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How to Fire an Employee the

Legal Way: 6 Termination

These days, its much harder to get rid of a problem employee. Workers are more aware of their rights under the
lawand theyre more likely to seek the advice of an attorney if they think theyve been wronged by their employer.
The result: A lot of workers are getting even by suing their employers for wrongful discharge or discrimination.
The lesson: Fire away, but do it the right way. Use this special report , How to Fire an Employee the Legal Way, as
your guide on proper procedures to exercise your right to fire at will, lay the groundwork with progressive discipline,
avoid wrongful termination lawsuits, and conduct termination meetings and exit interviews.
Termination Guideline #1 Fire at will: Employers'
Under the law in most states, if theres no employment contract , workers are employed on an at-will basis. That
means employers have the right to fire employees at any time for any reason or no reason at all, and, conversely,
employees have the right to leave the organization at any time.
If an employee is under contract, though, the terms of the contract apply. A written contract may specify the reasons
you can terminate the employee, while an oral contract usually implies that termination can occur only for cause. That
means the employer can terminate the worker only for poor performance, dereliction of duty, an act of dishonesty or
insubordination, or because the company needs to eliminate the employees position.
At-will limitations
Over the years, the employers right to fire at will has been limited, as courts have recognized exceptions to the at-will
doctrine. Here are three major exceptions:
Exception 1: Discrimination. Under federal law its illegal to terminate workers because of their age, race, religion,
sex, national origin or a disability that does not influence their job performance. Some states add other limitations
for example, in many states, you cant fire someone over sexual preference.
Exception 2: Public policy. You cannot legally terminate an employee for reasons that violate public policy. That
means you cant fire one of your engineers for informing the EPA that your company has been dumping toxic waste in
the river. By the same token, if a court orders you to garnish the wages of a worker whos behind on child support ,
you cant fire him merely to save yourself the hassle of additional paperwork.
Exception 3: Just cause promise. If you tell your workers that they will be fired for cause onlyor otherwise
establish guidelines that spell out how and when terminations will be handledyou may be creating an implied
employment contract.
Termination Guideline #2 The right way to fire: Lay the
Its a lot easier to discipline a worker if youve made your expectations clear from the
beginning. Each employee should have a job description that lists the tasks you expect
accomplished daily or weekly. Make it clear, however, that these tasks are subject to
change depending on the organizations needs.
If you have rules specifying how certain tasks should be performed, post them in the
work area. That helps workers do their jobs correctly and helps you point out when a
rule is broken. Some employers state clearly in their handbooks that employees are
subject to firing without cause. Some companies ask employees to acknowledge this by
signing a form. Theres a trade-off here: Signing such a statement wont endear your
workers to you and the company. A policy of firing only for just cause is more likely to
build loyalty, but it might subject you to judicial review.

Termination Guideline #3 Avoid wrongful
termination suits: Use progressive discipline policy
While no federal or state law requires you to create and follow a progressive discipline policy, courts often come
down hard on employers that promise progressive discipline but fail to deliver it. In fact, many employee lawsuits
stem from the employees perception that he or she didnt receive a fair deal.
Thats why the most reliable way to protect your organization from wrongful termination charges is to establish a
progressive discipline system and make sure your supervisors enforce it.
An increasing number of lawsuits have been filed in which terminated employees complain that employers have
violated their own progressive discipline policies by firing the employee before working through all the rungs on the
progressive-discipline ladder.
Thats why your policy should include language allowing you to skip progressive discipline and fire employees right
away for particularly egregious behavior.
While its usually your right to terminate at-will employees at any time for misconduct or lax performance, a
progressive discipline policy lets you make clear that problems exist and need improvement.
How it works: Your policy simply increases the severity of a penalty each time an employee breaks a rule. Typically, a
policy progresses from oral warnings to written warnings, suspensions and then termination. That way, employees
wont be surprised when they reach the end and are fired. By taking the surprise out of the firing, you lessen your
exposure to a wrongful termination lawsuit.
Termination Guideline #4 Beware of constructive
Constructive discharge occurs when employees claim their working conditions were so intolerable that they were
forced to quit. Employers must stay within federal employment laws so they dont contribute to factors that trigger
constructive discharge claims, and dont heighten the risk of employee lawsuits.
1. What do the courts look at when it comes to claims of constructive discharge? What types of actions can lead to
such a claim?
Heres how one state supreme court defined constructive discharge: An employee who is forced to resign due to
actions and conditions so intolerable or aggravated at the time of his resignation that a reasonable person in the
employees position would have resigned, and whose employer had actual or constructive knowledge of the
intolerable actions and conditions and of their impact on the employee and could have remedied the situation, but did
not, is constructively discharged.
What falls into the intolerable or aggravated category? Think: actions intended to humiliate (e.g., demoting a vice
president to janitor overnight); actions intended to harass (e.g., requiring a black employee to work extra hours for the
same pay as white co-workers and punch a clock while others do not); actions intended to destroy the employees
career or guarantee job loss (e.g., sudden, unexplained drops in performance ratings, skipped promotions, forced
demotions, pay cuts).
2. What other types of factors contribute to a constructive discharge claim?
Factors that may contribute to a constructive discharge claimeither singly or in combinationinclude whether an
employee suffered:
a demotion
reduction in salary
reduction in job responsibilities
reassignment to menial or degrading work
reassignment to work under a younger supervisor
involuntary transfer to a less desirable position
badgering, harassment or humiliation by the employer
offers of early retirement or encouragement to retire
offers of continued employment on terms less favorable than the employees former status
a threat of violence or actual physical assault
a threat of termination
Termination Guideline #5 Termination meeting:
Choose firing words carefully
The time has arrived Youve evaluated all the reasons why an employee should be
terminated. Youve run the decision through an employment law audit and made sure
you have appropriate records and documentation supporting the decision. Now its time
to tell the employee that he or she is about to become a former employee.
How you break the news to the employee is key: Follow basic rules of legal and
business etiquette to allow the employee to leave with dignityand not return with a
If the employees manager, rather than HR, is designated the bearer of bad news, at
least have an HR rep present at the meeting to answer questions the employee may
have and to help reduce the risk of legal exposure by keeping both sides focused on the
matter at hand. Also, it helps to have a witness, in case the employee challenges the
termination later.
Briefly deliver the news by summarizing the well-documented, job-related reasons for the termination. That way, while
the employee may not like it, he or she will have little to dispute. Allow the person to offer his or her side of the
storyand even vent a little emotionwithout interruption.
Also, avoid using any harsh words during termination meetings that would serve only to inflame the issue. Stick to the
facts; dont make generalizing statements.

