When Small Business Owners Should Consider Layoffs

In this article:

• What is a layoff?
• When is it time for a small business owner to consider layoffs?
• How to lay off employees
• Alternative options for small business owners

What is a layoff?

Layoffs occur when a business owner makes the decision to terminate one or more employees for reasons that are not related to the individual’s performance. These are never easy decisions, especially at small companies where every employee feels like family. Layoffs may result in permanent termination of the employee, or they may be temporary. It is uncommon for an employer to determine whether or not they’ll be able to bring the employee back at the time of termination, so most often the layoff does not give the employee any insight into its length.

The term mass layoff is used to describe the scenario when a business lays off a significant percentage of the company’s workforce. The term is also used by state agencies and other local governments when determining whether to expedite or provide special funding for unemployment benefits. Under certain circumstances, like the pandemic, mass layoffs occur throughout the state. Some of those special circumstances are considered emergencies, so the state will issue mass-layoff numbers that employees can use to access their unemployment benefits sooner.

A small business owner considers layoffs for several reasons including:

• Company downsizing
• Budget cuts
• Cash flow concerns
• Staffing strategy changes
• Relocation
• Abundance of staff
• Change in ownership, restructuring, or loss of a partner
• Merger and/or acquisition

When is it time for a small business owner to consider layoffs?

Making the decision to lay off employees can be tough for even the most seasoned manager or small business owner. However, many entrepreneurs don’t consider terminating staff until they feel like it is their only option. When the business is letting employees go for financial reasons, leadership has probably already considered all other areas where expenses could be reduced, and revenues increased.  However, if you think it is time for your company to lay off members of the staff, there are some factors to consider before executing the terminations.

How will layoffs affect the remaining staff and regular customers?

If you are considering making any change to your employees, it is important to be prepared for pushback from other staff members and customers. When deciding if layoffs are the next step in your business plan, factor in the responses of those nearby. Will other employees leave the company in support of the laid-off workers? Will the remaining employees be able to carry the workload? Will productivity decrease? Is the business at risk of losing any long-term customers because of former employees?

Will the company’s reputation or relationship with vendors be damaged?

In addition to considering the reactions of other employees and customers, layoffs may have an impact on vendor relationships. If there are some key vendors that your business works with, consider giving them a call after the terminated employees have been informed. Proactively reaching out and explaining the reasons for layoffs may lessen the risk of damaged relationships or a tainted reputation.

Are there other areas in the budget that could be adjusted?

Often layoffs that are a result of a business downsizing, moving, or changing ownership are unavoidable. However, if cash flow concerns are fueling your decision to let some team members go, be sure to review the budget one last time and confirm that there are no other options for cost-cutting. It will provide peace of mind for the business owner making the decision and some employees may inquire about proactive measures that were taken prior to layoffs.

Making the decision

After you’ve considered all options to avoid layoffs (see below for some great alternative options) and the impact the action will have on your business, it is time to make some more tough decisions. It is important that during the process of decision-making, layoffs are kept confidential. Only key shareholders should be involved in the process. It is never good business practice to let employees learn that layoffs may be coming. It can create panic, instability, and decrease productivity. Before sharing any indication of layoffs, be sure the following details are set in stone.

• How many employees will be affected? – If there are more than a couple of staff members, you may want to consider multiple rounds of layoffs.
• Is the intention for the layoffs to be temporary or permanent? – If the layoff is permanent, work with Human Resources or the staff member’s supervisor to communicate that during the process.
• Which employees will be laid off? – It is common that the employees with less time at the company are laid off first, but each business owner must decide the method of selecting individuals that they are comfortable with. Some companies choose to lay off employees with weaker performance reviews than those that are new to the business.
• When will the layoffs go into effect? – Also consider if the employees will be given any notice or if they will be informed of the termination and then asked to leave.
• Who will be notifying the employees? – Will the business owner, managers, or Human Resource personnel handle compiling formal letters and meeting with the employees?

How to lay off employees

After making some decisions about the details surrounding the small business layoffs, it is time to put the plan into action. Conducting layoffs should be a formal and professional experience for both the business and the affected staff members. Continue reading as we break down some recommended steps to conducting single or mass layoffs at your company.

Review laws and regulations

Before informing any employees, customers, or other interested parties about the plans to conduct layoffs, it is important to first review the laws and regulations that affect employment law in your area. Take note of both the employer and employee rights that may pertain to your business and be sure you know whether the WARN Act is applicable.

WARN Act

The Worker Adjustment and Retraining Notification (WARN) Act of 1988 regulates certain employee rights and is the right place to start when considering which Department of Labor (DOL) laws apply to your small business. Businesses with 100 or more employees are required to comply with the WARN Act and notify employees of layoffs and plant closings 60 days prior to the layoffs being effective. The purpose of the WARN Act is to protect affected employees by giving them enough time to secure a new job.

Some other key takeaways from the WARN fact sheet:

• Employees that have worked less than 6 months in the last year or those that work an average of 20 hours per week or less are not factored into the 100-employee headcount.
• Hourly and salaried employees, managers, and supervisors are entitled to protection under WARN, business partners are not.
• Terminations are considered mass layoffs if 50 or more employees are affected. Mass layoffs require 60 days’ notice.
• Layoffs resulting from certain unforeseen circumstances, like Coronavirus, or natural disasters do not require notice under the WARN Act.

To learn more about other laws and regulations you may want to consider, check with the following sources:

• Employee Retirement Income Security Act
• S. Department of Labor’s Employment and Training Administration (ETA)
• Employment Laws Assistance for Workers and Small Businesses

Prepare documents

Before meeting with any affected employees, the small business owner, or Human Resource Manager, should compile a formal letter to give written notice to each team member being terminated. The content of the letters may vary depending on if some employees will be asked back to work and some will not. The information to the employee may also need to include additional details if the employee qualifies under the Older Worker Benefit Protection Act, in which case it’s best to consult legal counsel or an HR professional.

Each letter should be prepared prior to meeting with the employees, on company letterhead, and include the following basic information:

• The name and contact information of the employee
• The effective date of the layoff
• A statement that clearly explains the termination is part of a reduction in workforce

In addition to the content of the letter, prepare in advance for each employee:

• A final paycheck
• Information about COBRA
• Other continuing benefits, like Health Insurance coverage and outplacement services
• A list of company property that will need to be turned in

Meet with affected employees

It is not required that the business owner schedule a time to sit and talk with the affected employees, but it is recommended.

What not to say

The formal letter presented to the employee will explain that the termination is a layoff and doesn’t reflect the employee’s performance, avoid going into any further details. During the meeting, do not offer false hope. Even if you expect to be able to have the employee back to work in a month or two, do not give any dates or guarantees during the meeting.

Severance Package

A severance agreement can protect both parties during the termination process. The agreement is a legal document and outlines any terms and conditions for the employer and the employee after the termination. The severance agreement may explain a sum of money the employee will receive upon termination and can include a release of liability, which will protect the company from lawsuits. Before writing or presenting a severance agreement letter, review the Equal Employment Opportunity Commission (EEOC) guidelines.

Give exit instructions

What happens after the meeting should be predetermined by the employer. If the meeting was to give notice to the employee that their layoff will be effective as of a certain date, then the team member will likely return to work after the meeting. If the layoff is intended to immediately terminate employment, then the owner or manager should plan to escort the employee to gather their belongings and leave the building. The company’s policies, handbook, or HR department can give further guidance on the employee’s exit instructions.

Alternative options for small business owners

If employee retention is the goal, there may be some other actions you can take to avoid layoffs. One option for small businesses is to implement a company-wide reduction of wages, either with or without offering a shortened work week. Another alternative to layoffs is to offer full-time employees a part-time position or to work for the company as an independent contractor. Either option will reduce the company’s employment benefits expense. Another route some business owners choose to take is to initiate furloughs, which is an unpaid, short-term, leave of absence for the employees.

Bottom Line

Before watching valuable, laid-off, employees hop on LinkedIn and move on, consider if layoffs are the best option for your business needs. If you’ve determined layoffs are necessary, spend some time determining the details of the layoffs, preparing notices, and meeting with employees. If you are still looking for a way your small business can avoid terminating employees, consider working with Biz2Credit on a term loan or ERTC loan. They were able to help small business owner, Debbie Elder retain her staff through financial hardship and they can help your small business as well.

FAQs

What are the red flags for layoffs?

Layoffs often come with warning signs, and being aware of them can help you stay prepared. If team events are suddenly canceled, it might be a cost-cutting measure. Unusual notifications about returning equipment or handling personal belongings could also hint at upcoming changes. A lack of clear direction from leadership, where long-term plans seem uncertain or avoided, may indicate trouble ahead—sudden, vague meetings—whether all-hands or unexpected one-on-ones—can sometimes be a red flag. Additionally, layoffs often align with quarterly results, especially if the company has missed targets or is facing financial pressure. While these signs don’t guarantee layoffs, staying informed and proactive can help you navigate uncertain times.

Do small companies do layoffs?

Layoffs are never easy decisions for small and medium-sized businesses, but sometimes, they’re necessary to ensure long-term success. Whether due to performance challenges, skill gaps, restructuring, or the need to reduce costs, leaders must handle these decisions thoughtfully and strategically. Taking a careful approach can help minimize the impact on both the business and its employees.

Who usually goes first in layoffs?

Earlier this year, patterns during layoffs revealed that non-essential departments that don't directly support the business's core operations were often the first to face cuts. This trend reflects a broader focus on streamlining resources and prioritizing the most critical functions for long-term stability.

What are the selection criteria for layoffs?

When making layoff decisions, the criteria typically focus on three key factors: relevant skills, knowledge, and abilities; documented performance; and length of service. In cases where multiple employees have similar skills and performance, seniority becomes the deciding factor those with longer service will generally be prioritized for retention. This approach helps ensure fairness while keeping the business’s needs in mind.

What is the warn rule for layoffs?

The WARN Act mandates that employers provide 60 days' notice before a mass layoff, plant closure, or relocation. This notice must be given to affected employees and state and local representatives. The goal is to give workers time to prepare for potential job loss, seek new employment, or explore training for new opportunities, offering a more supportive transition during difficult times.

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