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By Roy Rasmussen Updated on October 12, 2021

Laying Off Employees: How to Handle It Properly

Laying off employees is one of the most difficult decisions an employer has to make. Here’s how to go about it the right way.

Soften the blow by following these 7 layoff best practices. Use these guidelines to help you know when you need to lay off employees, how to decide who to lay off and how to handle layoffs prudently and compassionately.

1. Review Your Financial Projections

Reasons for layoffs revolve around financial planning issues. To place decisions about how to lay off employees on an objective basis, start with a review of your company’s financial statements

Your cash-flow statement will tell you how much money is coming into your business over a given period compared to what’s going out because of expenses. If the amount of money you have coming in is being offset by payroll expenses, you may need to consider layoffs as a way to cut payroll costs.

Review your cash-flow projections for upcoming quarters. This will give you an objective perspective on how long you can sustain your current payroll budget before you start to run into a cash-flow crunch. If your projections indicate a cash-flow crisis on the horizon, you need to take preventive measures.

2. Consider Alternatives to Layoffs

Layoffs can be one solution to a cash-flow crunch, but they are not the only possible answer. The best way to handle layoffs is to avoid them if possible. If you want to consider other alternatives before laying off workers, here are some other options:

  • Offset payroll expenses by increasing your revenue through better marketing and sales strategies
  • Apply for a short-term loan to cover payroll expenses
  • Find other places to trim your budget besides payroll, such as cutting office rental costs by letting employees work remotely
  • Reduce your own salary as a business owner
  • Reduce employee salary without reducing hours
  • Offer employees the option of cutting back hours
  • Limit overtime
  • Reduce benefits or bonuses
  • Place workers on a temporary furlough instead of laying them off permanently

To determine whether any of these alternatives are viable alternatives to layoffs, do a comparative analysis of how different options would affect your cash flow. For example, estimate how much you would save by reducing employee hours and determine whether the result would be enough to offset excess payroll expenses. 

In the case of using a loan to offset payroll costs (and to evaluate the feasibility of this option), you might first need to check your business credit score and determine whether you qualify for a loan or other form of financing.

Don’t Forget Hidden Costs

When calculating the cost savings of laying off employees for your small business, don’t forget to factor in any unemployment or healthcare benefits you may continue to pay after workers are laid off. Employers may choose to continue paying for health-care benefits of laid-off or furloughed workers temporarily or indefinitely under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

Also, if business picks up again later, you may need to hire new employees to replace ones you laid off, which can be expensive. Estimate how long it will be before you’ll have to hire new employees if you lay off your current ones and determine when your rehiring costs will start to offset your layoff savings.

Explore All Your Options to Optimize Your Layoff Strategy

Accurately estimating the savings of layoffs in this way and exploring all your options may help you avoid layoffs entirely. It also can help you limit the number of layoffs you make by letting you know exactly how much you need to cut costs to maintain your cash flow. 

You may likewise find that you can meet expenses through temporary furloughs rather than permanent layoffs. This may save you the future cost of hiring new employees as well.

A pair of scissors severs a paper doll from a chain of paper dolls.

3. Plan Your Layoffs

If you’ve decided you need to make permanent or temporary reductions to employee hours, the next step is to plan your layoffs in detail. One of the biggest challenges is knowing how to determine who to lay off. 

You might be wondering, “How do companies decide who to lay off?” You can approach layoff planning by using a checklist of questions, such as:

  • How much do you need to reduce payroll costs?
  • How many employee hours do you need to cut back to achieve your target cuts?
  • Will you achieve your payroll cuts through permanent layoffs or temporary furloughs?
  • How many employees will be affected?
  • Which positions must remain filled in order to continue operations?
  • Which positions can you afford to lay off and still maintain operations?
  • How much advance notice will you give workers who will be laid off?
  • How will you notify workers that they are being laid off?
  • If you plan on temporary furloughs, what is your plan to bring employees back to work after the furlough period?
  • How will layoffs affect your remaining staff?
  • How will you continue to run operations with your remaining staff?