Termination Guideline #6 Conducting exit interviews
Many employers think that conducting exit interviews with employees who have been
fired is a waste of time. After all, angry or bitter ex-employees would not be motivated to
do something beneficial for the organization that just let them go. And if theyre
harboring negative feelings toward the company, how helpful could their feedback be?
Exit interviews, whether with an employee who has been fired or who has resigned, can
be a valuable resource. Information learned in an exit interview can pinpoint areas of
concern and provide a foundation for implementing changes.
Use the Exit Interview Form (Involuntary Termination) included in this report as a guide
for asking questions, or give it to the employee to complete during an exit interview.

The Legal Intelligencer

August 1999

In today's business and legal environment, discharging employees can be time-
consuming, unpleasant and expensive. Rather than ending with a farewell handshake,
post-termination contacts with former employees often include lawyers' letters,
compensation hearings, agency proceedings and actions in state or federal court.

Nothing can prevent disgruntled employees who believe they were terminated unfairly
from seeking redress. But here is a checklist of suggestions to help your clients reduce
the possibility of post-termination legal proceedings and to increase the chances of
successfully defending against claims that do arise.

1. Follow Company Policies.
Given recent Supreme Court decisions, it is imperative that every company have well-
established employment policies (if your client's company has none, advise him or her
to draft them now!).

Polices dealing with such issues as employee discipline, performance reviews,
terminations, or investigations of complaints alleging supervisors' misconduct or sexual
harassment are a necessary part of any company's defense arsenal.

2. Create a Paper Trail.
Incomplete and poor documentation makes companies vulnerable. Too often, poor
performance and employee misconduct are inadequately documented or not
documented at all.

Without the timely reports and written records corroborating an investigation into
allegations of harassment or other claims, subsequent inquiries during agency hearings
or lawsuits easily can turn into scathing "he said, she said" disputes. Having a thorough
paper trail can even serve to support management's version of events as well as refresh
supervisors' recollections.

3. Unite the Management Team.
Whenever possible, discuss the proposed termination in advance with the appropriate
managers and supervisors. Develop a consensus and present a united front when
terminating employees. Management should agree upon the reasons provided to
terminated employees and whether the company will offer such benefits as severance
pay and continuing health-care coverage.
Prior to the termination, all appropriate departments---includinghuman resources and
legal---should be consulted. Issues such as whether to seek a release of an employee's
potential claims (particularly when the employee in question is a member of a "protected
class") in exchange for an enhanced severance and benefits package should be
considered before the termination process commences.

At the same time, decide which manager will handle the termination and which will
function as the "contact person" for any subsequent communication with the former

4. Two to Terminate.
Have two managers conduct each termination interview. One should act as the
spokesperson and convey vital information to the employee. The second is a witness to
the termination. The tandem process helps prevent at upset employee from claiming
that harassment or improper remarks were made during the meeting.

5. Keep It Short and Simple.
Termination interviews should be private and short; when possible, they should happen
toward the end of the day. Begin meetings by informing the employee immediately of
the termination. The initial statement should be simple and direct, such as "I'm sorry, but
your performance hasn't improved and we have to terminate you," or, "unfortunately, the
company is downsizing and your position is being eliminated."

6. Provide Severance and Benefits Information.
Keep explanations short and fairly general since employees are often too shocked or
upset to understand fully all the information supplied during termination interviews.

Provide a letter outlining severance, vacation pay, insurance, and other benefits for
each employee to review later. COBRA and pension or 401(k) information also should
be set forth in writing in accordance with applicable regulations.

7. Communicate with Current Employees.
Understand that remaining employees may be concerned about their own job security. If
you discuss the terminations with your current employees, be brief, general and
respectful of the dismissed employees' privacy. This is particularly important in view of
the increasing number of defamation claims brought by terminated employees.

8. Better Safe Than Sorry.
Terminated employees quickly become disgruntled and may create dissention among a
company's current workforce. Consider requesting that a terminated employee leave the
company's offices as soon as practicable. If necessary, make arrangements to deliver
personal effects to form employees' residences, at the company's expense.

To prevent retribution, change security codes and locks, eliminate any access to the
company's computer system, and remove former employees as signatories to any post
office boxes or bank accounts.

9. Respect Everyone.
Post-termination proceedings often begin against companies when dismissed
employees feel they were not treated with respect. These perceptions may be entirely
groundless, but wrongful-termination plaintiffs consistently testify that companies failed
to treat employees properly and to respond to requests for minor changes in severance
packages or information on benefits. Accordingly, consider their requests seriously,
even if the company cannot agree to them.

10. Promptly Respond to Inquiries.
It is important to continue answering discharged employees' queries for information.
Employees may write seeking additional facts and explanations about their

While there is no legal requirement to reiterate the reasons for the termination decision,
respond promptly and professionally. This approach will help reduce hostility and help
demonstrate a clear record of communication in the event of litigation or an agency

Unless your last name is Trump, you probably don't enjoy firing people. It's precisely because downsizing makes
managers squirm that it tends to be done poorly.

In fact outplacement and workforce transition (e.g. career transition assistance and career management) ranks 6th
out of 6 in core elements of a company's talent management strategy. This according to Right Management Canada,
a leader in talent and career management solutions.

Done badly, a downsizing can paralyze your remaining staff. They become risk averse and fearful for their own
futures. Also your most valuable performers may start looking for a better place to work.

