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Workforce Reorganizations
How Do I Manage Workforce Size in a Changing Business Climate?

IN TODAY’S EVER-CHANGING BUSINESS ENVIRONMENT, companies need more than ever to be able to remain nimble to satisfy the demands of the marketplace. New market trends require some organizations to add products or services to existing offerings, or even completely change the nature or scope of their businesses. Other companies choose to grow by acquisition and are faced with the challenges of integrating two or more companies in a short period of time. And unfortunately, there are companies that experience a downturn in their fortunes and need to find ways to cut expenses in order to survive.

Though these situations may be quite different in nature, all have a common thread: These corporate changes will usually cause a business to rethink the organization and structure of its current workforce. Companies undergoing these changes will ask themselves questions such as, “Do I have too few or too many workers?” or “Do we have the right people with the right skill sets to get where we want to go, or do we need to make changes?” Companies involved in recent mergers and acquisitions are traditionally faced with too many people for available positions in the new organization. And those with fiscal woes or urgent pressures to increase profits will often look to reducing head count as a solution.

Layoffs. Downsizing. Restructuring. Reductions in force. Reorganization. Terminations. No matter what the term used or the reason behind the action, layoffs are, by their nature, unpleasant for all involved. It is therefore tempting to move through the process as quickly as possible in an attempt to get the bad news over with and proceed with business. However, many organizations learn too late that an inadvisable or hastily conducted reduction in force results in costs that far outweigh the benefits obtained—including a sharp drop-off in productivity, risk-averse decision making, increased legal liability, low employee trust and commitment, bad publicity, and a negative reputation in the community. Before implementing a major reduction in force or reorganization that will result in terminations, instead of giving into reflexive, short-term-only decision making, it is far wiser to adopt a strategic approach that will best position the organization to meet its objectives, minimize legal liability, and increase the chances that, going forward, the company will continue to be perceived as a responsible employer.

ACQUISITIONS AND MERGERS

“How should I make staffing decisions in an acquisition or merger situation?”

An acquisition or merger tends to be an exciting event for the surviving organization. Overnight, the enterprise has increased in size and is poised to become a more formidable competitor in its existing business or to enter an entirely new area of the market. For individual employees, however, the outlook is more uncertain. What are the plans for the new company? Is there a place for me? If I am terminated, will I get any severance or other assistance? The anxiety is generally heightened for the employees of the acquired or merged organization, who may believe (often justifiably) that if there are cuts to be made, they are more likely than their counterparts at the acquiring company to be designated for termination.

Companies almost always make acquisitions thinking they can create strategic efficiencies, which will usually include streamlining the workforce of the new, combined entity. Even in the best-case scenarios, there are likely to be redundancies—or situations where there is a person from each company presently in a particular job function, but room for only one person in that job function in the merged business. How the company handles these redundancies will chart the shape of the business and create an early impression concerning the corporate character of the new entity.

The acquiring company should begin planning the shape of the post-acquisition workforce long before the transaction is consummated. Develop a blueprint of the combined organizational structure, identifying both duplications and gaps in talent. Identify key employees or positions in both entities that will be essential to ongoing success, as well as those that are needed for a shorter transitional period. Devise a retention incentive program to discourage defection, which usually involves offering cash incentives, or “stay bonuses,” to appropriate individuals. Where duplications or excess personnel are identified, create a plan and timetable for making the terminations, and identify the severance, benefits, and other assistance you will make available to affected workers.

Deciding which employees will stay and which will go is one of the most strategically and emotionally challenging parts of the merger/acquisition process. Too often, when redundancies exist, the acquiring company automatically chooses its own employee over the one from the acquired entity. After all, it is human nature to see the merger situation as “us” vs. “them” and to opt for the known over the unknown. Don’t make this mistake. Instead, think of the situation as the chance to upgrade your workforce and to choose the best employee for each available position. Moreover, if your process is perceived as fair by both sides, you will better establish the trust and commitment necessary to build a successful culture for the new, combined enterprise.

For each position where you are choosing between two or more people, treat the decision the same way as if you were choosing among the candidates to fill a new position:

• Review the personnel files of each employee to determine experience, performance, and other relevant factors.

• Speak with each employee’s manager and peers to gain perspective on the individual’s strengths, weaknesses, and potential for growth.

• Interview the employee, also paying attention to the individual’s willingness and ability to participate in the desired corporate culture.

• If possible, retain the services of a third-party consultant who can provide an unbiased assessment using consistent criteria.

ECONOMIC CHALLENGES

Downsizing offers an immediate reduction in payroll costs and thus the opportunity to quickly impact the bottom line and appease investors. Reducing head count is not the only alternative for reducing costs, nor is it the best response in every situation. Before planning and implementing a layoff, it is important to assess the options to determine whether a layoff is right for your business.

“How do I determine whether a layoff is the right solution for my company?”

You will need both to look at your options to see whether another solution may be preferable to downsizing and to conduct an honest appraisal of whether your business can in fact absorb a reduction in force without serious adverse consequences.

Assessing Your Options. Many innovative companies lose their creativity when it comes to considering their options. Management often assumes that a reduction in head count is the only workable solution, when in fact a detailed examination of corporate spending across the company may reveal other viable ways to cut costs. These solutions may include:

• Decreased spending in other areas of the business, such as freezes on purchases of new equipment, limitations on the use of outside contractors, or restrictions on business travel expenses. Often employees can be the best sources of identifying corporate waste and suggesting ways to save money. Give employees the assignment or challenge to come up with cost savings and revenue-enhancement concepts.

• Streamlined work processes, which can save a business time and money and ultimately increase productivity.

• Available federal, state, or local programs or funding to assist struggling employers.

• Early retirement or voluntary separation programs, which offer incentives to certain employees to leave the organization voluntarily.

• Other personnel-related measures, such as reduction of hours, temporary shutdowns, offsite work or flexible hours, restrictions on overtime, leave without pay, transferring and retraining employees, hiring freezes.

Can You Really Afford to Downsize? As we mentioned above, a layoff can cost a company significantly more than it saves. In addition to the indirect costs, such as decreased morale and employee security and the increased risk of litigation, there will be additional direct costs. Make sure your cost analysis accounts for potential increases in your organization’s unemployment tax rate, expenses connected with retraining, and severance and outplacement costs.

Take a realistic look at whether your business can adequately absorb the planned cutbacks without causing a significant drop-off in productivity. Will there be enough people remaining to adequately perform the tasks at hand? Will these workers have the skills and training to absorb the responsibilities of departing employees? Staff reductions without a significant productivity increase from remaining employees are likely to lead to a decline in customer service and quality that not only may inhibit future growth, but also may damage the reputation of the organization.

“How do I go about conducting the downsizing?”

Whether your need to conduct layoffs arises from a merger or acquisition, challenging economic times, or any other circumstances, it is critical that you carefully plan and implement your layoff to comply with applicable federal and state laws, minimize adverse employee reactions, and reinforce company strategy going forward. There are three stages to effective downsizing:

1. Planning

2. Implementation

3. Support of remaining employees

Handle all steps with care and forethought to achieve maximum results.

PLANNING THE LAYOFF

“What do I need to consider when planning a reduction in force?”

First and foremost, put the layoff in its proper perspective. If you have done the necessary analysis in deciding that you need a reduction in force to begin with, you should be looking at the reduction and everything that flows from it as an essential, long-term strategy rather than a crisis-management situation. Instead of creating “head count targets,” develop a forward-looking vision of your company and a restructuring plan that will further this vision. Are there certain areas of your business that are booming and others that are dying? Are you looking to move into new areas of growth? Cutting staff across the board will do nothing to speed your progress and will probably hinder you in reaching your goals, but a focused approach to determining exactly who you can spare and who you must keep can help your company emerge a stronger business force.

• Create the action plan. Develop a written plan that includes the business rationale and objectives for the downsizing. This plan will serve as a reference point in determining the nature and scope of the staff reduction. It will also help protect the company in the event of future legal challenge by demonstrating that your actions were reasonable and fair. The plan does not have to be elaborate, but can be a brief document, outline, or summary of meeting notes. Identify those people who will be making the decisions about the layoffs. In most situations it is helpful to involve a cross-functional team, which may include representatives from affected business areas, human resources, and the legal department. Because layoffs have so many potential legal ramifications, involve an outside attorney or other experienced professional if you lack the in-house knowledge.

