how to handle layoffs
Reading Time: 14 minutes

With economic conditions rapidly changing since the COVID-19 pandemic, many small businesses are worrying about what will happen to the stability of their cash flows. Rising interest rates and the possibility of recession have caused many small businesses to start wondering whether they can survive and retain their current workforce. In these cases, businesses can be forced to make difficult decisions. Small businesses are especially susceptible to these problems since they do not have the broad financial resources of corporations to fall back on, should they need it.

Small businesses are confronted with a variety of unique financial challenges. In a difficult economy, small businesses may be confronted with the need to start downsizing in a bid to lower costs and continue operations.

Understanding Layoffs for Small Businesses

Downsizing is one of the last options businesses want to use to cut costs. The perception this creates among the public and former employees is certainly bad. However, that impression does not just stop there. The attitudes of current employees can be very much affected by the decision to downsize their company. This is especially true for small businesses because the degree of connection between the business owner and the employee is much closer. Unfortunately, the decision to downsize sometimes becomes necessary.

When a small business decides to proceed with layoffs, it is important that they follow all laws and regulations governing layoffs. There are also generally good practices to maintain good connections with employees and a good reputation in your community even after layoffs occur.

A layoff is when a company lets go of an employee for reasons other than their individual performance. The reason is not due to an employee’s actions like fraud, conduct, or having general bad productivity. On the contrary, the reason is the result of a business having problems with cash flow, budget cuts, getting rid of a position, or some wider structural change. Layoffs can be either temporary or permanent.

Making the decision to lay off employees at your small business is obviously one not taken very lightly. However, there are also extra steps you can take to potentially avoid having to lay off an employee. It requires that you investigate potential extra steps.

One way to do so is to halt bonuses. If you give out bonuses at your small business, you might consider having a conversation with your employees and informing them about the financial difficulties facing your small business. People might be upset that their normal bonuses will not be in effect for the year or the time period for which the pause is necessary, but they might understand that it is better than being laid off or seeing their coworkers be laid off. Moreover, you might be able to frame the situation as temporary. If the situation your business is facing has to do with the state of the overall economy, it might be true that the bonuses could be recoverable and reinstated down the road.

Another option would be to halt overtime. For small businesses and employees where overtime is a discretionary option, this may be an outstanding liability to the small business costing you lots of money. A way to cut back on these costs would be to halt the ability for people to take overtime and instead have people work normal hours. You could implement this practice for however long it would be necessary in an effort to avoid having to go to layoffs.

Overtime is certainly one lever you might be able to pull to reduce costs for your small business and avoid layoffs, but it is not the only one. You could also reduce working hours. If your small business pays people by the hour, it might be helpful to reduce hours or employees on staff to reduce labor costs. This might eventually save you enough money to avoid having to lay off employees. Further, you could run this measure until the business is back in good shape. Communicating this status with your employees would be key so that they understand what is going on.

A furlough is a further, and perhaps more controversial, tool to fix your small business’ finances in an effort to prevent layoffs. This option has risks, however. You should consider a furlough if you expect to correct your small business’ financial situation quickly after a temporary break in high labor expenses. If you can correct the outstanding financial issues and subsequently be able to afford labor expenses again shortly after, then you can bring an employee back from furlough. However, if you expect this period to be long, then employees might become unhappy with your small business, and you might garner a bad reputation.

It is important to understand all your options before you get to the point of having to lay off your small business employees. It is recommended that you explore other options first and read more about potential fixes.

Handling Layoffs at Your Small Business Legally

Before you initiate the layoff process at your small business, you should consider reviewing government and other online resources for small businesses on laying off employees. It is important that you know your responsibilities and rights as an employer as well as that of your employee when you start the layoff process.

One of the first things you might be confronted with is whether you need to provide your employees with advance notice of a layoff. Theoretically, the more notice you give your employees, the better, as this allows them the time to begin searching for a new job. However, you may or may not be legally required to give a minimum notice.

To determine this, the first question you should ask yourself is whether your small business employs 100 people or more. If you employ more than 100 people, your small business is subject to The Worker Adjustment and Retraining Notification (WARN) Act. This act establishes a requirement for your business to give 60 days of notice to employees of being laid off if there are at least 50 employees to be laid off at a single location.

Although your business may not be required to provide notice under the federal part of the WARN Act, you may still be required to provide notice under applicable state laws. It is best to check the laws of your state to determine whether your small business is obligated to provide notice under these laws.

