A business may lay off employees for a variety of reasons: a decrease in productivity, a slowdown in business, economic concerns or a general downsizing of a workforce due to cutbacks, close-outs, mergers or buyouts. There are advantages and disadvantages to laying off employees, all of which have economic implications and some of which have legal implications.

Advantages of Laying off Employees

Laying off employees results in an automatic reduction in overhead costs associated with payroll, benefits and insurance. