Small Business

The Right Way to Handle Layoffs


On paper, cutting staff can make sense. In practice, it's a painful process that, if poorly executed, can hamstring turnaround efforts

Layoffs are a last resort for most small employers. They know cuts can quickly throw their companies into a tailspin by decimating morale and can hobble turnaround efforts once demand revives. Many first try to find ways to reduce payroll costs without cutting staff on whom they spent serious time and money to train and develop. Of course, not every company can avoid layoffs, particularly in a sharp downturn, when sales are tanking. Companies with fewer than 50 employees have shed more than 1.2 million jobs since October, according to estimates by payroll provider ADP.

So what is most crucial for employers to do to minimize the harm of layoffs? Management should be transparent about the company's difficulties, articulate a plan to overcome them, and treat laid-off employees with respect, say experts and entrepreneurs who have stomached the painful process.

"I think the most important thing in dealing with anyone whose livelihood is at stake is pretty direct and open communication," says Jeff Rappaport, founder and chief executive of Outlook Marketing in Chicago. The 20-employee, $3-million firm has avoided laying off staff, but Rappaport has had to cut back on how much work he can give contractors as clients reduce their marketing budgets. Every four to six weeks, Rappaport meets with his staff and updates them on how revenue and net income compare to the prior year. That approach grounds employees with solid information and can alleviate workers' anxiety. "In times of uncertainty, what people most crave is some information that helps make decisions," says Sally Klingel, director of labor-management programs at Cornell's School of Industrial Labor Relations.

Value of Credibility

Some business owners fear staff will panic and jump ship or productivity will drop if leaders discuss problems openly. But research has debunked that theory, says Peter Cappelli, director of the Center for Human Resources at the Wharton School. Leaders who wait until the last minute to announce layoffs are "just being selfish and treating employees like pieces of meat based on an assumption that's not even true," he says. In small enterprises, workers often sense when the company is in trouble anyway, so pretending things are fine will only hurt a business owner's credibility. When employers don't level with staff, Cappelli says, employees will speculate about what's going on, and the stories they make up are usually worse than the truth.

Just as important as transparency during a layoff, business owners also need to show remaining employees that they have a plan to turn things around. Leaders should explain how the decision to cut staff is necessary for the company's long-term health, says Kathryn Kerge, an HR consultant in New York who works with many small companies. "Without articulating a plan moving forward, people might sort of stay in that limbo state," she says. "That plan is crucial to keeping people focused."

Small business owners also need to treat laid-off employees with respect and sensitivity. That's particularly important in small companies, where social ties often overlap with work relationships. Rappaport says that when Outlook Marketing had to reduce work for contractors, he made sure to call them, not to break the news in an e-mail. Kerge says that employers need to think through beforehand how layoffs will effect the workplace. "It's a layoff, it's not a performance termination," she says. "You don't want to make someone feel they've all of a sudden become persona non grata."

There are specific steps companies can take to soften the blow for laid-off workers, which will help preserve the company's reputation as a good employer. While most small businesses can't afford generous severance packages or outplacement services, such courtesies as giving employees plenty of notice before their last day and writing a strong letter of reference can help ease the pain of a layoff. By handling layoffs as humanely as possible, employers can maintain a relationship with their former employees that could benefit both when the economy recovers. Some employers, says Klingel, are sure to tell their departing workers, "If you're still looking in six months, please check in."

Tozzi covers small business for BusinessWeek.com.

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