Why lay-offs and how to handle them

No CEO relishes laying off people.  Every CEO I know dreads the prospect.  Yet, all of them, without exception, have to brace themselves for that eventuality. 

A business downturn is the most common reason why lay-offs happen. The best laid plans of men can go awry, more so in the current volatile and uncertain business environment. But lay-offs can happen for reasons other than weak business conditions.  For example, automation, adoption of new technologies and outsourcing can throw people out of work, although in the last named, companies can and do shift their employees on to the payroll of the outsourcing service provider. Because these circumstances can be planned, organizations can retrain and re-skill employees or move them to other parts of the business to avoid having to lay them off.

Mergers and acquisitions are another cause of employee redundancy. Rationalization of the branch network when two banks merge, of the sales force when two FMCG or pharma or insurance companies merge are examples.  The objective in such cases is to achieve the synergies on which the merger is predicated. Shutting down an underperforming business or a division or unit thereof also occasions employee redundancy.

Where business conditions are weak or prospects bleak, the pace and timing of employee redundancies depend on management’s assessment of the duration of the business cycle. If a prolonged slump is expected, redundancies become unavoidable and the sooner they are effected, the better. But where the slump is seen as short-lived and an upturn is on the horizon, organizations can manage employee costs by freezing pay rather than letting employees go, especially as redundancy can drive away stars as well as laggards. Good management teams take a realistic view of business prospects at the start of the year and hire cautiously if they sense growth would be tepid.  So, business judgment is the first defense against mass lay-offs.  After all, the best way to prevent having to lay off people is not to hire them in the first place!

Where redundancies are unavoidable, it is commercially astute to let go of the costlier senior employees first. This also establishes credibility and makes laying off at junior levels easier.

Where employee costs are but a small fraction of total cost, employee redundancies are avoidable save when they are occasioned by automation, technological change or changes to the business model (e.g. outsourcing).  It is wiser in such cases – where employee costs are low - to attack other, bigger costs.

Whatever the cause, redundancies must be handled sensitively.  Badly handled, they can be disruptive and reputation destroying, as recent examples of layoffs in a few start-ups illustrate.

Any redundancy must be underpinned by a strong communication program. Top leaders must meet employee groups and explain to them honestly and empathetically the reasons and circumstances leading to the redundancy, how, when and in what manner it will be given effect to and what support the organization would provide.  As leaders are seldom called upon to communicate in such circumstances, they must undergo training, focusing as much on tone and manner as on content. 

Help desks must be set up, not virtual ones or voice mails, but manned by trained HR staff.  Employees’ questions will cover a wide range from gratuity and provident fund to loans and leave balances and their encashment. Senior employees would want to know the fate of their stock and option plans.  Car leases and health insurance would be of concern too. 

Although severance packages are not required by law for employees who are not defined as “workers”, senior management contracts often provide for severance pay. In the case of widespread lay-offs, managements can offer a severance package that is calculated as a percentage of annual salary, or a certain number of months pay. Generous managements offer extension of health insurance for six to 12 months post severance or until the employee finds another job, generous leave encashment over and above that permitted by the rules etc.  I know of a bank which offered gratuity even where employees had not become eligible to it by virtue of five years of continuous employment.

Outplacement and counselling services are also becoming common. Employees are helped with their resumes and trained for job interviews.  They are also encouraged to apply for jobs posted by other parts of the business, for which they are given preference over other applicants, other things being equal. Trained industrial psychologists are hired to provide emotional and psychological support. These measures mark out an employer as employer-friendly and caring, so much so that the organization emerges from the situation with reputation intact and in some cases burnished, instead of suffering damage.

Unlike a situation where all employees of a business or division are laid off, picking and choosing a selected number from a larger population of the workforce is tricky and challenging. Simple rules like “last in first out” and “poor performers first” help but must be bolstered by transparent governance to ward off accusations of bias.

It is worth remembering that employee redundancy is traumatic not only for those being laid off but also for those who remain.  Social ties and bonds are severed and employees who remain are assailed with the question “when will it happen to me”?  Therefore, communicating and engaging with retained employees is as important as dealing with those being laid off.  

Redundant employees also mean companies will have to deal with redundant infrastructure – office space, car parking, cafeteria, laptops etc.  In addition, they have to address “stranded costs” – that is, corporate overheads which now have to be allocated over a smaller base –  which have potentially adverse consequences for the cost base of the retained businesses as well as for their competitiveness.

Employers should stay connected with good employees being made redundant. This, and the manner in which the redundancy was carried out, will influence the decision of employees to want to return to the company when business prospects improve.

Looking farther afield, it is perhaps time for industry and government to work towards creating a social security net for the organized sector to ease the pain of severance.  This could take the form of an employee tax, based on the workforce population and can be used to retrain or re-skill employees or provide a straight unemployment dole. In the absence of a safety net, widespread job losses spell danger to private enterprises and social harmony.  Also, as RBI Governor Raghuram Rajan noted recently, by providing a safety net for employees to fall back upon, government can spur risk-taking and innovation.  Amid fears of a technology-induced inequality, some western countries are toying with the idea of a basic income to all citizens to provide for their basic needs.  In such a scenario, can we in India postpone the provision of a safety net for our working population for much longer?