So have a look at these best practices in downsizing, and in helping survivors to excel. You'll improve morale and
maybe even increase productivity.

Consider Alternatives To Downsizing

The fully loaded costs of downsizing are bigger than you might think. Termination, business disruption, replacement,
and training can be 1.5 to 2.5 times the annual salary paid for the job. On top of this is the plunge in spirit among
survivors after a layoff.

Before you do forced dismissals, consider all other options to save money and produce efficiently. This could mean a
freeze on hiring, raises or benefits; letting contract and temporary employees go; reducing wages or work hours
across the board; or scheduling unpaid employee furloughs. Instituting job sharing is another alternative.

Also calculate if you can achieve your goals via normal attrition (staff leaving on their own). If not, how about
voluntary termination - such as offering buy-outs and early-retirement incentives.

Make sure to let your staff know you've done everything in your power to avoid layoffs. It will help ease the hard
feelings if you actually have to downsize.

Be Fair When Choosing Who To Let Go

If you can't avoid layoffs, at least try to avoid appearing biased in who you downsize. For instance if you only dismiss
people you don't like, remaining staff may feel that their own level of performance doesn't matter - but that being
likeable at any cost does. And if you only terminate older workers, you run the risk of being sued for age

One way to show your fairness is to give a second chance to valued employees you're thinking of laying off. Provide
them with an opportunity to improve, if performance or attitude is the issue. Some extra coaching or training might do
the trick. If it doesn't, other staff will at least see that you've tried.

Think Ahead

Having a clear, well-defined vision of the company is imperative before the layoff is executed. Management should
know what it wants to accomplish, and where the emphasis will be in the new organization.

You should plan out how roles will be reassigned and workloads shifted. Make sure you know exactly what duties the
terminated employees handle and how these will be covered going forward. In a small company, responsibilities may
be divided informally. Dont wait until the lease payment on the office is late to realize that the downsized worker paid
that bill.

Communication is also critical. Announce departures quickly and honestly to your remaining staff. Nothing creates
paralyzing anxiety like silence after a trauma.

Reassure them, if true, that no further layoffs are planned in the foreseeable future. Recovery from a layoff is
hastened if managers and employees are allowed to speak their minds freely. It can be an occasion for the team to
pull together and renew ties.

Downsize With Dignity

If you were dismissed one day, would you want to be removed from the premises by security guards, with no chance
to say goodbye to your peers? Probably not.

There are ways to downsize that leave employees with their dignity. You don't want to alarm the survivors, nor should
you burn bridges with valued staff you've had to let go.

Here are some of the aspects that your remaining staff will be watching for carefully:

A sensitive dismissal process that gives the departing worker a solid chance of moving forward successfully.
This includes a generous severance package, a positive reference (if doable), and career transition coaching by a
professional - also known as outplacement.
Allowing the affected employee to resign, if they choose to, rather than being terminated
An agreed upon "statement of departure" that is as neutral or positive as possible
Giving the employee a chance to collect their important possessions from their office, and time to say a brief
farewell to co-workers
Providing security if there's a likelihood the employee will become violent or unstable

An additional way to blunt the pain of layoffs is to do them in a single batch, when feasible. Otherwise you keep a
morale-sapping sword dangling over your remaining staff.

Help Survivors Adjust To The New Normal

At the most basic level, survivors want answers to two important questions.
1. How will my own role be affected?
2. Should I be looking for a job elsewhere?

To answer question 1, inform survivors of their new assignments right away. Do it one on one so you can respond to
their questions and personal concerns.

As for question 2, announce the measures you've planned ahead for to retain, motivate and reward survivors. How
will you keep your staff performing? By doing the following:

Monitoring individual efforts and providing relevant feedback
Continuing to keep staff informed of evolving changes
Rewarding positive behaviours with small bonuses or perks
Standing up for your people so that they get what they deserve

Two groups of survivors that are often overlooked are the managers who do the dismissals, and the HR professionals
who may be present at layoff meetings. The process is highly stressful for them. They may require counseling
subsequently. Your other staff might too. You can arrange for Employee Assistance Plan (EAP) counseling for those
who'd like it.

Downsizing Strategies
Generally speaking, an organization that decides to eliminate redundant
employees does so by using four broad strategies: attrition, voluntary
termination (including employee buy-outs and early-retirement offers),
compulsory termination, and across-the-board cuts.[xiv]
Attrition, in which firms do not replace people who leave, is the simplest
method. With this approach, employees have the opportunity to exercise free
choice in deciding whether to stay or leave, and thus the potential for conflict
and feelings of powerlessness is minimized. At the same time, however,
attrition may pose serious problems for management, because it is unplanned
and uncontrollable.
Voluntary termination, which includes buy-out and early-retirement offers,
is a second approach to downsizing a workforce. The main advantage of a
buy-out is that it gives employees a choice, which tends to reduce some of
the stigma associated with the loss of a job. At the same time, there are three
important downsides to buy-outs. One, they are expensive. Employees with
long service find them attractive. Two, the best workers may leave.There is
demand for their skills, and low-performers may stay because they are less
marketable. Three, both high- and low-performing workers may leave out of
fear. Many worry that they could be dismissed later without any financial
cushion. To illustrate this approach, consider the buy-out plans recently
offered by Ford Motor Company and General Motors.[xv]
At Ford, offers ranged from $35,000 for workers with 30 or more years of
service, who could keep their full retiree benefits, to a flat payment of
$100,000 to younger workers who agreed to leave the automaker and to give
up retiree health care and Ford
pensions. For workers who chose to go to college or vocational school for four
years, Ford provided tuition, half their usual pay, and full medical coverage.
Workers who chose this plan could keep any accumulated pension but had to
leave behind any retiree health benefits. Almost half of Fords hourly
production workers (38,000 workers) took one of the offers.
At GM, 35,000 workers accepted checks ranging from $35,000 to $140,000 to
retire early. Another 12,600 employees at GMs former parts unit, Delphi, did
the same, helping the automaker slash $5 billion in costs. Unfortunately, that
was not enough to save the company. As economic conditions deteriorated
during the Great Recession, General Motors was forced into bankruptcy in
June 2009. A move that once seemed unthinkable became inevitable after
years of losses and market-share declines, capped by a dramatic plunge in
sales.More than 2,000 dealerships were closed, as GM shed its Pontiac,
Saturn, Hummer, and Saab brands. In addition, more than 20,000 U. S.
workers lost their jobs, and investors in $27 billion worth of GM bonds,
including mutual funds and thousands of individual investors, ended up with
new stock in a reorganized GM worth a fraction of their original investment.
Owners of current GM shares had their investments essentially wiped out.

