How to Lay Off Employees [Small Business Guide]

The COVID-19 pandemic has negatively impacted thousands of companies across the country. Many businesses were instructed to pause their operations entirely, while others drastically scaled back their services and/or hours. Large retail chains, mom-and-pop stores, and diverse service businesses have all experienced troubling financial effects from this unprecedented economic shutdown.

Looking ahead, some businesses will survive by streamlining operations or finding new sources of income. However, many company owners have been forced to take a hard look at laying off employees to stay afloat. The business owners don’t take this decision lightly, and want to treat their staff with the respect they deserve during this difficult process.

Deciding on How to (Properly) Lay Off Employees

Large companies in every industry contain human resources departments that manage hiring, workplace issues, and employee terminations. In a small business, however, the owner may personally handle all of those functions.

With respect to employee layoffs, it’s an unwelcome task that will have negative impacts on the employee(s), their coworkers, and the business owner alike. But doing it may be necessary for the business to survive. With careful forethought and planning, a business owner can determine the best way to lay off employees.

Here’s how.

Evaluate Your Business’ Financial Needs

Before making a final decision on employee layoffs, take a hard look at your company’s budget. Review income, expense, and profit projections. Implement substantial cost reductions in other areas. Then, decide if those efforts are enough to keep the company going without proceeding with employee layoffs.

Finalize the Employee Layoff Logistics

If you’ve concluded that employee layoffs are necessary to keep the company afloat, craft a logistics plan that details how to lay off multiple employees. Don’t share any information with employees until you have addressed every issue.  

Comply with Applicable WARN Act Provisions

To learn how to lay off employees legally, read the provisions of the Worker Adjustment and Retraining Notification Act (WARN Act) of 1988. The WARN Act’s goal is to provide affected employees with sufficient time to seek more training or apply for other jobs.

The WARN Act states that companies that employ 100 or more full-time employees must provide written notice of plant closings and mass layoffs 60 or more calendar days in advance. By definition, a “mass layoff” exists when 50 or more employees at one location receive layoff notices. Note: Only companies that employ 100 or more workers must comply with the WARN Act provisions.

Employee Layoffs: Temporary vs Permanent

First, decide whether the layoffs are likely to be temporary or permanent. Next, know that layoffs normally proceed according to seniority, with recently hired employees often receiving layoff notices first. In a small business, however, that guideline may not always apply.

Next, let’s say an employee’s job is being eliminated. Determine whether that person could move to a different position, even if the job offers a lower pay rate.

Notification and Effective Dates

Create a structured layoff notification plan that should help to moderate your emotional involvement in the process. First, choose a date on which the layoffs will become effective. Next, select the date on which you will notify the affected employees. Decide how (and where) you will break the news to them.

If possible, avoid doing more than one round of layoffs. Losing a coworker is difficult for the employees who remain, and they’ll begin to wonder if they are next to be eliminated. To minimize the layoff’s emotional impact, conduct all layoffs at once, and provide the remaining workers with an honest assessment of the situation.

How to Ethically Lay Off Employees

Unless circumstances dictate otherwise, deliver the layoff notification to each employee privately. Your goal should be to respect every employee’s dignity. Toward that end, keep the news off the company Intranet or other message channel, and don’t tell other employees first. Below are several universal guidelines on how to lay off employees.

What to Say

During your discussions with each employee, provide as many details as you can. Emphasize that the employee isn’t at fault, and thank them for their contributions to the business.

Write a Recommendation Letter

Offer to write a recommendation letter that highlights the employee’s achievements. As a side note, if the employee applies for other jobs, prospective employers may contact you about the person’s performance at your company. Although the safest policy is to verify only the employee’s job title and dates of employment, use your best judgement.

Pay Wages Until the Layoff Date

Ensure that each employee is paid for all wages earned until the layoff date. Your state’s employment law will dictate the time frame in which laid off or terminated workers must receive their due compensation.

Final wages typically include regular and overtime pay. Salaries, commissions, and bonuses should also be included. Again, follow your state law (and company policy) regarding payment of unused vacation, sick leave, and personal days.

Discuss Unemployment Benefits   

Assuming the layoff isn’t the employee’s fault, they can seek unemployment benefits while they search for a new job. Provide them with details on filing for the benefits, which will pay them a portion of their regular paycheck. Note that each state has specific unemployment claim requirements.