• Look for any contractual restrictions. Some employee handbooks contain layoff policies that detail the procedures under which layoffs will take place, as well as severance benefits payable to laid-off workers. Or you may have employment contracts or collective bargaining agreements that will mandate certain actions. If your company has written layoff policies and procedures or employment or union contracts, you will have to follow them carefully when conducting your downsizing. Even if you do not have written policies, if you have offered workers severance compensation in the past when they were fired for financial or other reasons not related to their performance, you will risk litigation if you do not offer downsized workers similar compensation. If you are cutting jobs in a merger situation, be sure to do a thorough search regarding severance contracts the acquired company may have with its employees. As the acquiring company, you will be bound by contracts entered into by the business you purchased. Absent severance agreements, you will likely still be bound by the acquired company’s severance policy when you release its employees.

• Decide which jobs and functions will be reduced. Sometimes layoffs will occur only at specific sites or in specific job categories or functional areas. Other times you may choose to reduce head count across the business as a whole. Either way, your plan should focus on positions, not the individuals in the jobs. Detail the areas that will be affected by the action, as well as who in each area will make and review termination decisions. If your plan involves eliminating certain departments or positions, you will not have to decide which individuals to terminate, as all employees holding the positions to be eliminated will be terminated. If, on the other hand, you are not going to eliminate positions entirely, but want to reduce the number of people in these positions and consolidate the work, you will have to develop criteria to determine which employees in similar job categories will be fired.

• Establish criteria for determining employees to be downsized. Make your criteria as clear and objective as possible. Examples of objective criteria are factors such as skills, performance, and seniority. Try not to use subjective factors such as motivation or commitment to the company. Objective criteria are more easily measured and less ambiguous, and thus easier to apply uniformly and defend in a future lawsuit. Once you have established the criteria, use them consistently in your termination decisions. Do not make exceptions for sentimental or arbitrary reasons. Document the criteria you used and how the results you achieved reflect your criteria.

• Analyze the proposed reductions. Once you have a list of proposed staff reductions, analyze it to ensure that the group does not include a disproportionate number of members of any protected class (minorities, females, older workers, etc.). You must conduct this review after you determine the initial group of employees under your set criteria. You will risk discrimination lawsuits if managers and others in the decision process use employee demographic data during the selection.

The demographic balance of laid-off workers should reflect the general demographic population of the organization as a whole. If before the reduction in force, women made up 50 percent of your managers but the restructuring would reduce that number to 30 percent, the resulting imbalance could lead to future discrimination claims that you may have difficulty defending. If you find that your affected population is skewed in any way, you may wish to make adjustments to your criteria to achieve a more equitable result. Make sure in this situation that you are adjusting your measurable criteria, not making exceptions for individuals based upon their membership in a particular class. In circumstances where it is inappropriate to adjust your criteria and there exists an unbalanced result, reexamine your decision process to be certain there are legitimate, nondiscriminatory reasons for your selections and that the documentation reflects these reasons. You should be prepared to defend the layoff decision for every affected employee. Having an attorney review your proposed plan will help to head off any potential problems.

Your termination list may include individuals you believe are likely to sue for discrimination or retaliation, particularly workers who have filed a claim or grievance in the past, are on medical or maternity leave, are close to vesting in a retirement or benefit plan, or have litigious personalities to begin with. Again, do not make exceptions, as this will undercut the integrity of the process—if your criteria are reasonable, nondiscriminatory, and well-documented and you follow them consistently, you will be more likely to succeed in a future lawsuit.

Analyze the proposed layoffs to determine whether there are enough remaining employees, and whether they possess the required skills, to get the work done. Many organizations do not learn that they have an inadequately staffed workforce until after the downsizing, and they end up having to hire new employees, rehire terminated employees, or use contract workers. Not only does this approach negate any financial benefits achieved by the reduction, but it also damages morale and will cause your workforce to question management decision making.

• Decide what severance benefits you will offer downsized employees. There are certain compensation and benefit items you will be legally required to offer, such as payment of accrued wages and vacation time, COBRA continuation, the opportunity to exercise vested stock options, and 401(k) and/or pension benefits (see Chapter 9 on termination).You may also decide to offer severance payments, outplacement, or other optional benefits. The amounts and types of post-termination benefits you offer are totally up to you, unless you have specific policies or employment contracts covering severance concerns or you have set past precedents regarding severance during layoff situations.