Early-retirement incentives (ERI), in which a company offers more
generousretirement benefits in return for an employees promise to leave at a
certain time in the future, are often part of a larger buy-out scheme.
Sometimes, early-retirement offers are staggered to prevent a mass exodus.
Retention bonuses with different quit dates may be used to ensure an orderly
From an organizational viewpoint, managers assume that early retirement
opens up promotional opportunities for younger workers, but one research
study found that it is difficult to predict accurately how many older workers
will take an ERI. Typically, about one-third of those offered ERIs accept them,
but there is a great deal of variation.
Beyond that, high performers may
leave if an organization offers open-ended, non-targeted ERIs, and incentives
may not work. For example, lump-sum bonuses, such as one-weeks extra
pay for each year of service, are relatively ineffective in persuading older
workers to retire early. On the positive side, poor performers are more likely
to take ERIs because they lack confidence about future pay increases.
Compulsory termination, in which departing employees are given no
choice, is a third downsizing strategy. Plant closures and the wholesale
elimination of departments or business units are examples of this approach.
Although it is, of course, unappealing to employees, the managers who make
the decisions do have the opportunity to design and implement criteria based
on the needs of the business.[xviii]Eliminating jobs or entire business units
also makes it less likely that employees will prevail in lawsuits alleging
A final downsizing strategy, across-the-board cuts in every department, is
perhaps the least effective downsizing option. Such cuts emphasize
standardized treatment of employees, but ignore the strategic importance of
different departments to a firms overall success and ignore different
performance levels ofemployees. Suppose one department iscomprised of
superstars, and anotheris comprised of slackers. Why shouldthe same
percentage of superstars andslackers be laid off? The Economistmagazine
described this problem asSnip, Snip, Oops![xix]
Selecting Employees for Downsizing
Once the decision to implement layoffs has been made, a variety of decision
criteria are available to determine who goes and who stays. Generally
speaking, in the United States employers are free to use whatever criteria
they wish in terminating employees, as long as the criteria do not discriminate
based on membership in a protected class, are not arbitrary or capricious, and
are based on legitimate business reasons. Here are five important guidelines:
Identify departments and functions that are strategically critical, along
with critical employee skill sets going forward.
Identify criteria that reflect legitimate business needs.
Use a funnel approach to selection; that is, evaluate employees by
critical skill sets first, followed by job performance, disciplinary actions,
and seniority (to break ties).
Document the criteria and processes used.
Conduct analyses to ensure that there is not a disproportionate effect of
layoffs on members of protected classes, and have all analyses and
documentation reviewed by an attorney.
As noted above, begin by identifying specific departments or functions based
on their strategic importance. In doing this, companies try toretain pivotal
talent those employees with skill sets needed to execute business
strategies in the comingyears.[xx]A firm may move in stages, first selecting
specific departments or functions, and then turning to amultiple-hurdle
or funnel approach. In this approach, managers identify critical skill sets and
then take explicit steps to retain employees with those skills, letting them
know how important theyare to the organizations future success.
Job performance becomes the most important factor when there are more
people with critical skill sets than there are available positions in thedownsized
organization. Generally speaking, employers tend to retain people who have
performed well in the past and who have not had disciplinary problems.
Unfortunately, in some organizations, the lack of reliable and valid
measurements of performance forces reliance on other criteria.
Once the available pool of employees is limited to those with critical skills,
high performance, and few, if any, disciplinary problems, and the firm still has
more workers than required what is the next step? At this point, many
employers use seniority or tenure with the organization as the criterion for
Ultimately, reducing the workforce can be an opportunity to address
performance problems that have festered over the years and to terminate
employees whose performance has been weak. However, in all downsizing
scenarios, sound professional practice requires that firms conduct adverse-
impact analyses before implementing such a strategy. Document the criteria
and processes used in downsizing, and have results and materials reviewed
by an attorney who specializes in employment law.
Note that even when some adverse impact is expected from downsizing, this
option is still viable if the criteria used are job-related and reflect legitimate
business needs. Having identified who will go and who will stay, the next step
is to manage the downsizing process in a dignified, respectful manner. Our
next section addresses that important issue.
Managing the Downsizing Process
Despite a variety of styles and strategies used to let employees go, there is a
core set of sound professional practices. Here is one such set.[xxi]
Be transparent about the current conditions that the organization faces, and
the potential impact on the workforce. Employees want to hear the truth, and
they want to hear it from the CEO. In small businesses, employees often
sense when a company is in trouble; pretending things are fine will only hurt
a leaders credibility. Provide regular updates at least every 4-6 weeks that
include reports on year-over-year revenue, net income, current business
strategy, and future prospects. Invite employees to ask questions and raise
concerns. Allow them to identify redundant jobs, wasted activities, and
bloated cost structures that will improve efficiency and cut costs. People who
know what is going on can be part of the solution. Beyond that, if people
know that their employers tried to use other options to preserve jobs, and use
downsizing as a last resort, that will help to ease the pain. At Reflexite, a
company that makes reflective safety products and films, the CEO regularly
communicated the effects of the downturn, and employees had been involved
in discussions about the business. After exhausting all other options, the firm
cut 75 positions in one division. The employees general reaction? Losing our
jobs is painful, but at least we know you did all you could.[xxii]
Treat laid-off employees with respect and sensitivity. Give soon-to-be-
terminated employees plenty of advance notice, and, if appropriate, tell them
that the organization will write a strong letter of reference on their behalf. Be
sure that immediate supervisors not HR professionals deliver the news
of the layoff to affected employees and that they do so in private. The
immediate supervisor must be able to make the business case about the need
for layoffs, and the criteria for dismissals. Some companies have an HR
representative present along with the immediate supervisor during that
process. Allow employees to vent, and always treat them respectfully. The
role of HR in this situation is to listen and to empathize, not to argue. Finally,
create a severance plan that provides tangible economic benefits, and that
reflects managements compassion and understanding of the impact of the
termination. Although the trend is for companies to offer less in severance
payments, fully 93 percent of them require employees to sign releases of
liability in order to receive severance pay.[xxiii] Outplacement assistance that
can assist employees in job-hunting and networking can be particularly
valuable, but ensure that severance arrangements are consistent across units
and divisions.[xxiv]
This is precisely what eBay did when it reduced 10 percent of its global
workforce in 2008, almost 1,000 people. U. S. employees were allowed to
stay on for up to four weeks to take care of personal needs, to say good-bye
to their colleagues, and decide when they would leave. This element of
personal control is critical. It provides laid-off employees at least some sense
that they are still in command of events that affect them. In addition, all U.S.
employees received at least five months of severance pay, plus four months
of paid health-care benefits, plus 1-3 months of outplacement services.
According to Beth Axelrod, eBays senior vice-president of HR, How you treat
the leavers has a strong impact on how the stayers feel about the company.
Ensure that procedures used to make decisions are seen as just and fair.
Research has demonstrated time and again that the procedures used to
select, notify, and support employees are critically important. This is known as
procedural justice. When laid-off employees perceive downsizing procedures
to be fair, they tend to file fewer claims of wrongful termination, and
voluntary turnover among surviving employees is much less frequent. So also
are incidents of theft, violence, and sabotage. Indeed, procedurally fair
treatment has been demonstrated to result in reduced stress and increased
performance, job satisfaction, commitment to an organization, and
trust.[xxv] Conversely, when employees feel that they have not been treated
fairly, they may retaliate in the form of theft, sabotage, and even violence.
One way to promote perceptions of fairness, as we saw in the eBay example
earlier, is to give employees a sense of personal control by offering options
that might include choice in the forms of severance, actual departure date,
and outplacement assistance. The lesson is clear: sound HR practices, as
reflected in procedural justice throughout the process, and practices that
facilitate commitment and fit with the organization, can reduce the negative
effects of downsizing considerably.[xxvi]
On the day of discharge, give employees options on how they want their exit
handled. That includes when and how to collect their personal things, say
their good-byes, and depart with as much grace and dignity as possible. Dont
allow an unwarranted fear of sabotage to govern the exit process. Here are
some sensible security measures to consider: Protect computer systems by
taking away access codes from terminated employees, and have terminated
employees turn in their building-access cards to thwart them from returning
to the premises. Dont allow long-time, loyal employees to be marched out of
the building by security personnel, carrying boxes of their personal belongings
and passing by surviving co-workers.
Give survivors a reason to stay, and new hires a reason to join. Both groups
will experience transitions. Explain how the decision to cut staff is necessary
for the organizations long-term health. Give survivors hope by describing
future business plans, targets, and details. Describe a future full of promise,
one that will allow the company to seize business opportunities with
everyones determination and buy-in. Encourage everyone to participate in
inventing the future. Explain that you will be investing in those who remain,
building skills by retraining everyone in the new ways of operating.
Carefully examine the impact of employment downsizing on all HR systems.
Recognize that downsizing is just one tool in a portfolio of strategies to
improve firm performance. That portfolio includes workforce planning,
staffing, compensation, performance management, training, job safety, and
employee relations. How should each area change in light of the new strategy
or environment facing the organization? Let the 3 Cs care of customers,
constant innovation, and committed people guide that examination.
Japanese electronics giant, Matsushita Electric Industrial Co. did just that. It
shaved billions of dollars from its cost base by cutting its domestic workforce
by 19 percent from 2001-2005, and by closing 30 factories. At the same time
it boosted spending on research and development, and renewed its focus on
creating innovative products (Panasonic cameras, DVD recorders, and flat-
screen televisions). Two years later, its stock was up 33 percent.
Consequences of Downsizing on Those Who Remain
Clearly there are ripple effects of employment downsizing for a variety of
stakeholders, from survivors who remain, to those laid off, to the larger
communities affected. For purposes of this article, we focus particularly on the
consequences of downsizing for survivors and their organizations.
Examinations of the broader effects of employment downsizing on other
stakeholders are available elsewhere.[xxvii]
Those who remain often feel guilty and depressed.[xxviii] Many
studies have found that morale, loyalty, and trust in management decline
after a downsizing. So also does organizational commitment, job satisfaction,
and job involvement. At the same time, stress levels, intentions to quit, and
actual levels of voluntary turnover all increase, due at least in part to the
lossof a sense of personal control over importantevents in ones life. This
constellation of symptoms is known assurvivor syndrome.[xxix]
Two groups of survivors that are often overlooked are the managers who do
the firing, and the HR professionals who are often present at layoff meetings.
The process is highly stressful and exhausting for them, and many require
counseling subsequently.[xxx] Here is how David Pottruck, former co-CEO of
Charles Schwab & Co., Inc., described his experience after the firms first
Facing up to our first layoff was probably the worst feeling that I ever had
in business. I went through a period of incredible sadness and sense of
failure. I couldnt imagine the way we had let down these people and these
families who had to depart. We made every effort to undertake that
process with as much dignity and generosity for employees as we could.
We wanted to make sure that those who were still here respected the way
the company dealt with those who left. Because if there were other
layoffsWe dont want to see any destruction of employees loyalty to the

