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How to Lay Off Employees

The old adage "It's a dirty job, but someone's gotta do it" couldn't be more true when it comes to laying off employees. Here's how to do it properly.
October 1, 2001

For many entrepreneurs, the thought of having to lay off employees can be nerve-wracking. And if you're young, the act of firing an employee-especially one who may remind you of your old Uncle Stanley-can be especially daunting. You may have vivid nightmares of the scene of the termination: What if Bob goes crazy and shoots up the joint? What if Brenda cries hysterically? What if Pete sabotages the computer network?

While these may be valid concerns, the fact is that termination of employees, while almost always painful, is a vital, rejuvenating part of business life. Just read the business press, and you'll quickly realize that if you need to lay off some employees, you're not alone. So if you've already tried to fix matters using the strategies we suggested in "Restructuring a Problem Company,", you have no HR department and you don't have a security guard hanging around the office, it helps to follow in the footsteps of those who have been through it.

Step 1: Have a Strategy

The absolute worst way you can fire someone is haphazardly. It's harder on both you and the employee, and you have a greater risk of something going wrong-not to mention the risk of future litigation. So whether you are canning one lousy performer or shutting down a whole business, you need to strategize ahead of time.

A few months ago, Rafi Musher, founder and CEO of Cambridge, Massachusetts, strategic research firm Stax Research, scaled back his firm about 30 percent-and he actually wishes he would have acted sooner. "All top firms do regular, healthy pruning," says Musher, 33. "No one has a 100 percent hit rate on their hires." So he established a process of regular reviews to measure performance on a number of levels: Can the employee grow with the business and the changes in his role? How does the employee's productivity and salary level compare to that of co-workers?

According to Musher, you ideally want to continually exit the bottom 10 percent of performers on your staff, and make that policy. "If you don't think about it consciously," he says, "you won't act on it in a timely way." Worse, poor performers impact the morale of the top performers, not to mention the bottom line and the paychecks, bonuses, and stock options of everyone in the company. And there are hidden costs, too-people who aren't doing well suck up a lot of management time, so the actual cost to the company is far greater than just salary.

Step 2: Do Your Homework

One of the biggest mistakes you can make is to not prepare adequately. The last thing you want is your employees bombarding you with a bunch of questions to which you can only reply, "Um, I'll have to get back to you on that one." Here are some of the issues to consider:

Step 3: Plan the Logistics and Execute

There is no great time for a layoff, but most experts recommend you do it in the middle of the week. Also, first thing in the morning is preferable, mainly so you don't have to sit around all day waiting to act.

If you are just firing one employee in a small, open office, to limit the gawking of others and the affected employee's embarrassment, consider firing him or her off-site, say, at the corner deli. But no matter where you hold the meeting, ask an HR representative (if you have one) or other senior manager to join you. "Often there is a credibility dispute and a question of what was said," says Rooney, and having an extra person in the room helps to mitigate that.

If you have several employees to fire at the same time, you'll need to carefully work through the logistics. You can't be in 10 meetings at once, and you want to avoid having employees all sit at their desks with sweat pouring down their faces, waiting to see if they will be called in front of the firing squad next.

Eric Spitz, CEO of Medford, Massachusetts, digital sports technology firm Trakus Inc., recently had to lay off 40 percent of his staff, or about 18 people. On the morning of the layoff, Spitz held a meeting for all employees and told everyone there would be a large number of layoffs, explaining the rationale behind the decisions. Then he told staff to return to their desks. "If they had an e-mail waiting for them," explains Spitz, 31, "they'd been affected and had to return to the conference room for their paperwork." The terminated staff then had until 1:30 p.m. to collect their belongings and leave.

As for the actual termination meeting, don't give long speeches, argue or allow a debate to ensue. You've made your decision, and you cannot allow yourself to be talked out of it. A meeting to fire someone need not last longer than 10 or 15 minutes. Explain your reasons, review the paperwork, and move on.

Step 4: Deal With the Aftermath

Even if you're firing one person, in a small company there could be a large impact on remaining staff. Be prepared to address them immediately, and assuage their fears that their necks may be next on the chopping block. Also, don't reveal details about the terminations-remember, many of your employees may be good friends with those ex-employees and may be emotional about the termination. After all, while you've been planning this event for weeks or even months, everyone else will feel like they were suddenly hit over the head with a sledgehammer.

Lastly, know that no matter how much careful planning you do, something will go wrong. So be flexible. Your employees may come in late or call in sick. Three people may be on vacation. Or, as has happened to this author, you may forget that it's "Bring Your Kids to Work Day" for the whole office.

Do your best, be decent, and if it helps you sleep at night, just remember this: By making your company more efficient, you're doing everyone a favor.

As a CFO, CEO and consultant, Dale M. Galvin has noticed an inverse relationship between the quantity of hair on his head and the number of employees he's terminated. He holds an economics degree from Cornell and an MBA from MIT, neither of which was able to save his last two companies from the guillotine. He is now traveling the world seeking new methods of making employees' lives miserable.