In the long run, it pays to be as generous as you can be under the circumstances. Employers that send hordes of workers out on the streets with “nothing” tend to get bad press and suffer in the eyes of the community. Former employees who believe that they received an unfair severance package will be more likely to air their grievances in court. Strongly consider offering outplacement or other transition counseling to assist individuals in dealing with their anger and fears and moving on with a new job or career. Even if you cannot afford an extensive outplacement program, providing just one or two group sessions can assist workers in preparing their resumes and understanding basic job search methods.

If you decide to pay severance compensation or offer other optional severance benefits, above all be consistent! While you can vary amounts based upon such factors as years worked for the company or job category, apply these standards evenly and without exception to all employees in a given classification. Unequal treatment may give rise to discrimination claims.

• Keep the details of the changed organization confidential. Emphasize to everyone involved in the decision-making process the importance of keeping the planning and decisions confidential. Store layoff documentation and lists of affected employees in a safe, secure place. Do not conduct communications about the downsizing over the company e-mail system. The e-mail system is not private, and it is easy to inadvertently send a message to the wrong party.

“What is the Worker Adjustment and Retraining Notification Act and will it apply to our layoff?”

If you are a private employer with (a) one hundred or more employees (not counting those who have worked less than six months or who work less than 2 hours per week) or (b) one hundred or more employees, including part-time workers, who in the aggregate work at least 4,000 hours per week, excluding overtime, the Worker Adjustment and Retraining Notification (WARN) Act will apply if you plan to:

• Completely close a facility or discontinue an operating unit for a period of six months or more, resulting in the loss of employment of fifty or more full-time employees; or

• Conduct a “mass layoff” affecting more than five hundred full-time employees at a single site of employment during a thirty-day period, or at least fifty workers if they constitute at least 33 percent of the workforce at the single site of employment.

There is a limited exemption from this law for companies that close temporary facilities or conduct a closing or mass layoff as a result of the completion of a project. To qualify for this exemption, you must have informed workers at the time of hire that their employment would be limited in duration.

The WARN Act mandates certain detailed timing and notification requirements and imposes substantial penalties for violations, including back pay and benefits for affected employees. The major procedural requirements are as follows:

You must give affected employees at least sixty days’ advance notice.

If you have a series of small terminations during any ninety-day period, you must add them together to determine whether the total number of affected workers meets the WARN standards. For example, if you lay off 250 employees on May 1 and an additional 300 on July 15, these two actions will be considered one mass layoff, requiring you to follow WARN procedures.

Notices must be in writing and in clear language that employees can easily understand. It is sufficient to send the notice to employees’ last known addresses, or to include the warning with pay stubs.

When your layoff will affect union employees, you must deliver written notice to the chief elected officer or the employees’ exclusive representative or bargaining agent and to the local union officials representing the workers, in addition to any notice requirements in your collective bargaining agreement.

You must also send notices to the state dislocated worker unit and to the chief elected official of the local government where the site is located. Your state department of labor can tell you how to contact the dislocated worker unit.

Under the WARN Act, there are certain limited circumstances where a sixty-day notice may not be required. These include:

• Faltering company. When a company can prove that during the time the sixty-day notice would have been required, it was actively seeking capital financing or business in order to avoid a plant closing and that the required notice would have caused the company to lose the financing or business. This exemption applies only to plant closings and not mass layoffs.

• Unforeseeable business circumstances. When a shutdown or mass layoff is necessitated by significant circumstances outside of the employer’s control and not reasonably foreseeable at the time the sixty-day notice would have been required.

• Natural disasters. Circumstances falling under this exemption include floods, earthquakes, storms, etc. that directly led to the plant closing or layoff.

It is the employer’s responsibility to prove the existence of circumstances sufficient to qualify for an exemption to the notice provisions of WARN. In addition, several states have their own notice requirements for plant closings that may impose additional obligations on employers. Consult with an attorney before acting to ensure that you comply with federal and state mandates.

IMPLEMENTING THE LAYOFF

“How do I implement my downsizing plan?”

The way you handle your reduction in force not only impacts affected workers, but will also influence the attitude and productivity of those remaining, and the perception of your business in the eyes of customers and the community as a whole.

“Should I give employees advance notice of the layoffs?”