If you decide to lay off employees, you may be curious about your obligation to provide severance pay. The Fair Labor Standards Act, governing this area of regulation, does not obligate small businesses to pay severance. This is, instead, something that an employer can offer at the start of employment. It is also important to note that some states might regulate severance pay. Thus, it is important to check your state regulations and determine if you may need to provide severance pay for your employees.

Severance pay standards vary between companies. They can depend on many things, including the length of time that team members spend working for the firm. Their contribution to the company’s future overall could remain important, and small business owners could undertake initiatives to help their laid-off workers with this pay.

Some of your laid-off employees may experience a difficult time. Providing a severance package could be a way to help break the bad news to the employees who are affected. Former employees could perceive the business more positively in this case, which could help the business’ overall image, even after mass layoffs. At the very least, it can assist in lessening the damage to the reputation of the small business. It does not have to be an all-or-nothing type approach to severance pay either.

At the point of a layoff, a former employee would be eager to receive help where they can get it. Even if not large in number, a form of severance pay or a severance package might mean a lot to a former employee. That could generate returns to a business in the form of protecting the business’ reputation after a layoff or keeping good connections with a former employee.

Health insurance for employees and employers is another concern. In America, many employees depend on their health insurance. Lawmakers have noticed this, and they have incorporated a business requirement to continue health insurance group coverage, even in the event of layoffs, for certain companies. This is something that small business owners should be aware of when calculating the costs of layoffs.

The legislation governing this regulation is known as the Consolidated Omnibus Budget Reconciliation Act (COBRA). It states that if your small business has had at least 20 employees for half of the days of the year, you must continue group coverage for former employees and their dependents.

Handling Layoffs at Your Small Business the Right Way

Aside from legal matters, layoffs are also emotionally difficult. If you own a small business or startup, you come into close contact with your employees every day. Staffing is no longer simply a number of employees but a series of interactions that allow you to get to know your employees really well. You should take care of the layoff process, handling it in a mature and professional manner in the interest of your business’s reputation, as well as to lessen the impact of bad news.

After a layoff, your remaining employees will likely have watched the layoff process. It is important to consider the perception you are creating with layoffs so that you don’t give your remaining staff a reason to be upset. This would be key for future retention, too. Moreover, you do not want past employees upset with the layoff process, voicing it on LinkedIn, Glassdoor, or social media, for example.

The first step you should take is to understand how your employees will perceive this information and prepare for the conversation. It is possible that employees at your small business will be unaware of the financial conditions leading to their layoff. As a result, they may be surprised by the news. It is important to be accommodating to this so that the news can be taken a little lighter. You may consider consulting your human resources department to think about how to structure this conversation with affected employees. If you do not have one, you could carefully construct a talk you will give to affected employees and review other advice online.

A worthy example of being empathetic would be trying to place the layoff announcement at a time outside of the holiday season. With the understanding that the news will be substantially negative to those who are affected, you should try to make all efforts to save layoffs until after the holidays. Financially, this would help your employees get through the holidays. Emotionally, you can help prevent employees from having a stressful holiday season.

Being empathetic during this process has the potential to improve the perception of being laid off from the employee. Having empathy is something you are already likely to experience as a small business owner laying off an employee. Nevertheless, it is a good mindset to have when considering the ramifications of the decisions you have to make and communicate to a close employee.

Being laid off is really hard news to hear. If you are planning to lay off employees at your small business, it would be best practice to meet with them in person when possible. This would allow you to give them the news directly and talk with them about how you can help them in seeking further employment or just as a way to comfort them and let them know you care.

When meeting with an employee and breaking the news to them, you should try to meet individually. When you meet individually, you can discuss their concerns, needs, and next steps through whatever support mechanisms you may provide. It is much better than laying off employees in a group setting. By doing so in a group setting, it appears that you are trying to save time by not meeting with people individually. This would reflect poorly on the business and especially a small business.

You might be wondering just how to begin such a difficult conversation with your small business employees. Certainly, no conversation on this topic will be emotionally easy. It is not supposed to be. However, there are ways to structure a layoff conversation in a way that supports an employer and employee connection even after a layoff.

You could begin the conversation with an employee discussing the current challenges your small business is facing in the macroeconomy as well as the smaller problems the business is experiencing, including any mistakes you made in managing the small business. This adds context for the employee to potentially feel sympathetic to the situation that the small business and you are in, given the challenges that you are facing. Overall, this increases mutual understanding and trust.

Next, you should lay out the date of the layoff, as well as any details related to the employee being laid off. If there are any options for assistance, severance pay, or outplacement, this is a good time to mention these.

