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Downsizing is a management strategy that involves cutting back on staff in order to become more viable and/or run more effectively. Usually done in response to financial hardship, downsizing is a voluntary attempt to reduce expenses by trimming payroll.
However, the term downsizing has come to refer to a range of activities, from personnel layoffs and hiring freezes to consolidations and mergers of organizational units. Whether referred to as downsizing, reorganization, or “rightsizing,” these activities have an effect not only on the employees being let go, but also those who remain.
Pitfalls of downsizing
Downsizing may not always provide the financial relief that the company may anticipate. Some research indicates that less than half of all downsized companies achieve the desired reduction in company expenditures, with less than 25 percent showing any increase in productivity.
Downsizing can also result in a loss of key personnel. By cutting too deeply, a company can actually start to harm itself by removing needed expertise in critical areas. If the company workload is not lessened, the downsized workforce will only have to try to do more work with fewer resources.
If there is not a solid plan in place for reorganizing the company after the downsizing, the company could just end up with a smaller version of what didn’t work before. There may also be a loss of institutional memory, and certainly there will be performance interruptions, even if there is a temporary increase in the bottom line.
Alternatives to downsizing
In some cases, alternatives to downsizing will offer better options to some employers. Employers may want to consider alternatives including employee transfers, voluntary early retirement, job-sharing, or reducing employees’ hours.
Other alternatives to downsizing include:
- Business process re-engineering — Looking at long term performance and what can be done to increase or add value.
- Downscaling — Reducing product lines to focus on core business.
- Re-training workers — Instead of releasing employees, find ways to retrain or redirect them to other priorities in the company that have a more positive effect on the revenue stream.
- Workweek adjustment/overtime reduction — Vary the number of hours employees work per week based upon the work load, rather than reducing the workforce.
- Hiring freeze/reduction by attrition — Some organizations can accomplish the same goals of downsizing by freezing hiring and not filling any open positions. Cross-training employees to do more than one job will allow labor force flexibility.
- Consider wage and benefit reductions — The workforce may accept wage and benefit reductions more easily if they understand them as an alternative to workforce reductions.
- Reducing layers — Organizations may consider eliminating layers of management or operations before cutting back on blue collar workers.
Employer responsibilities
Downsizing places certain requirements upon the employer with respect to continuing health coverage, vested retirement benefits, and unemployment insurance benefits. Most states do not require the payment of severance pay or other benefits to the employees who are being let go. Still, many employers do provide severance pay or other benefits to the employees being downsized.
Employee records
As employee’s past performance may play a role in deciding who will be released, the employer should examine employee personnel files to ensure that they are current and accurate. Review contents and make sure that employee evaluations and performance reviews are up to date. Make sure that managers and supervisors are using the evaluation system properly and are performing proper recordkeeping.
It is wise to review the data to see whether downsizing will have a disproportionate impact on a protected group, such as minorities or females or those over age 40. If so, the results and criteria should be reviewed to ensure discrimination has not occurred.
Personnel records should be maintained in the custody of an employer representative to verify that they are accurate and have not been altered. In the event of future claims against the company, all employee information must be available, in order, and accurate.
Be consistent
After determining that downsizing must occur, establish the criteria for releasing employees. Apply those criteria equally to all employees, making no exceptions. To do otherwise opens the organization up to charges of discrimination and other legal challenges.
Legal considerations
Among the laws that may affect downsizing are:
- The Worker Adjustment and Retraining Notification Act (WARN),which requires, with certain exceptions, employers of 100 or more workers give at least 60 days’ advance notice of a plant closing or mass layoff to:
- Affected workers or their representatives,
- The state dislocated worker unit, and
- The appropriate local government.
- Employee Retirement Income Security Act of 1974 (ERISA)/Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA), which requires employers with 20 or more employees to provide an opportunity to terminated employees to continue employee health benefits. The employee is responsible for paying the premiums.
- Title VII of the Civil Rights Act of 1964 prohibits discrimination on the basis of race, color, religion, gender, or national origin.