Unless you are covered by the provisions of the WARN Act, whether you give advance notice is up to you. In most cases, though, it is advisable to notify workers of the impending actions. Layoffs are rarely a complete surprise to employees. Your workforce knows that some cuts will be made after an acquisition and it senses when business is bad, and the closed-door meetings and stressed demeanor of management that usually accompany a downsizing will encourage rumors and heighten anxiety. Honesty and openness with employees is almost always the best approach. Don’t wait for office gossip to get out of hand or, worse yet, let employees first read of impending layoffs in the local newspaper. Even if you believe you can keep word of the reductions from spreading, springing surprise layoffs on your workers can damage trust in management.

Top management should deliver the news in person. Never delegate the task of messenger to nonexecutive personnel or resort to e-mail, newsletters, or written memoranda to spread the word (although you can and should use these written communication methods to follow up on or reinforce what has been communicated verbally). Call a meeting or series of meetings and explain that there will be job cuts. Be forthright. Communicate the reasons for the downsizing, the strategies to be pursued, and the time frames involved. Reinforce that this is a business decision to strengthen the company or weather a storm, not a personal action intended to clean house. Explain the company’s plans for a more efficient and profitable future and how the restructuring will help the organization attain its goals. Be positive and optimistic about the future rather than going into panic mode. Listen and respond carefully to employee concerns. This is a difficult time for everyone concerned, but all eyes will be on management, looking for a reasoned game plan and to see whether the company is treating employees with sensitivity and fairness.

“Should I lay off employees in groups?”

Under most circumstances, it is best to conduct your layoffs personally. When you are terminating a very large group it may be impractical to have one-on-one meetings, and personal conversations may be unnecessary for short-term, temporary layoffs. Yet as a general practice, group layoffs are insensitive and demeaning. Just because you are firing several employees rather than a single individual, there is no reason to sacrifice their dignity or treat them with any less consideration than you would in any other termination situation (see Chapter 9). While you may decide to hold subsequent group meetings regarding explanation of benefits continuation or outplacement assistance, a group setting is an inappropriate place to break the news of a job loss.

“Who should conduct the actual layoffs?”

As with individual terminations, it is best to have two people in the termination interview, one to conduct the meeting and the other to serve as a corroborating witness. Usually, the two persons will be the affected worker’s manager and a member of the human resources department or someone who has worked closely with that individual, but there are no hard and fast rules. You will need to decide what works best in each situation, especially when the downsizing affects entire departments or units and the managers and supervisors are losing their jobs as well.

Even if top management is not involved in terminating individual employees, it is important that they maintain visibility during the process. Executives who disappear during difficult moments such as layoffs do not demonstrate the leadership that is necessary during challenging times and will lose the respect of the staff.

“How should I break the news to terminated employees?”

In Chapter 9, we discussed the general guidelines applicable to termination interviews. These guidelines are equally applicable to downsizing situations. However, be especially sensitive to the fact that layoffs resulting from mergers and tough economic times are unlike traditional terminations, in that you may be firing individuals who are good workers. Do not make employees feel like they have done anything wrong to lose their jobs, but explain why the layoffs were necessary and the process used to make decisions. While you need not—and should not—go into intricate detail about the reasons an individual was selected for the reduction, prepare a simple statement like, “After our recent acquisition of the XYZ Company, we have decided to consolidate the two sales forces,” or “In reducing the number of financial analysts, we decided to release those analysts with the least seniority.” Even though you may have a number of terminations to conduct in one day, do not rush through the process and make the individual feel unimportant.

If the layoff will be of limited duration, or if the worker will be eligible for potential recall, explain this during the meeting. Provide clear, written information about benefit continuation options, collect or arrange to collect any company property in the employee’s possession, have someone on hand to answer any immediate questions, and let workers know whom to contact with future concerns. Take notes of the meeting and place them in the worker’s employment file.

“Should I obtain a waiver and release from employees terminated in a layoff?”

It is often a good idea to get downsized employees to sign a waiver and release, as long as you are offering them some form of benefit in addition to those they are entitled to by law, policy, or custom (see Chapter 9 for criteria governing valid releases). However, unlike situations involving individual discharges, where it is acceptable and common to negotiate release provisions, providing differing release documents, amounts, and terms and conditions in layoff situations can be considered discriminatory. Therefore, it is best to stick with the predetermined severance formula and not allow separate negotiation of release documents.

