When Should I Lay Off Employees?

Laying off employees is one of the hardest decisions a small business owner makes. With the great uncertainty of how social distancing will affect the economy and business in the near and long-term, you should be asking yourself this question: when should I lay off employees?

Why do small businesses lay off employees?

Laying off employees is a cash saving measure. It typically occurs when a business is generating negative cash flows (losing cash) and needs to either slow down or stop the bleeding. Most businesses don’t think about laying off employees until they are in this scary position, but some businesses use forecasting to proactively layoff employees and avoid negative cash flow in the first place.

The downside to laying off employees is you lose talent. Some business owners rush into layoffs only to later discover they don’t have the staffing to grow once conditions improve. Other times a reduction in force (or RIF, another name for a lay off) can hurt morale and cause remaining employees to seek new jobs. 

How to lay off small business employees?

Determine which employees to layoff

First, put together a business forecast to understand how many employees to layoff due to a recession. If you are unfamiliar with this process, consult a financial expert for assistance, as small errors in this calculation can lead to catastrophic failure. 

Small businesses don’t have much redundant staff like big corporations, so usually every headcount reduction is a challenge. Who will take over their work? How will remaining employees cover all the needs? To have a successful small business layoff, use one or more of these strategies:

  • Focus your staff on key business areas. Coming out of growth mode, your business may have had such as vertical expansion or research and development. These are non-critical areas during a cash crisis, so eliminate that staff or reassign them to sales, marketing, operations, or cost-saving initiatives.
  • Eliminate non-performers. Use a reduction in force to trim the fat.
  • Keep employees who demonstrated resourcefulness and innovation. In a recession, a small business will rely on these individuals to build efficiency and grow the business in new ways.
  • Outsource part-time work like bookkeeping and administration. With a reduction in sales there is often not enough work to keep an office manager occupied full-time. These roles are excellent candidates for part-time or outsourcing to an agency.
  • The business owner steps up and does more work. Every small business owner worked their tail off in the early days to become successful. Usually a slide backwards means the owner needs to step back in and help with more tasks.

Keep in mind there are restrictions on adverse impact to protected classes (race, religion, etc.) These restrictions are important to follow – if you are not certain how to layoff employees in protected classes, consult an HR professional. 

How to conduct a small business layoff?

Once you have determined the reduction in force needed, you should execute your plan quickly and professionally. You should, at minimum, prepare a letter for each employee with:

  • Company letterhead
  • Name and address of employee
  • The date of the RIF
  • A brief statement saying they are being terminated due to a reduction in force

You should also prepare the following materials for each employee:

  • A final paycheck (as required by your state law.)
  • COBRA information
  • Checklist of company property that needs to be returned (laptop, keys, etc.)

The exact information you provide will depend on whether the employee qualifies under the Older Worker Benefit Protection Act or the Worker Adjust and Retraining act. Review these acts or contact an HR professional for assistance before conducting your layoff.

What not to say when laying off employees

A professional layoff meeting is concise. Don’t spend a long time over-explaining the situation – most employees understand and many anticipate the event (especially in a recession.) You do not want to commit the organization to anything by saying things like, “We will hire you back when things get better.” Do give the individual contact information should they have questions in the coming days. 

After the reduction in force is complete, save all the documents to the employee’s HR folders. Again, if you need more details on how to layoff employees, contact an HR professional.

What alternatives to layoffs do small businesses have?

There are three major alternatives to a small business layoff you may consider:

  • Reduction in wages. If you are unable to spare any team member and your employees don’t have great job alternatives due to the recession, you may be able to reduce wages across the board and achieve a similar financial effect of a layoff. This is rarely a popular option in corporations, but in certain small business teams with the right cultural, a reduction in wages is preferred to a layoff. One trend we are seeing now is switching to a 4-day work week paired with a 20% wage reduction – a win-win to many employees.
  • Full-time to part-time or contract. This is a smart option for companies with expensive benefits plans. By converting employees to part-time or contract laborers, you can save up to 35% on taxes and benefits.
  • Furloughs. A furlough is an unpaid leave of absence, or sometimes there will be a minimal payment just to cover medical insurance. This is a great alternative to a layoff if you have talented employees who want to take time off to travel, enjoy parental leave, or just take a break from their career (think: Millennials.) The downside is a furlough often becomes permanent, so take it with a grain of salt when an employee tells you they intend to return after some time.

It is best practice to forecast each of these three alternatives in combination with targeted layoffs so you understand how layoffs affect your business cash flow.

Covid-19 Small Business Layoff Alternatives

Covid-19 has endangered many employees jobs, and various governments are stepping in to assist: 

  • SBA disaster loans. The Small Business Administration is offering disaster loans up to $2M to small businesses to help cover payroll expense (among other things.) – this is a great option if your downturn is temporary in nature. 
  • Deferred income tax payments. The IRS is allowing deferred payment on business income taxes. This is essentially a free loan from the government for 90 days, and you should take advantage of this if needed.
  • Covid-19 and FMLA reimbursement. Many states are offering reimbursement or tax credit for wages for employees that miss work due to Covid-19. The credits vary by state, so consult your state’s website to see if your business is eligible.
  • Local Covid-19 credits. Many local city governments are offing disaster relief funds for businesses that were mandated to close, such as restaurants, bars, and gyms. Call your local representative to see what is available.

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