During challenging times, company leaders may feel one of their only options is to downsize the workforce. Among other things, this process can have a lasting impact on an organization's reputation. However, a strategic and careful approach to downsizing coupled with proper offboarding strategies can mitigate potential damage and put a struggling organization on the road to success.

This article explores organizational downsizing, including why organizations downsize, strategic approaches, other options to consider, and the associated risks.

What Is Downsizing?

Downsizing is one method organizations use to reduce their operational costs. Companies may reduce the size of their workforce by offering voluntary separation or early retirement programs, closing facilities, or terminating employees through layoffs.

Reasons for Downsizing

Many organizations reduce the number of employees because it's often an effective and immediate way to cut costs. After all, employee compensation and benefits can account for at least half of a business's total operating expenses and, in some cases, even more.

Organizations downsize for many reasons, including:

• Cost reduction
• Improved efficiency
• Increased profits by reducing overhead
• Recession
• Technological advancements
• Industry decline
• Mergers and acquisitions
• National disaster or crisis
• Industry competition
• Market trends

Strategic Downsizing

Due to the complexities and potential risks involved in downsizing, organizations should be strategic in their approach. Careful planning can help identify and address concerns and potential issues as employers strive to manage their remaining employees. Organizations should consider how downsizing may affect employee morale and productivity and other costs associated with their decision to downsize, such as talent loss, future hiring challenges, and the costs of early retirement and severance packages.

In addition, leaders should also contemplate the best way to deal with benefits administration, reference requests, employment verification, unemployment insurance claims, and potential lawsuits from former employees.

Downsizing Alternatives

Layoffs are not the only option for employers seeking to reduce costs. Employers may want to consider the following alternatives:

• Job sharing
• Furloughs
• Reducing employee pay, benefits, or job perks
• Hiring freezes
• Contract or temporary employees
• Part-time employees
• Shortened workweek
• Voluntary separation or early retirement programs
• Reductions in force
• Wasteful practice elimination or reduction (e.g., high-cost travel. free employee meals)

Successfully implementing an alternative — or a combination of other options — requires planning. In some situations, alternatives may be more effective than downsizing in helping employers achieve their organizational goals.

Choosing Which Employees to Layoff

Once the decision is made to reduce the number of employees, employers must determine which employees or groups to terminate. Many organizations establish criteria for selecting which employees to lay off. Often, individuals are dismissed based on seniority, merit, skill set, or employee status (e.g., full-time, part-time, contingent). In many situations, relying on a combination of criteria can be the most effective. Employers can rank the criteria based on their organization's goals, needs, and values. Choosing objective criteria when letting employees go can often help protect employers from federal, state, and local violations.

Provide Clear Communication

Impacted employees should be appropriately notified that they're being laid off. Clear communication keeps employees informed about what's happening and can help organizations rally employee morale and productivity. In most situations, layoffs are permanent, but sometimes employers may rehire employees after restructuring. If layoffs are permanent, employers may be able to provide employees with adequate time to search for a new job or receive training to reskill. If layoffs are temporary, offering employees details about anticipated timelines for returning can help them plan for how long they may be without work.

Understanding Potential Legal Risks to Downsizing

Employers need to consider legal risks when downsizing. Terminating a single employee can present various legal issues, but downsizing multiplies that risk with each additional employee who is let go.

Employers must consider federal, state, and local laws and regulations that employee layoffs may trigger. In addition, employers may need to review state laws or local requirements regarding unemployment insurance, severance pay, accrued and unused paid time off, vacation pay, sick or other leave, and personnel records. Employers are encouraged to seek legal counsel to discuss specific issues and concerns.

For more workplace resources, connect with a CBIZ professional today.

The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.