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The Layoff and Downsizing Dilemma To stay afloat you may need to layoff, furlough or terminate employees.

By Dr. David G. Javitch

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Opinions expressed by Entrepreneur contributors are their own.

Without a doubt, these are very difficult times. Companies are downsizing, rightsizing, and even capsizing. The dire worldwide financial pressures have thrust massive changes on businesses, many times with negative results.

Many organizations are reeling from the lack of revenue as companies and individuals reduce or cancel orders, and delay or even stop paying their bills. Businesses are thus forced to carry heavier debt loads and higher overhead as materials, inventory and real estate do not "move," while at the same time personnel costs mount.

As a result, entrepreneurs have to make key decisions: adapt to change, go bankrupt, be acquired or go out of business.

As a leader not yet ready to throw in the towel, you may have already taken a number of steps. You cut back on expenses and pushed harder to increase sales and revenue -- it did not work. Those efforts did not have a sufficient enough positive impact on your bottom line.

Accordingly, you take the next step and decide to downsize. You now have at least four options: Sell off a unit or department of your business or layoff, furlough or terminate employees.

Selling a portion of your company can take time. It obviously involves high-level negotiations that are time consuming, usually emotional, and divert you from your core focus: Running your business. In some cases, you might not even have a buyer to be bought out.

That leaves you with three other alternatives:

Decreasing the amount of hours each employee works.
With this choice, you still maintain employees, retain a sense of continuity and stabilize a declining level of morale. Many people would rather work fewer hours than be let go. Even though they would not welcome a shorter work week and a smaller paycheck, they are still your employee and the company continues. Morale will naturally decrease for a time as the shock of fewer hours and less pay take hold. The redeeming feature in today's economy is that people will stay employed. Given the cuts, you can expect a percentage of your employees to seek fulltime work elsewhere. Still, it is more likely that your employees will stick around, being glad that they have a job and an income, albeit a diminished one.

Furlough your employees.
This forced, unpaid vacation can be mandated to selected units, departments or across the board. Sometimes, entrepreneurs institute a furlough for one to two days per week, or one week per month, for example. Furloughs have the benefit of maintaining the workforce, guaranteeing a specific salary or wage rate, while decreasing the organization's cost. In some cases, some employees look forward to more time off on this forced "mini-vacation" as long as it is for a minimal amount of hours. Just like in the decreased hour model, many employees will stay with you due to the poor job market.

Terminate employees.
Clearly, this measure is the most complicated and will have the greatest impact. Unfortunately in an economic downturn, where the company must fight to stay alive, you as the entrepreneur/owner have few good choices.

Nevertheless, to avoid discrimination lawsuits, you must ensure that the criteria for termination are very clear and equally administered throughout the organization, whether this decision is applied to a selective number in a variety of units or departments, or system-wide. This is especially true in the case of older employees and minorities.

Termination might also involve another issue -- severance packages. Many companies compensate their employees for their service by offering separation benefits. The amount varies widely between and among industries; some pay only one week for every year worked, while others pay one month per year. Large financial firms often pay even more. Some companies offer outplacement services, career counseling, resume writing, secretarial assistance, email and telephones. Some companies cover health benefits at full rate, others do not. Remember that the COBRA law does require that you allow the terminated employee the opportunity to buy into your health insurance plan, in which case the former employee would pay up to 102 percent of the original amount rather than sharing a portion of the total with you, the employer.

In all this, please note: A severance package is not required by law. At times, it is written into an employment contract. Sure, it would be nice if you pay out a sum of money and/or benefits, but your company's financial position, and to some degree your generosity, play a big role in your decision.

Again, with all these decisions, a key factor in your consideration is consistency. Keep in mind that some state laws require weeks or months of advanced notice to employees before closing down a business, but benefits, other than COBRA, after closing are not required as part of this process.

If your goal is to downsize and you do not want to fire people or pay increased unemployment insurance premiums, then select the furlough alternative. If your intention is to decrease your payroll expense without dealing with the negative aspects of firing employees, you can accomplish this by vastly decreasing your employees' workweek. This method will likely cause a certain percentage of your workforce to quit, which usually disqualifies them from severance packages or unemployment benefits. This is not a recommended procedure because of potential legal ramifications falling under the definition of "constructive discharge."

Where legal considerations apply, please seek the appropriate professional help. Depending on your goals and your circumstances, you have several different options for taking action to deal with your bottom line in this distressed economy. The exact choice you make will depend on the actions that most closely reflect your individual circumstance and your personal philosophy.

Dr. David G. Javitch is an organizational psychologist, leadership specialist, and President of Javitch Associates in Newton, Mass. Author of How to Achieve Power in Your Life, Javitch is in demand as a consultant for his skills in assessment, coaching, training and facilitating groups and retreats.

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