Reducing Labor Costs During Economic Downturns

In response to COVID-19 and other unforeseen events that can negatively impact businesses, some companies may be forced to significantly reduce their labor costs in order to remain solvent. Hutchison Group HR and Labor Relations Consultants have identified several actions employers should evaluate before announcing permanent layoffs, and what to do if it is determined that layoffs are necessary.

Important First Steps

• Carefully Assess your Situation – Obviously, before taking any actions, a company needs to understand what cost reductions or other measures are required for the business to survive.  
• Communicate with Employees – Once the company has identified what actions need to be taken, a formal employee communication plan should be developed, to inform employees as to why specific cost reduction measures are needed, and how they will be affected. 
• Ensure the Entire Organization Participates – Our HR consultants note that it is helpful for all parts of the organization to participate in whatever cost-cutting measures are implemented. For example, if the company elects to cut wages, they should do so for all employees and not just a select group.

Options to Consider Before Announcing Permanent Layoffs 

While many companies may be forced to permanently lay off a portion of their workforce, there are a number of alternatives that should first be explored. This is especially true when the economic challenges are anticipated to be temporary, or short-term. Listed below are several strategies that our labor and employment consultants believe should be considered. 

• Manage Attrition – Many companies can achieve headcount reductions simply by not hiring replacements for workers who leave the company. However, this approach can take a long period of time and is not practical when immediate relief is needed. 
• Early Retirement Incentives – To help accelerate employee retirements, companies can provide various economic incentives. Be mindful that senior employees are typically among the highest paid, which helps to further reduce labor costs.
• Voluntary Layoffs – Another way to accelerate attrition is to let employees volunteer for layoff. Oftentimes, our labor and employment consultants note that voluntary terminations are attractive for employees who were planning to leave the company in the near future, as it may allow them to collect unemployment and severance benefits, which they would not normally be able to receive if they simply quit.
• Reduced Work Week – If the company anticipates that the business will rebound over a short period of time, they may want to consider establishing a reduced work week. For example, shortening the employees’ work week from 40 hours to 30 hours would reduce the cost of wages by 25%.
• Across-The-Board Pay Reductions – Similar to the above, if the company expects business to return to normal sometime in the near future, an across-the-board pay cut for all employees is something to consider. Having all employees, salaried and hourly, take the same percentage pay cut also helps to demonstrate that everyone is in this together.
• Employee Furloughs – Temporary furloughs may be helpful to bridge short periods of time when there is a lack of work. Our labor and employment consultants note that when on furlough, employees may still get paid for any unused vacation time and will continue to receive company healthcare benefits. 
• Terminate Documented Non-Performers – Before a company implements any type of layoff, be it short-term or long term, they should consider terminating any documented non-performing employees. 
• Negotiate New Labor Agreements (union locations) – Lastly, for those companies with a union represented workforce, they should meet with union leadership to discuss potential opportunities for saving costs that would help to avoid or minimize potential layoffs. Collective bargaining agreements can be opened and renegotiated in advance of their scheduled expiration date if both parties agree. Our union relations consultants are more than happy to help with this step.

Sometimes Mandatory Layoffs Are Necessary

In those situations where the economic recovery is anticipated to take a long period of time, permanent layoffs may need to be implemented. In this situation, Hutchison Group HR and Labor Relations Consultants recommend that employers consider the following:

• Establish Objective Criteria – To help maintain good employee relations, avoid inadvertent discrimination or the perception of unfair treatment, employers should establish objective criteria for determining which employees are to be laid off. For example, companies may consider an employee’s seniority, or specific job skills.  
• Internal Review Panel to Assure Fairness – Prior to announcing any planned layoffs, it is often helpful for a company to establish an internal panel to objectively review those employees targeted for layoff. In addition to reviewing each employee’s individual circumstance, the panel should also make sure that no particular class, race, or gender are adversely impacted by the company’s actions.
• Provide Transition Support – When informing employees that they will be laid-off, our employee relations consultants recommend that the company should advise them of any transition support that will be made available. Transition support services may include resume preparation, outplacement counseling, available workspace, etc. 

Actions to Help Minimize the Need for Future Layoffs

Because most businesses will always be subject to periods of economic downturn or instability, they should consider proactive strategies to help mitigate the need for permanent employee layoffs in the future. One such strategy is for companies to employ temporary or contract employees as a normal part of their business operation.

By having temporary or contract employees constitute 10-20 percent of their workforce, companies can create a protective buffer for their full-time employees. Contract workers can help the company deal with a surge of activity and can be let go when there is an unexpected decline, thereby eliminating the need for the company to terminate members of its permanent skilled workforce. 

Hutchison Group offers many areas of support for businesses in tough economic times. Our employee relations consultants can help you decide which course of action is best for your business and then help you manage the processes involved. Contact us today for a consultation.

The above article was written by Cameron J. Hutchison, president and founder of Hutchison Group, and Nancy J. Smith, employee relations consultant. With over 35 years of experience, the Hutchison Group is a highly regarded management consulting firm focused on all aspects of labor and employee relations; helping union and non-union employers improve productivity, teamwork, and performance. Visit our web page at www.hutchgrp.com