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Small Business Guide on How to Decide When to Lay Off Employees

Mona Bushnell
Mona Bushnell

How do you know when it's time to lay off employees? Find out how to conduct a mass layoff and when to do it.

  • Assess your monthly payroll costs and your available funds to determine how long you can continue to pay your staff while your business operates at a reduction.
  • Consider if alternatives like reducing workers' hours or eliminating bonuses allows you to retain your staff until business returns to normal.
  • If you must lay off employees, consult a lawyer to ensure you handle it correctly so you can avoid potential wrongful termination lawsuits.
  • When laying off employees, communicate with transparency and compassion. If it's financially feasible, offer a severance package.

While the lamentations about mass layoffs as a side effect of the coronavirus are nothing if not prescient and economically frightening, for small business owners, the challenges of COVID-19 pose an immediate moral and financial quandary.

As the weeks wear on, more businesses deemed "nonessential" are being told to shutter their doors or risk being in violation of the law. Since the closures are related to an emergency and not scheduled seasonality, small business owners are in the unusual position of not only having a workforce that may not be able to work at all, but they also don't have any idea when normal business will resume.

Job loss is never something to be taken lightly. Just as the futures of workers must be considered and safeguarded, so, too, must the futures of business owners and their families. These are unusual, though not wholly unprecedented, times.

It is our hope that this guide offers you the information and resources you need to make the best decision possible for your business, employees, family and community.

What's happening with businesses and COVID-19 right now?

As the conditions of the coronavirus evolve, so, too, does the impact it has on businesses in different regions of the country.

Staying abreast of local news is the best way to know what restrictions are in place in your area, but if you're in a mostly unaffected region (for the time being), looking at what's happening in more densely populated areas in the Pacific Northwest and Northeast may be a good indicator of what's coming your way in the next several weeks.

Most states have business guides for operating during the coronavirus. Check yours for information about safely operating (for essential businesses) and shutdown guidelines (for nonessential businesses).

Additionally, we are updating our COVID-19 resources hub daily. Here, you'll find links to important government guidelines, as well as access to resources for financial relief. Organizations like the U.S. Chamber of Commerce and the Small Business Administration are also directing their efforts toward promoting relief for small businesses.

What is a layoff, and how does it work?

A layoff is not the same as an employee termination. A layoff is an involuntary separation, but reflects no wrongdoing on the part of the employee. According to the Employment Security Department, the employer is not replacing your position when a layoff occurs. If your position is being filled by another person, the separation is labeled as a firing. With a layoff, the employee has an increased likelihood of qualifying for unemployment benefits.

The reasons for layoffs versus terminations are vastly different. If an employee is fired, it normally relates to employee misconduct. Cited reasons for firing an employee include poor work performance, frequent unscheduled absences and damaging company property. Employees may also be fired by violating any of the rules in their employee contracts. The reasons behind a layoff are usually reflective of changes occurring within the company. The company may be downsizing or restructuring. Layoffs could also occur if the company is preparing to go out of business. Being laid off is preferred over firing, because the circumstances increase your likelihood of collecting unemployment benefits or receiving severance packages. Those who are fired could receive a severance package; however, a severance is typically provided in exchange for signing an agreement pledging not to sue the company for wrongful termination.

Layoffs can be long term or short term. As an example, a short-term layoff may occur if the company operates on a seasonal basis. Employees who are laid off may be offered perks by their former employers. Negotiations can be made for COBRA health insurance payments, job search aid and tuition reimbursement.

Alternatives to laying off employees

Laying off employees falls into the worst-case scenario for small business owners. There are alternate ways to cut your payroll costs without permanently laying off your workers. Here's what some businesses are doing to cope with COVID-19 related shutdowns:

  • Freezing hiring on all vacant positions
  • Cutting other costs, such as operational costs unrelated to staffing
  • Eliminating or reducing overtime
  • Temporarily reducing workers' hours
  • Temporarily suspending workers' hours
  • Eliminating bonuses
  • Pivoting the business to increase revenue

While things like reducing overtime and eliminating bonuses aren't the best way to win over employees, in the wake of an unpredictable global pandemic, both are understandable. Explaining to your workers that you are taking these measures to avoid mass layoffs may soften the blow. Before you act, however, consult with a lawyer to make sure none of these measures violate contracts you have with employees, vendors or leasing agencies.

When should I consider laying off employees?

While grocery stores are experiencing unprecedented sales, many other businesses are unable to do much business at all. If yours is a small business that is currently unable to operate or has experienced a significant downturn due to recent events, it's time to look at your balance sheet and start planning.

Look at your payroll costs and available funds.

Step one should be to assess your monthly payroll costs and check that number against your available funds to see if you have enough capital to either float the business entirely, or if you need to supplement it with your savings, depending on how much business you've lost due to atypical operations. 

You'll need to project out and see just how long you can continue to pay your current staff while your business is closed or operating at a reduction.

Evaluate your employees, and reproject your payroll.

Next, you need to look at whom you can realistically afford to lose and keep your doors open, either now or in the future. This is tough, because everyone in a business adds value, but in extreme circumstances, difficult choices must be made. Some business owners prioritize those who drive more business, like salespeople, while others take a performance approach and eliminate bottom performers across several departments.

Once you have your skeleton crew established, costs included, do another projection. Adjusting for lowered business, how long can you operate with a decreased staff and (possibly) decreased hours? If you can continue to operate indefinitely with fewer staff members, then you have your answer, and you know the way forward is to eliminate nonessential staff. Whether you do so immediately (with or without a severance package) requires further thought and planning. If, on the other hand, the numbers don't work out (or, at least, not for long) even with as many costs cut as possible, you may have to consider a full shutdown.