The next part of the conversation is critical to communicating in a small business. You should ask the employee if they have any thoughts, questions, or concerns. You likely know the employee personally, and you want to be there for them during this difficult time. You should be prepared to answer their questions in a thoughtful manner and be respectful of their concerns.

Following this, you can explain to them what you can help them with after their employment ends and any follow-up options with you or the small business itself. This could help maintain a good reputation among the employee who is being laid off or in the community at large. This is a standard good practice. It is also appropriate to thank the employee and make sure that you wish them well in their future careers.

The Importance of Being Careful About the Layoff Process at a Small Business

It is also possible that following a layoff conversation, an employee might try to argue that they should not be laid off. Whether they suggest that another employee should instead or that they are critical to the business’s operation, it may benefit you to take into account the possibility of pushback.

Be prepared to defend how you decided to lay employees off. You should compare their performance against others objectively or be prepared to say in what capacity the job function is more expendable than others. In the event that you have this pushback, you can then be blunt, clear, and direct about the explicit reasons for which certain employees or teams were laid off from your small business.

Having this information on hand is good for another reason. If a former employee later accuses you of discrimination in your layoff, you should be able to defend your reasoning for legal reasons. This remains a good step to secure your legal standing in the event of any formal future complaint or lawsuit.

Another note should be made on which employees you decide to let go. There are laws regarding protected cases of employees, and if you disproportionately lay off groups of people who are of the same race or of people who are disabled, you may face lawsuits. It is important to be objective and unbiased in deciding whom to lay off. However, it is also necessary to be careful that your small business does not attract an unwanted and accidental lawsuit.

In any case, you can still thank the employees and express your gratitude for everything they have done to support your business, in good times and bad.

Since you have a role as a leader in a small business or are the owner of your small business, it would also be a good practice to accept responsibility for things going wrong in the business leading to the decision to lay them off. Since people depend on you, it is imperative that you take responsibility for things not going well and the consequences which led you to make this decision.

You might also explain to the employees whom you are laying off that their positions will not be filled by other people. It is important to clarify this to employees so that they can be assured that the actions taken to lay off employees are not unnecessarily being directed toward them for some reason, like their work quality, for example.

A great idea for your small business would be to seek to offer outplacement services to employees who are being laid off. Outplacement services could encompass a wide range of meanings, but overall providing affected employees with a path to a new job would be viewed positively.

Small business owners or managers in this situation could seek to establish connection networks, make recommendations for employees to work at certain places, or help with recommendations, interview preparation, and resumes. A positive and proactive plan to help affected employees find new work is admirable and likely to improve your image among the affected people. Moreover, you could offer them an expedited place for rehire if the company’s position and standing improve.

The process of laying off employees at your small business will, unfortunately, not be limited to just the employees being laid off. As such, once you have completed laying off the employees you selected to be laid off, you should consider meeting with the remaining employees to inform them of what happened and that layoffs have ended. This can make the remaining employees feel assured that they are still employed and do not need to worry about their current job. This is important since the employees at your small business have likely heard from other employees who were laid off, and they might be concerned about their job security.

For employees who are continued to be employed past the layoffs, you should ensure them that appropriate steps are being taken so that layoffs will not continue to occur or will not have to occur again in the future. There should be an emphasis on trying to reach increased productivity to stabilize the financial situation of small business. Efforts should also be made to increase morale.

After fellow employees have witnessed other employees being laid off, they may feel less energized and like they do not have enough morale to perform as well. It is critical that you take steps to increase cohesion and improve the mood after layoffs so that momentum does not turn negative with the previous layoffs.

The process need not stop here, though. There are more ways to ensure that your former employees have been treated as best they can through the layoff process. You should consider telling them that you will follow up with them after their departure from your small businesses. You can proactively reach out to them to follow up on their journey and search for new work. You could offer advice, recommendations, or help along the way. In any case, such a step would show how much you appreciate and care for them.

One of the crucial points to being around to support employees is that even if you are a small business, you are still there for your former employees to the fullest extent possible. It brings out the humanity in a small business and shows that even if mistakes were made, the small business owner or manager is doing everything they can to maintain relationships and help those who are affected.

Biz2Credit

Here at Biz2Credit, we pride ourselves on our continued support for small businesses across the nation. As part of our efforts, we continue to maintain our Biz2Credit Blog, updating it each day with new articles and posts about everything small business related. So, please continue to check back for all the latest news and information on trends and events impacting small businesses.

Find more blogs

Apply Online in Minutes

Applying does not impact your personal credit score.