For both laid-off employees and survivors, keep in mind that there is
something known as the psychological contract that guides the relationship
between workers and employers. Employees infer a set of expectations from
their employers actions, including the expectation of fair treatment.
Downsizing is often interpreted by workers as a breach of the psychological
contract, and surviving employees may respond by withholding effort and
involvement, or through absences or quitting. For example, high-performing
employees often take jobs elsewhere in order to avoid the uncertainties and
ambiguities in a downsizing environment.[xxxii]
Keeping workers engaged and involved. A recent study [xxxiii] examined how
layoffs moderate the relationship between high-involvement work practices
and productivity, and how continued investments in high-involvement work
practices through the period of layoffs maintain workforce productivity. High-
involvement work practices are those that create firm-specific employee
capabilities that are difficult for other firms to imitate or transfer. They cover a
wide range of systems and routines, from team-based production and semi-
autonomous work groups, to gainsharing and flexible work design, to
information sharing and opportunities for training and development.
Using a large sample of Canadian firms that responded to a Workplace and
Employee Survey conducted by Statistics Canada over a 4-year period, the
researchers found a negative relationship between high-involvement work
practices and productivity in workplaces with higher layoff rates. Workplaces
that continued to invest in high-involvement work practices, however, were
able to avoid productivity losses, as compared to workplaces that discontinued
such investments.
At the most basic level, survivors want answers to three important questions.
Were departing employees treated fairly, with dignity and respect? As
we have seen, how an organization treats the leavers sends important
signals to those who remain.
Why should I stay? This is a me-question that survivors want
answered. What will be the impact on my career and professional
development? Is there a future here worth working towards?
Is there a new business strategy? Will the organization ultimately be
better off as a result of the downsizing?