Also remember that workers over forty years of age who are terminated in a group termination situation are entitled to an extended period of forty-five days in which to review and consider the waiver and release document. In addition, the employer must provide information about the ages (not the names) and job titles of those employees selected and those not selected in the “decisional unit.” A decisional unit consists of the group of employees who were considered for layoff, such as a specific department.

“Is it best to stagger the layoffs?”

Conducting layoffs in stages is rarely advisable, as it will prolong the distraction and uncertainty, and delay the process of recovery and return to business. If possible, conduct all necessary downsizing at one time.

“Are downsized employees entitled to collect unemployment insurance?”

Yes. You will not have grounds to contest unemployment compensation for individuals who were laid off.

CONSIDERATIONS FOR REMAINING WORKERS

Employers are often so preoccupied dealing with the terminations that they neglect the employees who are left behind. It is a huge mistake to assume that layoff survivors will be happy merely to have retained their jobs. In reality, they will be beset by a variety of questions and emotions. They will be fearful about their own job security. They will be saddened by the loss of their coworkers and overwhelmed by their increased responsibilities. They will be concerned about the future of the company and wondering whether they should be exploring other employment opportunities. Just as important as treating departing employees fairly is keeping remaining employees loyal and motivated. Your success as a business will depend on your current workforce.

“What should I tell surviving employees after the downsizing?”

Senior management should communicate with remaining employees immediately after the layoffs. Do not rely on memoranda or e-mails to do the job for you. Like all important layoff communications, the situation calls for personal contact from the top. Your communication has several purposes: to inform employees about what happened, to acknowledge and deal with the thoughts and emotions that workers are having during this difficult period, and to motivate them to move forward and help the organization prosper.

Candidly inform survivors about the downsizing actions that you took, explaining the business motivation and the rationale for decisions. By being open with workers, you will help to quell rumors and show that the layoff determinations were reasoned rather than random.

If the layoff resulted from a downturn in business, never blame the terminated workers for the company’s woes. Explain that it was the positions that were no longer needed by the company, not the individuals.

Do not ignore the fact that survivors will have deep feelings about the layoffs. Some may feel angry with the company or guilty that they survived and others did not. Do not try to keep people from discussing what happened; rather, acknowledge to employees that this is a difficult time and allow them to air their emotions and concerns.

Detail any changes in management or organizational structure resulting from the actions.

Discuss how work will be redistributed and how to handle telephone calls for and reference requests regarding terminated employees.

Reassure workers that they are important to the organization and will be a critical part of the company’s plans going forward.

Never promise that there will be no further reductions. Such statements will erode trust if further downsizing does become necessary.

“How do I keep employees motivated and focused?”

There are several steps you can take, both in the immediate aftermath of the layoffs and on a continuing basis going forward.

• Provide necessary training. Survivors will be worried about their workload as well as whether they will be able to succeed in any new roles and support the company’s new direction. If they need additional training, provide training in-house or though outside sources. Don’t expect people to learn all the necessary skills on the job. You may also want to consider providing training or coaching on dealing with change, especially for those employees who are experiencing particular difficulty coping with the events.

• Provide reassurance. Meet with individuals to let them know that their contributions are valued. This message should come from the company’s top executives as well as individual managers. Discuss strategies for career development within the organization. Recognize and reward good performance—this may be a good time to beef up your reward and incentive programs. Give excellent performers the message that you are really committed to keeping them, but never make statements such as, “Your job is secure” or “We want you to stay.” These comments, though well-meant, can lead to implied contract claims if you terminate the employee in the future.

• Be sensitive to conspicuous spending. No matter what the financial condition of the organization, the post-layoff period is not the time for management to purchase a new company jet or to buy fancy new furniture for the offices of senior executives. Employees are already questioning whether the staff reductions were actually necessary— don’t give them a reason to believe that management sacrificed employees senselessly.

• Communicate on a continuing basis. The communication should not stop in the immediate aftermath of the downsizing. No matter what the reasons for the layoffs and how effectively they were conducted, it will take time to rebuild lost trust. Generate a practice of ongoing communication to rebuild security and confidence, and diffuse the damaging perception that employees will be expected to always do more with less. Focus on plans going forward, project momentum and purpose, and involve employees in actively helping the organization succeed and prosper.