How to Lay Off Employees: A Guide for Small Businesses

As the economic conditions of 2024 evolve rapidly amid market uncertainties and expected slowdowns, many small businesses are becoming increasingly concerned about the stability of their cash flows. Rising interest rates and potential recession scenarios have prompted these businesses to question their sustainability and ability to maintain their current workforce. Given their limited financial resources compared to larger corporations, small businesses might be compelled to lay off employees and make other tough decisions.

Facing a range of distinct financial challenges, small businesses in a challenging economy might consider downsizing as a strategy to reduce costs and sustain their operations. But what is the proper protocol for laying off employees, and what should be avoided in this process?

What Does It Mean to Lay Off Employees?

A layoff occurs when an employer ends an employment relationship not because of the employee’s performance but due to external business factors. These factors can include budget cuts, downsizing, a need to enhance cash flow, the position becoming unnecessary, or reorganization of the business. Unlike firings, layoffs do not stem from an employee’s poor performance, misconduct, or any fraud by the employee. Layoffs may be either temporary or permanent.

Typically, employees laid off through no fault can apply for unemployment insurance benefits. Note that some states offer a mass-layoff number that employers can use in emergencies or other specific circumstances, which can expedite the benefits process for employees and potentially safeguard the employer’s account.

Why Is It Difficult to Lay Off Employees?

For many small business owners, the need to lay off employees represents one of the most emotionally taxing and challenging aspects of their roles. These decisions often entail complex considerations, including the impact on individuals’ lives, potential harm to company culture, and various ethical and legal responsibilities.

Providing support to these employees is essential, as the layoff process can be emotionally exhausting and stressful. The business owner must equip the employees with appropriate tools and resources to help them manage their challenges due to the layoff.

These resources include thorough training in communication and empathy, advice on legal and compliance issues, and access to outplacement services that help displaced employees find new employment opportunities.

By offering this support, companies can enable their employees to handle layoffs more professionally and with some compassion. Managing layoffs effectively can help cover negative impacts, sustain a positive work atmosphere, and protect the company’s long-term reputation.

Legal Guidelines for Managing Layoffs in Small Businesses

When planning layoffs at your small business, you must start by accessing and reviewing relevant resources provided by governmental agencies and other organizations. These resources will help you understand your legal duties as an employer as well as the rights of your employees during the layoff process.

Some essential legal requirements that you need to take care of during the layoffs are:

• Advance Notice Requirements:

Depending on the size of your business, you may be legally required to provide advance notice to your employees before layoffs occur. This is mandated by the Worker Adjustment and Retraining Notification (WARN) Act for businesses with 100 or more employees, requiring a 60-day notice if 50 or more employees are laid off at a single site.

In addition to federal laws, check your state’s laws regarding layoffs. They may have their own notice requirements, even if your business is not covered under the federal WARN Act.

• Severance Pay:

While the Fair Labor Standards Act doesn’t mandate severance pay, it is a common practice that can be stipulated at the start of employment. State laws might also have specific regulations about severance packages, so it’s important to understand any obligations you may have.

• COBRA Requirements:

For businesses with at least 20 employees, the Consolidated Omnibus Budget Reconciliation Act (COBRA) requires continued group health insurance coverage for former employees and their dependents after a layoff. This is critical to ensure compliance and factor into layoffs’ financial planning.

• OWBPA Requirement

Employers are required to adhere to the Older Workers Benefit Protection Act (OWBPA) to validly secure waivers of age discrimination claims under the Age Discrimination in Employment Act (ADEA) in exchange for severance pay. The OWBPA mandates that releases of ADEA claims must be “knowing and voluntary” to ensure employees have sufficient information to decide to sign the waiver.

This includes additional disclosure obligations when requesting waivers from a group or class of employees, as outlined in the provisions regarding waivers of ADEA claims.

• Unemployment Insurance:

Familiarize yourself with the process of how laid-off employees can claim unemployment insurance. Providing this information to employees can ease their transition and show good faith as an employer.

Keep thorough records of all layoffs, including reasons for the layoffs and how employees were selected, to protect against potential legal claims of discrimination or wrongful termination.

Tips on How Employers Can Lay Off Employees Effectively

Understanding the difficulty of laying off employees, employers can use these guidelines to alleviate their stress. It’s beneficial to regularly review and adhere to the company’s ethical standards and the legal requirements concerning employee termination. Instead of hiring anew, it may be more prudent to let go of an employee who shows less dedication.

Here are some steps that can significantly reduce the stress involved for the employer.

1. Assess Your Business’s Requirements

Deciding to lay off employees is significant and requires careful consideration of both the advantages and disadvantages. Several indicators might suggest that your business could need to consider layoffs:

• There has been a substantial decline in sales.
• Financial targets are not being met.
• You have an excess inventory that isn’t selling.
• The number of employees exceeds the workload.

If you notice any of these signs, it might be time to think about layoffs. This decision is challenging, so seeking guidance from your financial advisor or business mentor is advisable before making any definitive choices. Conversely, avoiding layoffs might lead to unsustainable financial losses. You can explore alternatives to layoffs:

• Pay Reductions

Many employees would be willing to take a 25% pay reduction to avoid being laid off. To gain employee support for salary reductions, it’s crucial to communicate that these measures aim to prevent layoffs. Stress that these cuts are intended to be temporary and that company leaders are also taking salary reductions.