- The Age Discrimination in Employment Act of 1967 (ADEA) protects workers who are at least 40 years old from age-related discrimination.
- The Americans with Disabilities Act of 1990 (ADA) outlaws discrimination against people who are disabled.
- The Fair Labor Standards Act governs wages and compensation of employees. Wages and compensation, and non-discretionary bonuses earned prior to the termination must be paid to employees.
Foreign workers and downsizing
With careful planning, employers can protect themselves and their employees from most of the immigration problems associated with corporate downsizing. Here are some general guidelines to keep in mind when developing your company’s layoff strategy:
- Provide as much advance notice as possible to foreign employees who will be laid off so that they can try to secure alternate visa status. This may allow those employees to remain in the United States without spending time out of status or being required to leave the country.
- If possible, review foreign worker’s immigration status prior to layoff to see if keeping that employee for a few more weeks or months would allow that individual to secure immigration benefits that would take several years to reprocess if the employee had to start over. Such action must, however, take into account the impact on others.
- Consult an immigration attorney if unsure of the issues facing foreign employees.
- Be aware of any immigration-related obligations that apply to your organization based on the types of foreign employees being laid off. Different visa categories have different requirements when terminating employment. Failure to comply with these requirements could result in considerable financial liability for the employer.
- Consider if any changes in the workforce would affect an employer’s H-1B dependency designation. Changes in a company’s classification can substantially affect that employer’s legal compliance obligations.
- Understand how downsizing could affect prohibitions against displacing U.S. workers.
Effects upon employee morale
When a company begins a program of downsizing, it rarely only makes one round of cuts. Usually there are waves of cutting, restructuring, and reorganization that create a tremendous amount of stress on the remaining employees. Often when further cuts are anticipated, it causes decreased productivity and poor morale.
In rare cases, the employer will face increased threats of or incidents of workplace violence. Some employees may just be looking for the ax to fall, while others may feel guilty about not being let go when co-workers had been, leaving an anxious and mistrustful group of survivors.
The remaining employees may lose respect for and allegiance to the company, and no longer be willing to trust information that comes from management.
Communicating events to the “survivors”
Prompt, open, and frequent communication with the workforce is necessary to maintain employees’ confidence in management and keep fear from taking over the workforce and to allay their apprehensions. Lack of adequate communication can create fear, confusion, mistrust, and cynicism in the workers who remain, followed by declines in efficiency and productivity.
The company should explain exactly why any workforce adjustment is needed and, in as much detail as possible, which areas or departments will be involved or how many positions will be eliminated. Also explain whether this will be a one time event, a series of events, or dictated by future necessity.
Also provide plenty of opportunity for employees to ask questions and to meet with representatives of HR to find out about severance packages and services.
Note that while employers will want to do what they can to reassure remaining employees, they should steer clear of guaranteeing future employment, since doing so could create an employment contract, undermining the at-will employment relationship.
Collective bargaining agreements
Collective bargaining agreements will further complicate the downsizing scenario. Unions will generally try to protect the number of jobs, while making wage and benefit concessions if necessary to keep members employed. Of course, at some point in the future the union will expect to be rewarded for making sacrifices for the good of the company.
After it’s over
Studies have shown that following downsizing, surviving employees exhibit predictable behavioral characteristics. These behaviors can include showing a distrust of management and a drop in productivity and moral. Surviving employees may see the displaced employees as victims, especially if management has been seen to treat those employees poorly or without tact.
On the other hand, in situations where the management has treated laid off workers with respect and compassion, remaining employees may become even more committed and more loyal to the company.
Companies must strive to manage the release of employees to reduce the amount of discontent, through good planning, good communications, and by assisting departed employees to become re-employed. This approach will result in the least amount of hostility in the downsized workers, help promote loyalty in the remaining employees, and minimize lawsuits.
Once the downsizing is complete, meet with remaining employees to discuss the future prospects of the company, explain how the company will maintain profitability, and address any outstanding employee questions and concerns.