When difficult financial times occur, employers looking to cut costs may consider reducing their workforce. Layoffs, however, may result in direct costs, such as severance payouts and increased unemployment insurance rates, and indirect costs, such as lower morale and productivity decline. Layoffs may also leave the company shorthanded when business improves.
While reductions in force provide one solution to address a business downturn, employers may have other options to help the company weather the storm and better position itself for when business stabilizes. The following are several alternatives to layoffs:
#1: Look at spending.
Look for ways to cut costs in areas that do not have a direct impact on the business. For instance, determine non-essential purchases you can put off for a later date. Additionally, you can temporarily suspend certain employee perks (such as company-provided meals or free gym memberships). If you lease your business location, you may try to negotiate a lower rent.
#2: Reduced work hours for non-exempt employees.
Because non-exempt employees are only entitled to pay for hours worked, 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.
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
#4: 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.
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.
#6: 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. Because 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.
#7: Pay cuts.
Pay cuts are difficult for employees, especially those living paycheck to paycheck, but they can be easier to swallow if employees feel it is a shared sacrifice. Because of this, many companies apply pay cuts across the board. If your company has traditionally offered regular merit or cost of living increases, pay freezes may also be an option. Note: For employees who are classified as exempt from overtime, salary reductions must reflect long-term business needs. Employers are prohibited from reducing exempt employees' salaries based on short-term, day-to-day, or week-to-week operating requirements of the business.
#8: 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 and reduce costs.
Layoffs can take a toll not only on affected workers, but also on the employees who remain employed. 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.