Layoffs and downsizing are both terms that refer to reductions that companies make in the number of employees on the payroll, although the term "layoff" is used more often to refer to temporary displacement, while "downsizing" generally has more permanent connotations. Other terminology sometimes used in this regard include reductions in force (RIF), right-sizing, restructuring, and reorganization. Employee terminations in such cases are usually the result of surplus labor caused by economic factors, changing markets, poor management, or some other factor unrelated to worker behavior. Because work force reductions make a company vulnerable to many of the same legal risks inherent in behavior-related terminations, companies usually terminate workers by means of a carefully planned and documented process. The process is typically conducted in two stages: 1) selecting the workers to be dismissed and then terminating them according to the above process; and 2) providing benefits to ease the transition, including severance packages, unemployment compensation, and outplacement services.

Prior to the 1980s, layoff/downsizing initiatives were typically associated with business cycle downswings, with laid-off workers recalled as business conditions improved. Beginning in the 1980s, a greater proportion of layoffs resulted from plant and office closures and were, therefore, permanent. Many of these downsizing efforts were intended to make U.S. firms more profitable in the face of intensified global competition. As the U.S. economy improved in the 1990s, large-scale layoffs continued even at highly profitable firms, indicating a break with historical patterns. These layoffs, many of them resulting from re-engineering and restructuring efforts, impacted managerial positions to a greater degree than ever before. Conversely, displacement rates fell for blue-collar groups that have historically been most vulnerable to layoffs/downsizing. Today, primary causes of layoffs and downsizing initiatives include rapid technological change, increased international competition, changing customer demands, regulatory changes, regional economic downturns, and poor company leadership.


Companies that engage in a study of their workforce prior to initiating layoffs or downsizing need to proceed carefully. After all, organizations must weigh the impact of such actions on company efficiency, morale, and public image. But care must also be taken to ensure that the reductions do not violate state and federal laws. As with behavior-related terminations, downsizing terminations cannot be based on bias against protected minorities, or even unintentionally result in an inequitable outcome for a protected group. In fact, extensive legislation exists to protect disabled workers, racial minorities, workers over the age of forty, women, and other groups. In addition to bias-related laws, moreover, companies must comply with a battery of laws specifically directed at cushing the blow for employees who are victims of corporate layoffs.

The actual termination of employees as a result of downsizing, however, should follow the same general procedures used when employees are terminated for behavioral reasons. That is, the situation should be reviewed carefully ahead of time and a plan established; the criteria for dismissal should be well documented (options include eliminating positions by job title or classification, reducing each area or department by a certain percentage or number of employees, and determining which resources will be needed to handle future work); the employees should be informed of their termination during a personal, face-to-face meeting that is not scheduled on a Friday afternoon or just before a holiday; the employees should be presented with a letter outlining the assistance and benefits they will receive; and then other employees and customers should be notified. "The exiting process is contingent on a variety of factors," said Richard Bunning in Personnel Journal, "including whether employees have volunteered to exit, the potential danger of sabotage (such as in the computer area), the potential for vandalism and the importance of the employees' continued presence in the organization. With a partial downsizing, quicker usually is better…. With a complete plant closure, a phased exit process may be necessary."


Downsizing, which may eliminate the jobs of many employees all at once, requires a more extensive communication effort on the part of management than does a single employee termination. As a result, it is essential that business owners and managers clearly explain the reasons for the action to their remaining employees. As Bunning remarked, "as the necessity to downsize becomes clear, management should openly acknowledge the difficulty it had making this decision, which is required to restore (or maintain) the organization's health."

The personal announcement should be followed with written communication, such as newsletters and bulletin-board postings, to help keep employees informed, eliminate rumors, and maintain morale and productivity. Dealing with the media is another consideration in downsizing, since the loss of jobs may be of interest to the community. Deems noted that companies might find it helpful to prepare press releases ahead of time and choose one person as a contact.

The final stage of the downsizing process, outplacement, helps maintain the morale of remaining employees, enhance the public image of the company, and reduce the amount of unemployment compensation owed. Whenever possible, outplacement programs should be conducted by professional counselors in a neutral location, beginning as soon as possible after the downsizing occurs. Outplacement usually includes two activities: counseling and job search assistance. Both are necessary to help the displaced workers: 1) develop a positive attitude; 2) assess their career potential and direction, including background and skills, personality traits, financial requirements, geographic constraints, and aspirations;3) develop job search skills, such as resume writing, interviewing, networking, and negotiating; and 4) adjust to life in transition or with a new employer. "The outplacement process often can be coordinated with local governmental and social service agencies," noted Bunning. "That way, employees may sign up for unemployment benefits, receive information about retraining programs, hear about other employment opportunities, receive financial planning tips and so on when they're told about benefits and receive severance pay."


Considering the mixed results large corporations have had with layoffs, some small businesses have adopted formal or informal no-layoff policies. In fact, the American Management Association reported in 1997 that small firms (defined as those with less than 500 employees) are half as likely as large ones to lay off employees. According to Harvey Meyer in Nation's Business, avoiding layoffs can offer small businesses a number of benefits, including "retention of highly trained, skilled, and productive workers; elimination of the need to spend time and money on

recruiting; payroll savings in those instances when employees agree to small and generally temporary wage reductions in return for employment security; the superior customer service that results from a loyal and upbeat work force; and reductions in turnover and absenteeism." Moreover, avoiding layoffs prevents adverse situations from arise in which employees who are not laid off are forced to handle both their usual responsibilities and those that were previously the prevince of laid off workers. Employees who are "swamped" in this manner almost always suffer from declines in both performance and workplace satisfaction.

A no-layoff policy can have pitfalls, however. It reduces the small business owner's ability to respond to a cash crunch, for example, and it may encourage employees who have been terminated to contest their firing in court (given this reality, small business owners should avoid putting no-layoff policies in writing). In addition, such a policy is unlikely to work for companies that have volatile sales levels or employ low-skilled workers who could be replaced easily.

For small companies that must compete with larger ones to attract and retain a highly trained and skilled work force, however, a no-layoff policy can be a valuable tool. Some small businesses that promote no-layoff policies keep employees busy during slow periods with training sessions or painting, maintenance, and repair work. Others choose alternatives that cut costs and eliminate the need to downsize, such as hiring freezes, restrictions on overtime, pay reductions, job sharing, and shortened work weeks.


Aaronson, Daniel, and Kenneth Housinger. "The Impact of Technology on Displacement and Reemployment." Economic Perspectives. Summer 1999.

Bunning, Richard L. "The Dynamics of Downsizing." Personnel Journal. September 1990.

Cameron, Kim. "Downsizing Can Be Hazardous to Your Future." HR Magazine. July 1991.

Crofts, Pauline. "Outplacement: A Way of Never Having to Say You're Sorry?" Personnel Management. May 1992.

Cross, Michael. U.S. Corporate Personnel Reduction Policies: An Edited Collection of Manpower Layoff, Reduction and Termination Policies . Gower, 1981.

Eisen, Rebecca D. "Devising a Layoff Contingency Plan." HR Magazine. June 1993.

Meyer, Harvey. "Avoiding Pink Slips." Nation's Business. June 1997.

Noer, David M. Healing the Wounds: Overcoming the Trauma of Layoffs and Revitalizing Downsized Organizations. Jossey-Bass, 1995.

"Study: Layoffs Haven't Boosted Profits, Productivity." Washington Post . September 26, 1993.

SEE ALSO: Constructive Discharge ; Employee Termination

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