Employment downsizing is not a cost-cutting cure-all, nor does it guarantee
that short-term savings will exceed long-term costs. At the same time, cash
flow is the lifeblood of organizations, and to preserve it, some level of
employment downsizing may be necessary. If that is the case, use the
research-based findings outlined here to downsize employees humanely and
with dignity, and be proactive in dealing with the predictable reactions of
survivors. Do the layoffs early rather than later in a recession, in order to
avoid dismissing workers just before demand picks up again. Late-recession
layoffs can be especially costly in terms of severance and other payments to
departing employees, coupled with rehiring costs later. Avoid doing
downsizing just because it seems trendy, or because all of your competitors
seem to be doing it. Above all, be very conscious of its consequences.

- See more at:

Cost-reduction Stages

The conceptual framework shown in Figure 1 encompasses three timeframe-related phases commanding several
internal cost adjustments that have produced a variety of stage-related HR practices. It is important to note that the
HR practices are cumulative. In other words, the practices in each stage are not unique to the actual phase, but
applicable in subsequent phases in a cumulative fashion.

First stage: Short-range cost adjustments

The first stage of the cost-reduction framework represents short-range cost adjustments in response to a short,
temporary decline in business activities (Vernon, 2003). These business slowdowns are expected to last less than six
months (Gandolfi, 2008). Most likely, the firm resorts to minor, moderate cost-reduction measures in this stage.
These preliminary adjustments should enable the firm to shun RIF-related layoffs and involuntary cutbacks and return
to normal business activity within four to six months (Gandolfi, 2008). Typically, this phase originates with an
unexpected drop in sales or a decline in sales forecast. It is characterized by short-term expenditure adjustments to
prevent a medium-range downturn or a more lasting, long-range decline. The immediate recognition of a temporary
business slip and the resolute engagement in preliminary cost-reduction methods should allow the firm to focus its
operations in a cost-sensitive mode for a quick recovery (Vernon, 2003).


The probability of success for the short-range cost adjustments hinges on a number of factors: First, senior
management must be able to articulate the business necessity for the cost-adjustment measures effectively and
stress the short timeframe of the strategy. A firm's ability to convey the message that preliminary cost-reduction
measures at the present time will likely prevent RIF-related layoffs in the future is critical. Second, the HR's role is to
communicate decisions made by the board of directors to the entire workforce promptly and to implement the cost-
reduction methods swiftly. Third, the employees' flexibility in allowing the firm to modify cost structures increases the
chance of success for the planned cost alterations. Therefore, a firm's capacity to overcome a business downturn in
the first stage will depend to a large degree on its organization's ability to respond to the new environment by
immediately and resolutely modifying expenditures (Vernon, 2003).
Suggested HR practices for short-range cost adjustments. A review of the literature and the popular press reveals
several HR-related practices that firms have implemented for preliminary cost reductions. The following is a non-
exhaustive overview and explanation of some of the approaches suggested by scholars and implemented by firms in
the global corporate landscape.

* Hiring freeze

A hiring freeze is a mild form of downsizing that reduces labor costs in the short term (Littler, 1998). However, a hiring
freeze does not imply that there is no hiring activity at all. Some firms hire new employees while cutting jobs at the
same time (Vernon, 2003). While this practice may make sense in terms of supplying the firm with key personnel, it
tends to send a confusing message to the workforce. As an example, in its latest attempt to fight rising jet fuel costs
and a deteriorating U.S. economy, American Airlines imposed an immediate hiring freeze on all management and
support staff (Maxon, 2008).

* Mandatory vacation

Mandatory vacation involves requiring employees to use their accrued vacation days or requiring them to take a
number of unpaid vacation days during a certain time period. While employees might not want to be told when and
how to use their entitlements, they will nonetheless appreciate the reaffirmed job security (Vernon, 2003). At the time
of writing, Chrysler plans a corporate-wide shutdown of its U.S. operations during two weeks in July 2008 to improve
the automaker's efficiency and boost productivity (Govreau, 2008).

