How to Talk about Layoffs

On the same day in November that it reported record revenues for the first quarter of fiscal 2009, Aruba Networks announced it was laying off 9 percent of its more than 500 employees. In an earlier time the conjunction of good news and bad news would have been jarring, but not now. "We took a hard look at how our organization was structured, and even though we were coming off a very strong quarter, I think everyone could see 2009 was going to be tough sledding," says Steffan Tomlinson, CFO of the Sunnyvale, California-based wireless-networking firm. To make sure the remaining employees understood why the positions were eliminated, top executives held a companywide meeting that same day and explained that the layoffs were part of a broader cost-cutting effort designed to, in part, save jobs. "We really emphasized that we did not want to have to make a second round of cuts," says Tomlinson.

A few days after Aruba's announcement, managers of a small New England-based consulting firm told employees that prospects for the new year looked grim. Asked if there would be layoffs, one executive said only that the firm was "considering a lot of options." For two weeks nervous staffers gathered in the hallways to swap rumors and handicap their chances of having a job come Christmas. Just before the holidays the word came down: 25 percent of the staff was being let go. But management let news trickle out; many employees were traveling and only got word through the office grapevine. In fact, some former employees heard the news before current staffers did. Those employees who remained received little reassurance that their jobs were safe or that management had a strategy for reviving the business.

Laying off workers is never easy, but as the examples of Aruba Networks and the New England consulting firm show, some approaches are far less damaging to morale and company reputation than others. At Aruba, the employees who remained understood why the layoffs were made and knew that their managers had a plan for moving the business forward. At the consulting firm, the employees who kept their jobs were left burnishing their résumés and wondering if they would be able to jump ship before it sank.

Many more businesses will face the thorny prospect of downsizing in the coming year. Companies made thousands of layoffs in 2008 — with more than 2,000 businesses laying off at least 50 workers in November alone — and nearly half of all finance executives surveyed by CFO say their companies will reduce their workforces this year. Given that many businesses are rapidly taking on water, it's hard to blame managers for taking a short-term view of layoffs. Still, experts recommend pausing first and taking a long, measured look before issuing pink slips.

"Executive teams that are considering workforce reductions have to slow down," says Ted Olsen, a partner with law firm Sherman & Howard who specializes in employment defense. "I'm seeing too many reductions in force that are being conducted too hastily. People are feeling the economic pressure, they're in panic mode, and they're losing perspective."

A Surgical Approach
Beyond the business and morale reasons for proceeding cautiously, Olsen points out, there are also legal considerations. For starters, federal law under the Worker Adjustment and Retraining Notification Act (WARN) requires many employers to provide workers with 60 days' notice before terminating their employment (see "Due Warning" at the end of this article). Hasty layoffs can also result in discrimination lawsuits. To cut that risk and make a difficult decision easier, Olsen recommends developing a system for determining which employees will be let go. "So often clients will say to me, 'Well, I know Bill needs to be let go,' rather than making the case for why Bill needs to be let go," says Olsen. "It makes so much more sense to set up a system and then lay off the employees, rather than jumping in and then trying to come up with the reason."

At Aruba, the management team took a "surgical" approach to layoffs, according to Tomlinson. They evaluated the company's product-development priorities and decided to allocate resources to fewer projects, favoring those that would help customers save money. "There were some ancillary features and products that might have been nice to have that were no longer critical in this environment," says Tomlinson. Thus, entire project groups could be eliminated without damaging the core business. Still, he notes, "The amount of cutting we did in R&D was pretty light."

When executives expect to make cuts across the business (a method Tomlinson calls "the peanut-butter-spread approach"), a system to evaluate employees can help managers stay focused on objective criteria instead of personal preferences. Length of service, performance, disciplinary history, and versatility are all possible benchmarks, says Olsen. "At the end of the process, there ought to be a written case for why cuts happened the way they did, and why certain people were selected to be let go. Make it systematic, rather than making one-off decisions about people."

The speed with which companies have conducted mass layoffs during the past few months suggests that many management teams are not being anywhere near this deliberate. Olsen says he has seen clients cut too quickly and too deeply, only to find themselves short-staffed later on. Companies can run into legal trouble if they then hire someone new to fill the position soon after the layoff — if the person who loses her job is female, for example, and the new hire is male. "It's hard to make a believable business case that there was a force reduction when a position is recreated so quickly," says Olsen. "Those are very hard discrimination cases to defend."

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