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Alternatives to Layoffs in a Down Economy

By Carolyn Worthington, PhD

It’s painful for any business to consider laying off workers, and perhaps even more so for small companies. In a small business, employees tend to become not only valued workers, but also friends. In an economic downturn, companies of all sizes search for ways to cut costs, and reducing labor costs is often one of the first tactics considered.  

In a poll conducted by the Society for Human Resource Management last October, nearly half of the over 600 respondents reported employee layoffs in the prior 12 months. Sixty percent of the respondents indicated that layoffs were likely or somewhat likely to occur over the next twelve months. Other than layoffs, the two major tactics used to cut labor costs were attrition (72%) and hiring freeze (48%).1

You may be able to avoid layoffs altogether by implementing proven cost-reduction methods. If you must reduce your labor costs, there are alternatives to layoffs that you may want to first consider. Here are a few suggestions:

1. Be transparent. Uncertainty about job security nearly always affects productivity and morale. Clearly communicate to all staff the purpose of any cost reduction strategies and engage everyone in the process. Employees often have good ideas and know where cuts can be made.

2. Freeze hiring. Existing staff may have a little more work but knowing the alternative makes them willing to share the load.

3. Take a good look at job descriptions. Changing a job to revise or shift duties might prevent letting a valued employee go.  

4. Reduce salaries, eliminate overtime, and consider variable pay options*. This works best if done early, usually in the first few months of a downturn. A salary reduction may negatively affect morale but employees prefer this to job loss.

Some companies reduce management pay first and at a greater percentage than that of non-management staff. Dedication may suffer after a pay cut but it helps to know that everyone is pitching in.

Another option is to reduce base salaries by a percentage and distribute any bonus or other annual payments over 12 months, adding that amount to employees’ monthly pay. This may provide staff with close to the same monthly income.

5. Shorten the workweek*. A reduction in pay is more acceptable if the time at work is less. A 35- or 32-hour workweek reduces payroll in the short term, and a compressed workweek offers employees more time off. Despite less pay, most workers prefer this practice to job loss and productivity is not usually decreased.

6. Establish a leave policy and offer voluntary sabbaticals or business-condition furloughs*. The cost of replacing an employee is far greater than the cost of a sabbatical. Most employees understand that a leave for a set period with reduced or no pay is much better than being laid off. Benefits are still provided, and the leave can be paid, partially paid, or unpaid. The duration of a leave is solely at the employer’s discretion.

A pay schedule for a leave might be a three-month leave at 50% pay; six months at 40%; nine months at 30%; or 12 months at 20%. A more cost-effective schedule might be three to nine month leaves at 30% pay. Staff could be allowed to take other jobs while on leave or encouraged to advance their education.

Leaves do not have to be paid other than for exempt employees who have done any work for the employer during the week or are absent for partial days. An employer can decide if benefits are paid during leave and can have the employee contribute to the cost of continued coverage.  Paid time off accruals can stop during the leave.

Be sure to review any related plan documents, summary plan descriptions, written policies and procedures, and laws or regulations to ensure an integrated and compliant approach to providing leaves.  Talk with an attorney or a human resource professional if help is needed.

7. Implement mandatory vacation. Having employees take some of their accrued vacation days at a designated time can cut labor costs in the short term. Some may not like this but most will see it as some assurance of job security. Asking employees to take a set number of vacation days over several months gives them some flexibility to choose. Alternatively, they could take a set number of Fridays over several weeks as unpaid vacation.

8. Consider offering early retirement for staff nearing retirement age.  Unless the usual retirement benefits are assured, few employees will opt for this.

9. Make all necessary job cuts at one time. If this can be done, it keeps staff from wondering, “Am I next?”

10. Consider a temporary facility shutdown*. A skeleton staff may still work and others may take paid or unpaid vacation. This works well if the shutdown is around a holiday.

Regardless of the methods employers use to reduce labor costs, assure your employees that the channels of communication will remain open throughout the process. And, be sure to follow applicable regulations to keep your company out of trouble.

* For information regarding how "mandatory time off" can impact exempt status, CLICK HERE.


1, SHRM Poll, Layoffs in Light of 2008 Challenges to the US Economy, October 30, 2008, pp. 3, 10, 12.

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Carolyn Worthington is a Senior Consultant with Strategic Workplace Solutions, Inc. She helps organizations develop innovative approaches to solve problems and achieve strategic goals.



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