Consult with experts before acting.

Perhaps you're an expert already and don't require outside opinions, but if not, we strongly recommend reaching out to trusted experts you have at your disposal, such as lawyers with whom you have an established relationship, accountants, and even other business owners in similar industries.

This step is especially vital if you are likely to go through mass layoffs or firings. For example, if you take the approach of eliminating employees who are the poorest performers, you need to make sure you fall within your legal rights, as this may technically be considered a firing rather than a layoff, and different laws may govern each depending on the employment type of the worker. You don't want to end up in the middle of a wrongful termination lawsuit.

If you're at all unsure of what you need to offer in terms of severance or notice, or if you're uncertain about your financial projections and next steps, now is the time to seek outside advice. The closer you get to your breaking point, the fewer choices you will have anyway, so even if your business isn't being immediately impacted by COVID-19, you should prepare now. No one ever laments being too prepared during an emergency.

Create an action plan.

Once you have a general idea of how you'll proceed, depending on your business's circumstances, as well as local developments in relation to the coronavirus, create an action plan.

Plan out how you'll execute job cuts to ensure the process is as painless as possible. Consider how and when you'll notify your human resources department and managerial staff, as well as how you'll carry out logistical tasks like sending out final paychecks to those made redundant.

The more specific you make each step, the easier it will be to carry out a layoff if or when it comes to that. 

Balance sheet realities and making the tough calls

Communication is a cornerstone of good leadership, and that's doubly true in times of great volatility. Whatever your plan is, whether it be closing temporarily with the understanding that your staff's jobs will be waiting for them, closing permanently, offering hazard pay to public-facing employees, or creating a pay package to help your workers who cannot do their jobs, be clear. Be clear about what you are doing, why you are doing it and how your plan will be rolled out. Explain your thought process and what is and isn't feasible.

When faced with uncertainty, many people behave reactively without a thought toward the next stage, after the dust has settled. As devastating as the effects of COVID-19 are, time will march on. For your business (or at the very least, your reputation in business) to survive, you need to be calculated in how you handle the next steps. Several companies have been lambasted by the press for laying off large numbers of employees in ways that look callous and uncaring, and people may remember these actions for years to come, long after the coronavirus is under control.

Act with sensitivity, transparency and an eye to the future. A good rule in assessing your communications to your employees is to imagine your words in a news article. If the way you're handing layoffs or firings were in the news, how would it sound to the public? This is a real possibility as many newly unemployed workers take to the internet to voice their displeasure at being out of work. There's no way to make layoffs entirely palatable, but you can mitigate backlash through strategic, compassionate communication. 

How to lay off employees

Laying off employees is never easy, but there are best practices to guide you. Remain transparent about layoffs to help impacted employees understand what is happening at the company.

Business experts and human resources professionals advise that you get your message across with as much transparency and empathy as possible. It's OK to explain how you feel, to express regret at the situation you're all in, and to explain why you're doing what you're doing. A layoff during a crisis like COVID-19 is different from a layoff due to shifting economic circumstances or outsourcing.

The following steps will help the process go more smoothly when you are forced to lay off employees:

  1. Understand the Warn Act. The Worker Adjustment and Retraining Notification Act of 1988 provides protections for employees who work for companies with more than 100 staff members. The act requires these organizations to give workers 60 days' notice of layoffs or plant closings.

  2. Conduct the layoffs. Remain sympathetic but forthcoming with staff members who are being laid off. Research each employee’s contracts to determine what type of benefits are available to them.

  3. Discuss COBRA and any other benefits. Employees may panic over the thought of not only losing a steady income, but they may also be very concerned about losing their insurance coverage. Provide information about COBRA and the period of coverage. Discuss any severance at this time as well.

  4. Inform other employees.  Besides being tactful and honest in your communications to employees whom you'll no longer be employing, it's vital to communicate openly and honestly with your remaining workers. Workers who are staying with your company after mass layoffs feel very concerned about their own job security or angry about their colleagues who were let go. Manage your expectations on how people respond, as some amount of anger or distrust is to be expected. Reassuring remaining staff that there are no plans to eliminate their positions, and explaining the severance and resources the company provided to departing employees should be an immediate priority.

What about offering severance packages?

One way to soften the blow of unemployment is with a severance package. There is no hard and fast rule about severance pay, but many employers offer pay commensurate to experience at the company.

You may offer one week's pay for every year an employee has worked for your business, thus rewarding seniority while still giving everyone something. Another option is to offer a flat sum to each employee regardless of their duration of employment, though this is less common.

If offering severance packages is not within your ability, you can, at the very least, help your employees get the resources they'll need to file for unemployment (or find alternate employment).

Creating a resource packet on collecting unemployment benefits (provided you run it by a legal expert to make sure it's accurate and not likely to get you into trouble) may help your staff that's being let go and  show that you're not kicking them out the door without a thought.

Bottom line

Job cuts are tough on everyone, but there are resources available to you and your staff to help you through the COVID-19 pandemic.

If you've found ways to avoid a mass layoff and keep your full-time employees during this difficult time, please share your experiences in the community. We want to hear from leaders like you!

Image Credit: fizkes / Getty Images
Mona Bushnell
Mona Bushnell Staff
I'm a Staff Writer for and Business News Daily.