* Reduced workweek

Firms sometimes resort to a reduced workweek. This may translate into a reduction from 40 to 35 or fewer hours,
thereby reducing short-term payroll expenditures. While most employees appreciate being able to spend more time
with their families, a reduced paycheck is not always welcomed. Also, employees may find that the same amount of
work still needs to be performed while they spend less time on the job (Gandolfi, 2008). Nucor Steel Corporation in
South Carolina has avoided layoffs for 35 years by resorting to two and three workdays for its employees during
downturns (George, 2004). In a similar vein, in 2008, workers at a St. Thomas automotive parts plant in the U.K.
voted a reduction in their workweek rather than see 200 employees leave permanently (De Bono, 2008).

* Cut in overtime pay

Minimizing or abolishing overtime pay for employees can be a powerful technique of reducing operational costs in the
short term (Vernon, 2003). Firms may institute an across-the-board (i.e., all employees) abolition or confine the cut to
selected categories, such as nonmanagerial, blue-collar, or salaried employees (Gandolfi, 2008). In 2004, GM and
Ford and car-supplier Visteon Corporation slashed overtime pay for most employees indefinitely (Dybis and Garsten,

* Salary reduction

Salary reduction methods have been standard practice for firms experiencing unexpected financial pressure.
Whereas salary reductions mitigate financial concerns in the short run, extended salary reductions can negatively
affect employee morale and loyalty. Also, while companywide salary reductions prevent layoffs, there is a clear risk
that top performers will be encouraged to leave for competitors that dangle superior compensation (Gandolfi, 2008).
In 2006, White Electronics Designs introduced salary reductions of 5% for salaried employees and 10% for
management, while the hourly workers remained unaffected. In 2006, a collation of Intel managers agreed to take a
temporary 100% pay cut to avoid permanent layoffs. Prior to that, Intel announced that it had planned to cut 10,000
employees, including 1,000 managers (Paul, 2006).

* Temporary facility shutdown

Temporary facility shutdowns occur when a work site closes for a designated period of time, while some
administrative functions still perform (Vernon, 2003). A shutdown allows employees to have time off without using
their vacation days. While overall company production decreases, the firm can achieve considerable costs savings,
thereby avoiding layoffs. In early 2008, Aleris International shut down its rolling mill production in Virginia to align
production with demand. As a consequence, production for customers was phased out and transferred to other
facilities within the U.S. (Aleris, 2008).

* Soliciting cost-reduction ideas from employees

Employees appreciate the opportunity to make a positive impact on their workplace and environment. Firms
frequently solicit cost-reduction ideas from employees, who are often creative in producing such solutions. This HR
practice has proven to be most effective when employees are able to make suggestions in the early stages of cost
cutting (Vernon, 2003). At Martin Heyman Associates, all professional construction consultants are encouraged to
contribute cost-reduction ideas. Unfortunately, many executives still do not realize that employees are the best
source of such ideas because workers on the job are in a prime position to identify and recognize waste (Yorke,

This overview has shown that there are numerous HR tools at an executive's disposal to reduce short-term
expenditures. While some firms have come up with innovative ideas, others have used layoffs as a very first resort.
Again, it must be understood that the techniques introduced in this stage are cumulative and applicable in other
stages. Moreover, the utilization of each HR practice is unique in that each selected tool will have certain
consequences that need to be carefully considered by management prior to adoption.

Second stage: Medium-range cost adjustments

The second stage of the cost-reduction framework comprises medium-term cost adjustments in response to a
medium-range business downturn exceeding six months (Vernon, 2003) and up to 12 months (Gandolfi, 2008).
These secondary cost-reduction adjustments are frequently signaled through extended company-wide or industry-
wide forecasts of diminished sales activity. If properly recognized and executed, the firm may be able to transition to
mid-range cost adjustments and thus prevent long-term, RIF-related layoffs and forced downsizing. In this phase
constituencies need to recognize that deeper cost-reduction strategies may be required to avert downsizing-related
layoffs. Senior management must be able to present the purpose and objectives of the expenditure adjustments
convincingly to the entire workforce. This should ensure employee buy-in and commitment. Adopting HR practices in
this stage could potentially alter employees' work environment. Therefore, the HR department will play an essential
role in the conduct and transition of these practices (Gandolfi, 2008).

Suggested HR practices for medium-range cost adjustments. A review of the literature and the popular press reveals
several HR-related practices that corporations have used trying to obtain secondary cost reductions. The following is
a non-exhaustive summary of practices recommended by scholars and introduced in the corporate landscape.

* Extended salary reductions

Extending salary reductions can be a method of choice if an economic downturn exceeds six months (Vernon, 2003).
While the extension of salary reductions can negatively affect employee commitment and morale, advocates stress
that employees would prefer a smaller income temporarily than a permanent loss of their jobs. As with short-term
salary reductions, there is a risk that high-performing individuals are encouraged to pursue external employment
opportunities (Gandolfi, 2008). Firms have generally been innovative regarding altering variable pay options.
Specifically, while some firms balance the reduced salaries by distributing once-a-year payments over 12 months,
others substitute stock awards for variable cash payment. For example, U.S. firm 415 Production offered an overall
5% pay cut or a four-day work week reflecting the appropriate decrease in pay to its employees (Morss, 2008).

* Voluntary sabbaticals

Voluntary sabbaticals, also called furloughs, allow salaried employees to take voluntary leaves for a designated
period of time. Companies may offer sabbaticals with considerably reduced or no pay. Most firms continue to provide
benefits during sabbaticals. Sabbaticals enable firms to reduce their medium-term expenditure and can be effective in
avoiding downsizing-related layoffs (Gandolfi, 2008). While employees may feel motivated and re-energized upon
their return, HR professionals point out that medium-and long-term sabbaticals may cause employees to lose their
leading edge and to return with outdated skills. Interestingly, evidence suggests that firms offer generous sabbaticals
during times of economic growth but refrain from this HR practice during tough financial periods (Vernon, 2003).
Practical examples abound. For example, in 2001, consulting firm Accenture announced that 800 employees qualified
for a special voluntary sabbatical program, while 600 employees were going to be laid off permanently (Taub, 2001 ).
In 2001, Information and Communication Mobile, a Siemens division, offered its employees a one-year time-out at
reduced pay without losing their jobs permanently (Perera, 2001). Siemens was thus able to reduce costs without
losing high-performing employees during difficult economic times.