Additionally, if salaries are being decreased uniformly, consider reducing the salaries of lower-paid employees by smaller percentages to ensure they can manage their basic expenses.

• Reduced Work Schedules

Implementing shorter work hours or days can maintain current wage rates while saving costs and preserving jobs. HR departments can provide valuable insights into which employees or departments can adapt to reduced hours without negatively affecting their work, objectives, and customer satisfaction.

• Furloughs

Furlough is compulsory unpaid leave where employees are temporarily off work but remain employed. Using furlough could be a strategic move to stabilize your financial situation without resorting to layoffs.

Offering employees a furlough—a temporary leave of one to two months—might be more appealing than permanent job loss. Assuring employees that their positions will be secure upon their return can encourage some to opt for voluntary furloughs, especially if they are guaranteed that their health benefits and other perks will remain in effect during their absence.

When contemplating layoffs, start by reevaluating your business’s financial plan. Update or create a budget to forecast expenses, revenue, and profits. This financial planning can reveal other areas where costs might be reduced. Ultimately, the decision rests with you to determine the most suitable for your company. If layoffs are unavoidable, ensure you meticulously plan out the process.

2. Document the Details of the Staff Layoff

Before approaching employees about layoffs, it is crucial to gather all relevant details thoroughly. It’s important to avoid causing unnecessary panic or stress by communicating inaccurately. Employers should consider strategies to minimize workplace anxiety. Here are some steps an employer can take:

• Identify the reasons for deciding to lay off employees.
• Determine whether the layoffs should be temporary or permanent.
• Decide which employees will be laid off.
• Consider the type of support you can provide to affected employees, especially if the layoffs are not due to their performance.
• Evaluate the potential impact on the morale and workload of the remaining staff.
• Assess how the layoffs will disrupt current operations.
• Plan how to communicate impending layoffs to employees effectively.

3. Strategically Select Positions for Elimination

When layoffs are necessary for cost-saving, it may be tempting to target the highest-paid employees for termination. However, this approach can lead to significant skill gaps that might hinder your company’s recovery. It’s crucial to retain key players and top performers to position your organization for a successful rebound.

Effective workforce management is essential in these decisions, as it ensures that crucial talent remains within the company. While salary considerations are important, the potential loss of expertise and influence must also be evaluated. Approach layoffs with the same diligence and criteria as hiring, focusing on both the hard and soft skills that are vital for your company’s continued success.

4. Prevent Adverse Action and Disparate Impact

Organizations should scrutinize the demographics of employees selected for layoffs to ensure no adverse or disparate impact on protected classes. Protected classes can include individuals based on race, color, ethnicity, national origin, religion, gender, genetic information, age (40 or over), disability status, and veteran status.

Additional classes might be protected under state laws, such as sexual orientation, marital status, or whether someone is a smoker. If layoffs disproportionately affect any protected group, such impacts must be carefully evaluated and justified.

5.    Inform the Workforce of the Layoff

Adhere to optimal practices when communicating layoffs. Ideally, each affected individual should have a private meeting with their manager and an HR representative, where the information is provided both verbally and in writing. If the organization’s size or a predominantly remote workforce makes in-person meetings impractical, consider using video conference calls and mailing the official letter to all the employees in talk.

The objective is to communicate as effectively as possible while minimizing stress during the discussion. This might involve briefing managers in advance and having them hold immediate team meetings to prevent prolonged uncertainty. In such scenarios, it’s crucial to manage the timing of communications to prevent employees from being left in suspense about their status, which could exacerbate anxiety and speculation.

You must be well-prepared for this meeting, ensuring all relevant information is ready and accessible for the employee. This includes explaining the reasons for the layoff, discussing COBRA options and health benefits, outplacement services, 401(k) details, and the rehire policy if applicable. Information on the unemployment process and other job placement resources should also be provided. It is advisable to review the severance agreement, address any immediate questions, and make an offer to be available for further inquiries in the coming weeks. If there is an employee assistance program, information about this should also be shared to support affected employees and their families.

6. Design Severance Packages and Offer Additional Support

While federal law does not mandate severance packages for laid-off employees, many employers choose to provide them. Offering severance can reduce the likelihood of legal challenges from former employees.

Some states may require specific severance arrangements. Typical severance benefits might include continued salary payments, payout of accrued vacation time, extended benefits coverage, employer-paid COBRA premiums, outplacement services, and access to counseling and resume-writing workshops.

Conclusion

When managing layoffs for small businesses, a delicate balance between legal compliance, ethical considerations, and compassionate leadership is necessary. Encouraging open communication and equitable treatment between management and staff is crucial. While layoffs may be necessary to ensure financial stability, exploring alternatives like pay reductions or furloughs can mitigate the impact on staff.

Adhering to legal obligations regarding severance, COBRA, and advance notice requirements helps protect both employees and the business. By approaching layoffs with compassion and integrity, small businesses can minimize disruption, preserve company culture, and maintain their long-term reputation amidst economic challenges.

Frequently Asked Questions