are disadvantages to using the “last in, first out” method, however. The firm may lose some top performers, as well as a disproportionate number of women and minorities—who are more likely to be recent hires in certain jobs. Nonetheless, the courts have upheld seniority as the basis for layoff as long as all employees have equal opportunities to obtain seniority.

When the workforce is unionized, layoff decisions are usually based on seniority. This provision is written into the labor contract. However, when the workforce is nonunion, and especially when cuts must be made in professional and managerial employees, it is not unusual for companies to base layoff decisions on performance criteria or on a combination of performance and seniority. Using performance as the basis for layoffs allows the company to retain its top performers in every work unit and eliminate its weakest performers. Unfortunately, performance levels are not always clearly documented, and the company may be exposed to wrongful discharge litigation if the employee can prove that management discriminated or acted arbitrarily in judging performance. Because of these legal risks, many companies avoid using performance as a basis for layoff.

If a company has taken the time to develop a valid performance appraisal system that accurately measures performance and meets government guidelines, then there is no reason why appraisal data cannot be used as the basis for layoff. When using this criterion, managers should take the employee’s total performance over a long period of time into account. Managers who focus on one low performance appraisal period and ignore other satisfactory or exceptional performance appraisals could be viewed as acting arbitrarily and unfairly. We discuss this topic in detail in the next chapter.

It is crucial to communicate with the employees who will be laid off as humanely and sensitively as possible. No employee likes being told he or she will be discharged, and the way a manager handles this unpleasant task can affect how the employee and others in the organization accept the decision.

Laid-off employees should first learn of their fate from their supervisor in a face-to-face private discussion. Employees who learn about their dismissal through a less personal form of communication (for example, a peer or a memo) are likely to be hurt and angry. The information session between supervisor and employee should be brief and to the point. The manager should express appreciation for what the employee has contributed, if appropriate, and explain how much severance pay and what benefits will be provided and for how long. This information can be repeated in greater detail at a group meeting of laid-off employees and should be documented in a written pamphlet handed out at the meeting.

An argument can be made that the best time to hold the termination session is in the middle of the workweek. It is best to avoid telling workers they are being laid off during their vacation or right before a weekend, when they have large blocks of time on their hands.28

One example of how not to communicate a layoff is provided by the following example: A petroleum company brought employees together for a rather unsettling meeting. Each employee was given an envelope with the letter A or B on it. The A’s were told to stay put while the B’s were ushered into an adjacent room. Then, en masse, the B’s were told that they were being laid off.

Rumors of an impending layoff can be very dangerous to the workforce’s morale as well as to the organization’s relationships with customers, suppliers, and the surrounding community. Top managers, working with HR staff members, should develop a plan to provide accurate information about the layoff to external clients (via the media) as well as the workforce (via internal communications).29 In this way, managers can control and put to rest rumors that may exaggerate the extent of the firm’s downsizing efforts. It is also important that direct communication take place with the employees directly affected by the layoff and the surviving employees and that all communication be coordinated with press releases to the media. In addition, HR staff must prepare to answer any questions that employees or the media may have regarding outplacement, severance pay, or the continuation of benefits.

In some situations, a layoff may threaten company property. Laid-off employees may find themselves rushed out of the building, escorted by armed guards, and their personal belongings delivered to them later in boxes. Although such treatment may seem harsh, it may be necessary in certain industries (such as banking and computer software), where sabotage could result in substantial damage.

For instance, Timothy Lloyd worked for Omega Engineering, Inc., a company that designs and manufactures instruments and process control devices. After he was dismissed but before his last day at the company, Lloyd allegedly set a “program bomb” in the company’s computer system. About two weeks after his last day, the bomb deleted key files from Omega’s database, resulting in $10 million in damage. Al DiFrancesco, Omega’s director of human relations, noted that the company could have avoided the problem with better security, but “hindsight is 20/20 . . .” As a result of the damage, Omega tightened its security policies and procedures to safeguard against disgruntled employees.30

In most cases, security precautions are probably not necessary when implementing a layoff, and using armed guards and other heavy-handed tactics will only lead to hard feelings and resentment. Treating laid-off employees with dignity and respect generally reduces the potential for sabotage.

On paper, a layoff may have the positive effect of reducing labor costs and restoring financial balance to an organization. As a practical reality, layoffs can have some negative effects on the organization. The Manager’s Notebook, “Effects of Layoffs on Survivors” considers the possible negative impacts of a layoff. It is important to be aware of the negative fallout that can happen following a layoff. As a manager, if you are aware of these downsides, you can take steps to lower or eliminate their occurrence. The Manager’s Notebook, “Survivor Management 101,” addresses some of the basic steps you can take as a manager to lessen the negative effects of a layoff on the surviving workers.

MANAGER’S NOTEBOOK Effects of Layoffs on Survivors

Ethics/Social Responsibility

Those workers who survived a layoff might be considered the lucky ones. However, research has found that layoffs can have a number of negative effects on those who got to keep their jobs. Some of the negative effects on survivors can include:

• ▪ Increased absenteeism and turnover.

• ▪ Lower productivity and poorer job satisfaction.

• ▪ Increased sabotage.

Why such negative effects from people who should feel lucky that they didn’t lose their jobs? When you consider the situation, the negative impacts may make more sense. Consider, for example, that when labor is reduced through a layoff, the amount of work that is expected to be done often stays the same. The layoff survivors have more to do. A layoff can also make clear to remaining workers that they are dispensable and their jobs could be on the chopping block next. It’s little wonder that the “lucky” layoff survivors can experience negative effects.

Sources:Based on Cotter, E. W., and Fouad, N. A. (2012, November 27). Examining burnout and engagement in layoff survivors: The role of personal strengths. Journal of Career Development, published online; Long, B. S. (2012). The irresponsible enterprise: The ethics of corporate downsizing. Critical studies on Corporate Responsibility, Governance, and Sustainability, 4, 295–315; Sobieralski, J., and Nordstrom, C. R. (2012). An examination of employee layoffs and organizational justice perceptions. Journal of Organizational Psychology, 12, 11–20.▪▪