The better you plan your layoffs, the more smoothly the process will go and the less additional disruption your company and workers will experience. You can’t avoid some disruption, but the more you minimize it through careful planning, the less distress it will cause for everyone concerned.

4. Comply with Regulatory Requirements

When laying employees off work, it’s important to be aware of regulatory requirements regarding employee notification or other issues. The federal Worker Adjustment and Retraining Notification Act (WARN Act) requires employers with 100 or more employees to provide at least 60 days advance written notice of plant closings and mass layoffs affecting 50 or more employees at a single location.

This includes managers and supervisors and both salaried and hourly workers. It doesn’t generally apply to employees who have worked less than 6 months in the last 12 months or to those who work fewer than 20 hours weekly. There are exceptions to general WARN rules, including exceptions for companies that close because of unforeseen circumstances such as disasters. Check with a labor lawyer to ensure full compliance.

In addition to federal WARN regulations, individual states may also have notification requirements. The Department of Labor provides a page with contact information and links for State Rapid Response Coordinators who can provide you with information about notification requirements in your area.

A notice of termination.

5. Notify Employees

Telling employees they’re about to be laid off can be the most stressful part of the layoff process. You can make it easier by following some standard layoff best practices:

  • Provide written notification in all instances preceded by a face-to-face notification when feasible
  • Let employees know the reason for layoffs
  • Reassure employees that they’re being laid off through no fault of their own and express sympathy
  • Let employees know when the layoff period will begin
  • Inform employees of how their severance pay and benefits will be handled
  • If you’re notifying employees of a temporary furlough, advise them how long it will be and what they can do if they wish to return to work after it ends
  • If applicable, offer support for placing employees with new jobs, such as letters of recommendation or time off as needed for job interviews before layoffs take effect
  • Answer any questions employees have

A good notification letter should cover these elements and can include answers to frequently asked questions employees are likely to have. You can find sample WARN-compliant layoff notification templates online and adapt them to your needs.

6. Unemployment and Health-Care Benefits

Each state has its own unemployment insurance requirements. In general, if an employee has become unemployed through no fault of their own, they qualify for unemployment insurance The Department of Labor provides an online portal on unemployment insurance with a link to a government-sponsored site where you can find information on state unemployment benefit requirements.

Under federal COBRA requirements, group health plans offered by employers with 20 or more employers during the prior year must include the option of allowing employees and their families to receive a temporary extension of their health-care coverage after certain instances where their plan would normally end (known as continuation coverage). 

Some states have additional “mini COBRA” laws that apply to smaller employers or include additional obligations. Work with your human resources and legal team to make sure you are in compliance with all federal and state regulations regarding healthcare benefits for laid-off employees.

7. Offer Job Placement Assistance

You can make layoffs easier for employees by offering job placement assistance. This can take a number of forms:

  • Providing letters of recommendation to help employees seek new work
  • Keeping an eye open for any job opportunities you can refer employees to
  • Putting the word out to your network that your employees are looking for work
  • Putting employees in contact with job-placement services that can help with career counseling, resume writing, interview practice and job seeking

By taking these types of steps, you can help your employees recover more quickly from the economic disruption that layoffs may bring them. You may even end up helping them advance their career path or creating an opportunity to hire them back later.

Follow Layoff Best Practices to Manage Financial Emergencies

No one wants to lay off employees, but if you’re facing a cash-flow crisis, it may become necessary. If you’ve considered all your alternatives and determined you need to lay off workers, following the best practices above will help cushion the blow for your company and your employees.

In some situations, you may be able to avoid layoffs by securing small business financing resources such as working capital loans or SBA loans. If you’d like expert assistance in locating financing, take a couple of minutes to fill out our no-obligation online application form and find out instantly what type of financing you may qualify for.

Roy is a respected, published author on topics including business coaching, small business management and business automation as well as an expert business plan writer and strategist.
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