Corporate downsizing considerations

Corporate downsizing involves laying off employees for a variety of reasons, such as a downturn in sales volume, the closure of a facility, or an acquisition that results in redundant positions. In these situations, the employment of a number of employees is terminated through no fault of their own. A variation on the concept is a furlough, where employees are laid off but also offered the opportunity to return at a later date; this concept is most common in seasonal industries or where there is an expectation that business conditions will eventually improve.

Downsizing the workforce is not always a good idea, since it triggers severance, outplacement, and rehiring costs, as well as the potential for employee lawsuits and long-term distrust of management. Also, the remaining employees are likely to be more paranoid about their jobs, and therefore more risk-averse. Nonetheless, if downsizing is necessary, consider the following issues when planning for it:

  • Selection process. The single most important element in a corporate downsizing involves the selection process for who is to be downsized. The best approach is to pare away entire business units or functional areas, since doing so allows the remaining parts of the business to be fully staffed and functional. Nonetheless, there will be situations where management decides to impose cutbacks throughout the business. If so, there should be a well-defined process for determining who is to be let go, such as by the seniority of employees. By acting consistently, employees will know how at risk they may be in the event of future layoffs, and so can decide whether they should start looking for a new employer.
  • Impact on work environment. A key consideration when downsizing is how it will impact the work environment. A deep across-the-board cutback is virtually guaranteed to crush any remaining corporate culture, since the remaining staff will be scrambling to preserve their jobs and working through the immense backlog of work that they must now handle with fewer resources. To mitigate these effects, communicate constantly with the staff and try to accommodate their needs whenever possible. If the downsizing was not too large, it may still be possible to preserve the work environment.
  • Union rules. If the workforce is unionized, consult with the local union representative at once, to ensure that any downsizing rules in the union agreement are followed. This typically involves strict attention to seniority, with the most junior staff being laid off first. Otherwise, the union is more likely to challenge who was laid off, which can result in litigation, a more aggressive union in the future, or even a strike.
  • Legal implications. If the number of people employed exceeds 100, the company is subject to the requirements of the Worker Adjustment and Retraining Act, which mandates 60 days’ advance written notice of a layoff. Also, consult with an attorney to see if the list of employees to be laid off contains a disproportionate number of protected classes of employees that could trigger discrimination claims.
  • Decisiveness. There is nothing more agonizing for the staff than to suffer through an ongoing series of downsizings, since a high level of uncertainty permeates the work environment. Instead, management should act decisively to complete the entire downsizing at one time, so that the remaining staff can put the upheaval behind itself as fast as possible.

When a downsizing is conducted, and a company’s circumstances later improve, it may be necessary to conduct a large amount of rehiring. When rehiring occurs, the business will have to incur a number of additional expenses, such as:

  • Recruitment costs
  • Training costs
  • Market premium for qualified new hires, if the prior downsizing reduced the company’s reputation in the marketplace
  • Additional supervisory costs while new hires are learning their jobs
  • Lower productivity of new hires during the training period

These additional costs can be substantial, and are worth considering when contemplating a layoff. The added cost may be so large that management elects to pursue other alternatives before engaging in a downsizing.