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Alternatives to Employee Layoffs to Reduce Business Costs

If the purpose of a layoff of employees is to cut down on business costs (as opposed to reduce redundancy), you may want to explore options that, at the very least, can reduce the number of people who need to be terminated:

  • Temporary pay cuts: Reducing salary costs is probably the simplest and most direct way to cut staffing costs without cutting staff. The key to this strategy is to ensure that everyone — including senior managers — shares the pain. Many companies vary the percentage of reduction according to the amount of salary an employee is earning, with higher salaried workers surrendering a higher percentage of their regular paychecks.

    Downside: No matter how justified the cuts and how many jobs you save, some workers will resent losing pay — and the decision to cut back on pay may induce some workers to quit. Keep in mind, too, that employees who agree to pay cuts will expect the salary to be restored — and then some — when the business turns around.

  • Work schedule reductions: This option is worth exploring for companies that have large numbers of hourly workers. You maintain the same hourly rates, but employees work fewer hours per shift or per week. As an inducement to accept the lower take-home pay, most companies pledge to maintain benefits at full-time levels (so long as insurance carriers allow it).

    Downside: Reduction of hours per shift or per week doesn’t achieve financial savings for exempt salaried employees and managers who aren’t paid by the hour. You may be able to reduce exempt employees’ hours and pay by eliminating entire workweeks. If you want to reduce exempt employee work hours and salary by eliminating less than a full workweek — for example, one day per week — you should consult an attorney.

  • Short-term compensation programs: Depending on the state laws under which your organization is operating, there may be legislation to help reduce hours (and, thus, costs) but avoid layoffs. Nineteen states have implemented some version of short-term compensation (STC) programs, authorized by federal legislation passed in 1982.

    In temporary economic downturns, STC programs allow employers that otherwise may be forced to lay off a portion of their workforce instead to apportion work reductions across the broader workforce. Affected employees receive unemployment insurance benefits on a prorated basis commensurate with the extent of their partial layoff.

    Downside: All 50 states participate in the unemployment insurance system, but only approximately one-third have STC programs, and until relatively recently, STC programs were rarely used — at least partly because employers were unfamiliar with them. However, such programs are garnering increased attention, even at the federal level, with more states moving toward establishing them.

  • Exit incentives: An often-used method of reducing payroll costs is to offer voluntary exit incentives, such as special early-retirement benefits. Because senior employees often are the most highly paid, trimming their ranks can result in significant savings.

    Downside: Senior employees often are your most valued, and losing too many of them at one time can significantly weaken the leadership of your firm. Remember, too, that under the Age Discrimination in Employment Act, it is illegal, with rare exceptions, to force anyone to retire.

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