* Employee lending

With this HR practice, the current employer lends an employee to another employer firm for a set period of time while
continuing to pay salary and providing benefits (Vernon, 2003). The borrowing firm, which can be a competitor, in
return, reimburses the lending company for part or all of the salary. While employee lending can dramatically
decrease medium-range expenditure of the lending firm, some employees may not wish to work for a third party.
There is also the risk that the borrowing firm decides to hire the employee permanently once the contracted period is
lapsed. As a consequence, the lending firm would loose a critical knowledge base (Gandolfi, 2008). Texas
Instruments engaged in lending HR staffers to vendors for up to eight months with the intention of bringing them back
to their original jobs at the end of that period. The supplier reimbursed Texas Instruments for their staffers' salaries
during the loan period and agreed not to offer them permanent jobs (Morss, 2008).

* Exit incentives

Exit incentive options give employees the option of leaving the firm and collecting severance pay or taking early
retirement (Vernon, 2003). This strategy enables firms to target jobs while recognizing employees for their service
and helps the firm retain the remaining employees (Gandolfi, 2008). Exit incentives can be costly and may create an
entitlement mentality for the remaining workforce in the future (George, 2004). In 2007, technology-outsourcing firm
EDS (Electronic Data Systems) offered extra retirement benefits to its 12,000 U.S. employees in an offer to accept
early retirement (EDS, 2007).

Corporate leaders need to be innovative about reducing medium-term expenditures. As with the previous stage,
some firms have demonstrated creativity and resourcefulness regarding the design and implementation of medium-
range cost-reduction practices. Anecdotal evidence indicates a natural tendency for firms to resort to layoffs hastily by
default without considering legitimate alternatives (Gandolfi, 2008).

Third stage: Long-range cost adjustments

The third stage of the cost-reduction framework represents long-term adjustments that are necessary if a firm
experiences a prolonged business downturn exceeding 12 months. This stage may be recognized through an
extended decline of current and projected customer demand or extremely volatile economic conditions (Vernon,
2003). The third stage generally requires extended expenditure adjustments by the firm (Gandolfi, 2008). In this
timeframe RIF, layoffs, and downsizing-related activities are frequently inevitable. The third stage has two phases
(see Figure 1). Phase 1 contains workforce reduction strategies that firms commonly adopt after a prolonged
business downturn. While RIF and downsizing activities should always be seen as a last resort, firms should avoid
mass layoffs at all costs (Macky 2004; Gandolfi, 2007). Companies who find themselves engaged in deep workforce
cuts must adopt HR practices that instill loyalty and commitment in the remaining and exiting workforces (Vernon,
2003). In contrast, Phase 2 encompasses HR activities that aim to re-attract formerly laid off individuals and hire new
employees in a post-downsizing period. This presupposes that the RIF have been implemented, that the business
downturn has ended and reversed, and that the firm is able and willing to re-hire.

Suggested HR practices for long-range cost adjustments. Firms forced to embrace permanent RIF and layoffs have
reported mixed results. While the execution of downsizing promises immediate financial relief, considerable empirical
evidence demonstrates that downsizing-related strategies do not automatically translate into improved organizational
performance (Littler, 1998; Macky, 2004). Such strategies have significant secondary consequences for the firm and
its stakeholders (Gandolfi, 2006). While downsizing and RIF-related layoffs should always be a strategy of absolute
last resort (Gandolfi, 2007), it is clear that layoffs are at times warranted, desirable, or unavoidable. Once the firm has
conducted RIF-related activities, the firm will need to re-position itself to be able to re-attract those laid off or hire new
employees. Again, this presumes that the economy has bounced back sufficiently and that the firm is in a position to
hire again. Some firms re-hire formerly laid off employees, whereas others opt to return to the labor market and seek
out new talent. How does the firm attract previous employees? The following constitutes a brief summary of three
commonly-used practices.

* Rehiring bonuses

While some firms provide a monetary rehiring bonus for veterans to return within a specified period, others hire laid-
off employees as external consultants. In some cases, firms realize that they cut too many or the wrong employees,
while in other cases management decides to hire back after the economic downturn (Vernon, 2003). Evidence
suggests that employees and consultants return to the downsized firm with improved monetary rewards (Gandolfi,
2006). For instance, in 2001 and after two rounds of deep layoffs, Charles Schwab Corp. offered a $7,500 hiring
bonus for any previously downsized employee rehired by the firm within 18 months following the layoffs (Morss,

* Maintaining communication with laid-off employees

Firms frequently make a concerted effort to maintain friendly relations with laid-off employees (Vernon, 2003).
Modern-day technology, including Internet forums, 24-7 hotlines, and e-mail, provides effective ways to foster and
sustain positive employer-employee relationships (Lublin, 2007). This is particularly important if firms intend to rehire
the former employees when the economic climate has improved.

* Internal job fairs

Firms should make every possible attempt to retain high-performing employees (Gandolfi, 2008). A powerful method
is an internal job fair, where firms host events to help place and redeploy downsized employees within the company.
For example, the Ford Motor Company is currently putting on internal job fairs in its U.S. plants to entice employees
to find new careers beyond the assembly-line (Vlasic, 2008).

Concluding Comments

This paper has presented a methodology of cost-reduction stages enabling firms to minimize, delay, or circumvent
reductions-in-force, layoffs, and downsizing-related activities. The depicted conceptual framework is an extension of
Vernon's (2003), George's (2004), and Gandolfi's (2008) original work on cost-reduction stages, including an
expansion of the third stage incorporating two distinct phases. The research has shown that the key to responsible
cost reduction and the selection of appropriate cost reduction methods can be found in the alignment of a firm's cost
reduction practices with its current cost-reduction stage. The paper has further established that it is difficult for a firm
to accurately forecast the duration and magnitude of a business downturn. Consequently, firms have a natural
tendency to respond reactively rather than to anticipate economic declines.