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January 21, 2009
Can You Stave Off Layoffs?
As the economy “craters,” as some of the media like to say, you may be thinking about layoffs to rescue the company’s bottom line. The Wharton Center for Human Resources, at the University of Pennsylvania, recently turned its attention to employers’ alternatives for survival during the recession.

Look at the downside of layoffs, cautions Peter Cappelli, director of the center. First and foremost, he warns, the morale of the employees who remain employed is guaranteed to drop precipitously. The company’s unemployment insurance premiums will rise, perhaps steeply. And, many organizations provide severance packages and/or outplacement services, either of which can be very expensive. Further, the likelihood of a lawsuit by one or more laid-off employees is considerable. Remember, too, that any organization that overdoes layoffs won’t be prepared to compete effectively once the economy recovers.

So why do so many employers choose layoffs as a first response to a down economy? Cappelli observes that the use of what he calls “creative alternatives” to layoffs fell sharply in 1980s. Executives came to believe, he says, that if they cut salaries by 10 percent or reduced working hours, the company’s best people would quickly depart for greener pastures. Competitors would gobble up the cream of the organization’s talent. But, he cautions, don’t forget that in a deep recession, no one else is hiring either, so the talent has nowhere to go.

Consider spreading the pain. Cappelli believes those executives are assuming that lower-level employees think the same way they do—which is not true. In fact, he is convinced that most employees would be willing to make a sacrifice, like receiving a pay cut, for their co-workers. He cites the city of Atlanta, which recently announced that the hours of 4,600 employees would be reduced by 10 percent because of a budget crisis. “If you have a choice between a 10 percent wage cut [across the board] and laying off 10 percent of the workforce, why on earth would you choose the latter?” he asks. Layoffs hurt morale, while a common sacrifice “might actually build some morale and knit the company together.”

Cappelli urges employers to think creatively about ways to avoid layoffs. For example, he suggests, executives could ask for volunteers to take a pay cut—in exchange for some form of deferred compensation, such as company stock or extra vacation. He points out that in the private sector, it is sometimes easier for the managers or owners of small and mid-sized companies to work out solutions with their employees.

A small firm in New Jersey, for example, has asked for volunteers to reduce the number of days on which they work; the initiative began with one work team, which encouraged others to follow suit—and they did. The company’s director also noted that it has avoided major project disruptions as well as maintaining its investment in employee training.

Make Sure Your Solutions Are Legal

Speaking of avoiding layoffs, leading employment law firm Littler Mendelson is also recommending alternative money-savers—along with advice for employers on how to do so in a way that will protect them against lawsuits. Along with pay reductions (voluntary or involuntary) and reduced hours, Littler suggests what it calls “mandatory furloughs”—temporary workplace shutdowns. Here are some of the Littler attorneys’ particular cautions:

  • Don’t allow any work to be done during the shutdown. Managers may be tempted to contact employees for input through e-mail, Palm Pilots, or other devices—but warn them not to do so. And, inform employees that if they wish to work during the period, they must obtain express written approval.
  • Employees may want to use some of their accrued paid time off during the furlough rather take the leave without pay. Or, employers may want to direct them to do so. In general, federal laws permit either way of approaching it—there are advantages to both employees and employers to treating shutdowns in this way. But state laws may be another matter. In California, for example, “use-it-or-lose it” vacation policies are not permitted, so employers cannot mandate the use of the time during furloughs.
  • What if some employees have not accrued enough time off to cover the entire furlough? If you decide to grant them advance vacation for the period, you will need to coordinate state law and your policy regarding what to do if any of those individuals resign or are terminated before making up the advance.
  • To protect your exempt employees’ status, conduct furloughs only in whole weeks that coincide with work weeks. Exempt employees’ earnings may not be reduced for periods of less than a week if the employer mandates the furlough.
  • Can you dictate shorter work weeks and a corresponding pay reduction for all employees? Where exempt employees are concerned, that’s tricky—an issue on which courts have disagreed. Initially, you must ensure that after the reduction, exempt workers still earn the federal minimum of $455 a week to protect their status. First, make prospective (rather than retrospective) pay reductions. Second, either avoid directing exempt employees to work only a certain number of hours or furlough them in full-week increments.

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