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7 Cost-Cutting Alternatives to Layoffs

While layoffs are one option for addressing a business downturn, they come with their own set of costs that need to be considered, such as severance payouts, increased unemployment insurance rates, and lower morale among remaining employees.

In addition, a smaller workforce may result in lower productivity and higher turnover. Layoffs may also leave the company shorthanded when business improves. Employers may have other options to help get them through difficult financial times and better position themselves for when business stabilizes. The following are several suggested alternatives to layoffs.

#1: Reduced work hours for non-exempt employees

Non-exempt employees are only entitled to pay for hours worked, so reducing their hours and/or restricting overtime can save the company money in hourly wages. Keep in mind that your state may allow employees to collect unemployment benefits if their hours drop below a certain point. It is important to know your state threshold and consider the impact of reducing hours. Some states and local laws have specific rules for how much notice an employer must provide before reducing an employee's hours. Be sure to follow applicable timelines and provide as much advance notice as possible.

#2: Furloughs

During a furlough, employees are placed on mandatory unpaid leave — either in increments of a full workday or a full workweek. Furloughs may be a good option for short-term or seasonal declines in business. While furloughs can save the company money, there may still be costs. For example, depending on the state, the length of the furlough, and the employee's work history, a furloughed employee may be eligible for unemployment benefits. Also, employees who are exempt from overtime must generally receive their full salary if they work any part of the workweek. For this reason, employers typically furlough exempt employees only in increments of full workweeks.

#3: Job sharing

Job sharing allows two employees to work a reduced schedule in a job that normally would be filled by one full-time employee. Many states have adopted shared-work programs to provide employers with an alternative to layoffs. Under these programs, the employer temporarily reduces the hours of a group of employees, and the affected employees collect partial unemployment benefits to help offset lost wages. One of the benefits of these programs is that employees should be available to resume work when business improves.

#4: Transfers

Moving employees to another department can help the company adjust to temporary dips in business. For instance, if the company reduces activity or spending in one department, the company could temporarily transfer employees to another department or area where there is a greater need.

#5: Unpaid time off

Offering more unpaid time off may be attractive to some employees, particularly those who want to do some extended traveling, work on a personal project or go back to school. This option is typically best for employees who do not have any accrued paid time off available and for those who would like to take an extended voluntary leave of absence. Since employees must be ready, willing and able to work to be able to collect unemployment insurance, employees generally wouldn't be entitled to unemployment benefits for taking voluntary unpaid leave.

#6: Pay cuts and/or reduced bonus pool

Pay cuts and reduced bonuses are difficult for employees, especially those living paycheck to paycheck. With inflation so high right now, these cuts may hurt even more. These changes can be easier to accept if employees feel the sacrifice is shared. For this reason, many companies apply pay cuts and reduce bonuses across the board, and some even require top executives to take bigger cuts. If your company has traditionally offered regular merit or cost of living increases, pay freezes may also be an option. Keep in mind some states and local jurisdictions require a certain amount of advance notice before reducing an employee's pay. Check your state and local laws for details.

There are some additional considerations, depending on whether the employee is classified as non-exempt or exempt from the minimum wage and overtime:

Non-Exempt Employees:

Under the Fair Labor Standards Act (FLSA), employers must pay non-exempt employees at least the minimum wage for each hour worked and overtime when they work more than 40 hours in a workweek. Some states require overtime pay in additional circumstances. Employers may reduce non-exempt employees' hourly wages, provided the employee is paid at least the minimum wage per hour and overtime when due and any advance notice requirements are met.

Exempt Employees:

Employees who meet certain salary and duties requirements may be classified as exempt from the FLSA's minimum wage and overtime requirements. Generally, exempt employees must receive a pre-determined, guaranteed salary of at least $684 per week under federal law (some states require a higher salary). With a few limited exceptions, exempt employees must be paid their full salary each week they perform any work, regardless of the number of hours or days worked. Depending on the exemption and circumstances, a reduction in pay could result in a loss of the employee's exempt status.

Under the FLSA, employers are prohibited from reducing an exempt employee's salary based on short-term, day-to-day, or week-to-week operating requirements. However, employers may change exempt employees' salaries prospectively to reflect long-term business needs, provided such adjustments aren't related to the quantity or quality of work performed, the employee still receives at least $684 per week on a salary basis, and any advance notice requirements are met. For instance, an employer could reduce all exempt employees' salaries by five percent for the upcoming fiscal year because of budgetary constraints (provided the reduced salary still meets minimum requirements). By contrast, an employer could jeopardize an employee's exempt status by making a short-term deduction for reductions in scheduled work.

#7: Solicit suggestions from employees.

Where appropriate, be straightforward with employees about the difficult situation the company is facing. In some business settings, employers may even want to ask employees for ideas to help improve business, boost efficiency and reduce costs.


Layoffs can take a toll not only on affected workers, but also on the employees who remain behind. Layoffs may also impact the company's productivity as business improves. Employers should conduct a full cost analysis to determine whether a layoff, or an alternative approach, benefits the company when cost-cutting becomes a necessity.

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