Talk About COBRA Coverage

The Consolidated Omnibus Budget Reconciliation Act (COBRA) offers protection for qualifying employees who lose health insurance coverage. COBRA-eligible employees must have been covered by a group health plan on the day before the layoff. The employee can choose to keep receiving coverage for 18-36 months.

As the employer, you must offer COBRA coverage if you meet two criteria: You employ 20 or more full-time equivalent employees, and you offer a private-sector group health insurance plan.

Provide Severance Pay (If Applicable)

Under the Fair Labor Standards Act, you’re not required to provide a laid-off employee with severance pay. If you’re under severe budget constraints, offering severance pay may not be feasible.

If you choose to provide the employee with severance pay, know that it’s generally based on length of employment. Some employers make one lump-sum payment, while others pay in several installments. If your business has an employer-employee contract, review it for any severance pay-related provisions.

Deliver an Official Termination Letter

Write a professional termination letter on company letterhead. Keep it factual in nature, and list the circumstances that caused the layoff. List the employee’s unpaid vacation and other payments due, and also discuss equipment returns or intellectual property issues.

Redistribute the Affected Employee’s Job Duties

Make plans to distribute the laid-off employee’s job duties among other workers. Don’t procrastinate on this, only to realize that some essential tasks have fallen by the wayside. Share any relevant information with your remaining employees.

What You SHOULDN’T Do

Avoid the following actions during your layoff discussions. Besides causing discomfort for both parties, these missteps may put your company in legal trouble.

First, don’t skate around the layoff topic without actually addressing it. Each employee deserves an honest communication with the information they need to move forward.

Next, don’t guarantee that their jobs will return, as you can’t foresee the future. Don’t burn any bridges, as that employee could play a role in the company’s future. Finally, don’t neglect to give the employee a written layoff notice.

Remember the Human Aspect

After you deliver the unsettling layoff news, the employee is likely to be upset and worried about what’s next. Give them the remainder of the day off to reflect and formulate a plan. If the layoff is effective immediately, encourage the employee to visit with their coworkers before departing the premises.

Comparison of State Laws on Employee Layoffs

The WARN Act details federal regulations on employee layoff notices. Because each state may have enacted its own laws, research your state’s requirements carefully before making your layoff notification plans. Below are examples of several states’ layoff notice requirements.

California Laws

In California, some layoffs or plant closings are not under the purview of federal law. In addition, some situations do not require an employer to give any layoff notice; or they can provide less than 60 days’ notice.

California has passed its own Mini-WARN Act that covers three situations:

Mass layoff, which is a job loss for 50 or more employees in a 30-day time period

Closing of a commercial or industrial facility with 75 or more workers

Relocation of a commercial or industrial facility with 75 or more employees to a location 100 or more miles from the current location

New York Laws

New York State has enacted its own Mini-WARN Act that includes more expansive provisions than the federal WARN Act. For example, employers with at least 50 full-time employees must provide 90 days or more written notice about mass layoffs, relocations, and other employment losses. This provision applies to more employers than the comparable federal law.

New York also requires layoff notice distribution to more parties than does the federal law. Finally, unlike the federal WARN, New York’s WARN covers company relocations. New York business owners should follow the New York state provisions.

Nevada Laws

The State of Nevada has not developed its own layoff notice requirements. Instead, Nevada state agencies help to enforce the requirements of the federal WARN Act.

Florida Laws

Thanks to the federal WARN Act, Florida employees must receive a certain amount of advance notice prior to a large-scale layoff or plant closing. However, Florida does not have its own mini-WARN Act.

Texas Laws

Employees who live in Texas will receive advance notice of large-scale layoffs or plant closings, courtesy of the federal WARN Act. However, Texas does not have a mini-WARN Act that extends additional protections to employees.

Bonus: Alternatives to Employee Layoffs

If you’re searching for ways to reduce expenses without resorting to employee layoffs, consider one (or more) of the following cost-cutting strategies. Keep in mind that each action may come with a tradeoff, so weigh the pros and cons carefully before you proceed.

Reduce Employee Hours

By decreasing each employee’s hours, you may be able to realize enough cost savings to avoid layoffs. Keep in mind that some functions require more consistent coverage than others. With that said, however, make every effort to make equal adjustments across the board.

Consider that if a full-time employee begins working part-time hours, they may no longer be eligible for certain benefits. Consult with your Human Resources Manager, or view applicable state laws, for guidance.

