Downsizing is an intentional activity. With dramatic shifts in the business ecosystem, companies are at times compelled to undertake it due to reasons related to cost pressures, restructuring, increasing productivity, tech advancements, mergers or acquisitions, outsourcing or simply, underperforming business. The reasons can be many, however, the need for organizations to carefully assess all their options and consider the feasibility of such a decision at all fronts is paramount. While the pain of downsizing can’t be avoided entirely, it can definitely be mitigated. So, how can companies soften their blow while ensuring support and protection to employees and safeguarding their own brands?
Legal provisions
Most laws have been designed to ensure that employers deal with employees in a reasonable way. It is an undeniable fact that employees play a significant role in providing competitive edge to organizations. However, with rapidly chang- ing business environment and constraints, most companies look towards formulating guidelines that enable them to mitigate the negative aspects of downsizing. Companies in India can lay-off employees, however, this prerogative is subject to certain regulations by the law.
One of the ways of handling redundancies is through LIFO (last in first out) — the asset management and valuation method that assumes assets produced or acquired last are the ones used, sold or disposed of first1. Most Indian organizations do not follow LIFO process; rather employees are acquiesced to resign. Thus, in the absence of the concepts like ‘at will employment” in India (which means that an employer can terminate an employee only on the basis of a reasonable cause), while terminating employees, employers need to be mindful of what the law requires i.e. a prior notice and adequate compensation. Here, it is important to understand the distinction between ‘layoff ’ and ‘retrenchment’, as they are used interchangeably. Layoff means temporary exit of employees. As shared by Ajay Raghavan, Partner Labour & Employment at Trilegal during the SME virtual conference, “When factories were not able to function due to reasons such as shortage of coal and electricity etc. during earlier times, they were given the flexibility of ‘laying-off ’ employees for a certain period, by paying them compensation.”
In the absence of the concepts like ‘at will employment” in India, while terminating employees, employers need to be mindful of what the law requires
“For redundancies and termination, the term ‘retrenchment’ is used in Industrial Disputes Act. Under the Act, Section 25(f) states that a person to be terminated needs to be served one month notice or higher notice period as mentioned in the contract and be paid 15 days of wage for every completed year of service. This falls under retrenchment compensation. The risk is if you haven’t compensated the employee, then termination is subject to annulment and the employee will can be reinstated. Thus, it is critical for companies to follow process under 25(f). It is advisable to include additional amount as exgratia and termination compensation. There is also a term ‘workmen’ in the Industrial Disputes Act which essentially covers class of people. In any organization 90% of workforce falls within the category of ‘workmen’. The language in legislation is extremely wide and definition is wide enough to cover anybody other than those who are in significant managerial position or those who are in supervisory position,” adds Ajay.
The SME perspective
Downsizing can be particularly trying in small and medium businesses. With several constraints in the SME segment, it is necessary to think of practical ways to downsize. “Many SMEs may not have experienced HR team who can handle such situation. So the onus falls on Chief Executive or Promoters who are advised to take eon the process emphatically. Good thing about SME sector is that they do not unnecessarily burden themselves with whole heap of permanent employees. Many of them have the ability to quickly change their business model and to move into variable cost model of employment like contract, fixed term contract or flexible working arrangement and the like. These are some of the things which are in favor of the SMEs and this can be adopted by large companies also. Instead of asking employees to quit, they can be asked to work half day and be paid accordingly. This can be communicated openly to an employee that due to financial constraints company is not able to afford them on full-time basis. This turn out to be win-win situation for both employees and company effectively,” says Sankar Ramamurthy, a former Executive Director at a Big Four.
There are three things that companies should keep in mind while downsizing – preparation, good communication, and good backup
Getting it right!
HR professionals play a key role in ensuring that downsizing is done in an appropriate manner. Companies not only have to comply with legal obligations but also have to ensure that their brand reputation is not harmed in anyway. The reputation of a company is also reflected in a way it deals with its people. Communication is the key in handling such a situation. There are three things that companies should keep in mind while downsizing – preparation, good communication, and good backup. Sankar Ramamurthy, writer and former executive director at a Big Four shared an example of how a few organizations are going the extra mile to manage the process of downsizing — “I will like to cite an example where rightsizing was done in a befitting manner by a multinational bank a few years back. Due to global economic crisis, the bank was forced to downsize and they did so in an exemplary way. They went through all the requisite processes beginning with identifying what staff they actually needed to let go. They kept in mind it that it was a traumatic experience for their staff and they should adopt an empathetic take. They explained the rationale behind their decision of downsizing through right communication. The bank initiated outplacement program, where a consultant was appointed to visit the bank and meet the affected employees and provide support and advice to downsized staff about their future career opportunities. Outplacement consultant provided them training in resumes and facing interviews. To maintain emotional and psychological health of all employees, the bank hired psychologist to deal with emotional upheavals of the downsized staff. To top it all, a generous severance package was given to all the employees who were leaving. In all, they carried good memories of the bank.”
Therefore, it is essential to understand the legal risks and complications involved while downsizing. For subsistence, companies need to abide by rubrics attached to the procedure. Most importantly, it is vital to gain momentum back and focus on organization’s growth henceforth.
Steps companies must undertake to downsize size effectively
Do it legit way:
- Follow lIFO: The concept of ‘LIFO’ means ‘last in first out’
- In the absence of ‘at will employment’, organizations can terminate only when you have reasonable cause to do so.
- Follow section 25(f): Section 25(f) of the Industrial Disputes Act dictates that a person that has to be terminated needs to be served one month notice or higher notice period as men- tioned in the contract and be paid 15 days of wage for every completed year of service.
Things to keep in mind while downsizing:
- Prepare well: Follow all requisite processes to meet costs and if downsizing is the last resort then identify staff that actually needs to be let go. Prepare well for their exit and ensure their emotional and psychological well-being while allotting good compensation and notice period in advance.
- Communicate well: Employers must explain rationale behind their decision through firm and open communication.
- Have a good backup: Companies need to ensure after the exit of employees, there is no shortage of manpower to fulfill business goals.
- Instead of asking employees to quit, they can be asked to work half day and be paid accordingly, and can also adopt variable cost models of employment like contract, fixed term contract or flexible working arrangement and the like.
References1http://www.investopedia.com/ terms/l/lifo.asp
Created from insights shared in the virtual conference on ‘Tailoring the Rightsize’ during the SME week