How to Handle a Labor Surplus

A downturn in business is rarely welcome at any level, and the company that responds promptly and effectively gains a competitive advantage. Since direct labor is typically the largest single cost of sales, trimming a labor surplus is usually a high priority when reallocating resources during tight economic times.

Several ways exist that you can handle surplus staff, and an immediate layoff is one of the most common. However, other approaches exist that consider aspects other than an immediate reduction in payroll costs. Since there may be value in keeping trained employees, or accounting advantages to other forms of separation, it often pays to look closely at all alternatives.

No matter which methods you use for dealing with a labor surplus, consider the indirect effects.

Reducing a labor surplus via layoffs may seem obvious, but a lot depends on the cause of the surplus. When excess staff results from permanent market changes, letting employees go may be your best response. If reasons for the surplus are temporary, consider the costs of hiring and training compared to the expense of retaining staff.

If you regularly use employment agencies to cover your staffing needs, discontinuing this in times of a labor surplus is obvious. In fact, if your business is subject to fluctuating staffing needs, using outsourced staff during labor deficits can smooth out your need for permanent employees.

Some labor surpluses are across the board, affecting all departments. If this is not the case, however, then redistributing excess staff may be an option. Retraining employees who are already familiar with the culture of your enterprise offers present and future flexibility at a fraction of the expense that new hires cost.

For large organizations with many departments and an equally large workforce, implementing a hiring freeze can help prevent aggravating a labor surplus. With a freeze in place, managers downstream must explore other options to fill their labor needs without adding to the overall company payroll.

Although it may not be a good short-term solution, offering early retirement or contract buyouts may produce sufficient attrition to reduce your labor surplus. There are potential financial benefits as well, since employees near retirement age may be toward the top of the wage scale. Depending on your company’s accounting methods, buyouts may come out of the operational budget, improving departmental performance.

Though it’s all but certain to have a negative effect on morale, across-the-board pay cuts may produce savings in wages that permit you to weather a labor surplus without layoffs. Wage reductions can be temporary or permanent but be sure to consider what this action may do to your company’s employment brand and labor relations.

In this age of increased emphasis on work/life balance, you may have employees who might welcome reduced hours or work-from-home arrangements. Offering a leave of absence could help smooth out a temporary surplus. Although reduced hours may have the same net effect as a pay cut, reducing the hours may be better received by staff, who will see that their wage rate has been maintained.

When your business experiences regular and predictable labor surpluses, plan accordingly during hiring periods, bringing aboard new hires only for the labor deficit period. You may be able to build a regular seasonal staff, as well as a pool of potential permanent workers, should the demand arise.