Restrict or Eliminate Overtime

Maybe employees are accustomed to working regular overtime to meet your business’ product or service demands. However, you’re now operating with a new set of conditions, so adjust your overtime plan accordingly.

Depending on your budget limitations, reduce or freeze overtime until the company’s financial picture improves. Ensure that you decrease everyone’s hours in a fair and equitable manner. Look for ways to reallocate work to minimize the effects on your business’ output.

Postpone Raises or Bonuses

Although high-performing employees deserve raises, it may be prudent to delay those pay increases until your business’ fiscal health is more stable. Or, maybe your company’s employee raises are governed by specific guidelines, such as a union agreement. If that’s the case, work with applicable parties to arrive at a workable solution.

If your business pays out bonuses when employees achieve predetermined goals, plan to postpone those cash outlays as well. Employees will likely be disappointed in the short term. To moderate that disappointment, explain that you’ll revisit the bonus plan as soon it’s feasible to do so.

Announce an Employee Furlough  

Furloughing your employees means giving them compulsory time off work without pay. However, a furloughed employee still has their job, as opposed to a laid-off employee whose position has effectively been eliminated.

Consult your state’s employee layoff guidelines for furlough protocols. Tell furloughed employees that you’ll welcome them back when the company’s financial situation improves.

Find Other Ways to Save  

You could also look at other components of your business and come up with ways to cut costs. Reduce discretionary spending or look for areas of waste. If you have any subscriptions, see which ones are worth keeping, then cancel the rest. You may need to renegotiate your contracts or find new vendors. 

Credit card processing is one of the most significant expenses you face as a small business owner. You want to be sure that you aren’t paying hidden fees on the backend, so it’s important to review your credit card processing statements to ensure that you know exactly how credit card processing works and what you’re paying for. 

If you suspect that your merchant services provider isn’t being completely honest about what you’re being charged, don’t be afraid to shop around for a more trustworthy provider.

At Payment Depot, we help merchants save $400+ a month in credit card processing fees. And instead of taking a cut out of your sales, we implement a membership pricing model so you pay a low, predictable fee every month. 

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FAQs about Employees Lay Off

Q: Why might a business need to lay off employees?

Layoffs might be necessary during tough economic conditions like a pandemic or recession. When businesses experience financial losses, streamlining operations and cost reductions may require the termination of some employees.

Q: What should be considered before deciding on employee layoffs?

Business owners should study their company budget, analyze income, expense, and profit projections, and implement cost reduction strategies in other areas before considering layoffs as a last resort.

Q: What is the significance of the WARN Act in employee layoffs?

The Worker Adjustment and Retraining Notification Act (WARN Act) provides mandatory regulations for businesses employing more than 100 full-time staff. It requires giving written notice of closures and mass layoffs 60 days in advance for proper employee preparation.

Q: What should be a part of the employee layoff logistics plan?

The logistics plan should detail how to handle multiple layoffs, including compliance with relevant laws, determination of temporary vs. permanent layoffs, specifics of notification, and delegation of the affected employee’s job duties.

Q: What benefits should an employer discuss with laid-off employees?

Employers should discuss unemployment benefits, healthcare coverage through COBRA (for companies that qualify), severance pay (if offered), and the payment of any outstanding wages or compensation.

Q: What is the difference between furlough and layoff?

A furlough is a temporary period of mandatory leave without pay from which the employee is expected to return. On the other hand, a layoff typically results in a permanent termination of the position.

Q: What are some strategies that might help avoid layoffs?

Strategies to avoid layoffs include reducing employee hours, restricting or eliminating overtime, postponing or freezing wage increases, implementing employee furloughs, or seeking other cost-cutting measures within the business operations.

Q: What considerations should be made when writing a termination letter?

A termination letter should be factual, listing the circumstances leading to the layoff. It should include details about vacation and other payments due, equipment returns, and any intellectual property issues.

Q: Are there different layoff regulations for different states?

Yes, while all states adhere to the federal WARN Act, some, like California and New York, have enacted their own mini-WARN Acts with more expansive provisions. Always research state-specific regulations before proceeding with a layoff plan.

Q: What role does respecting employee dignity play in the layoff process?

Maintaining respect for employees’ dignity in the layoff process is crucial. This involves open communication, providing detailed explanations about the layoff, ensuring privacy during the notification process, and providing help and resources for the transition.

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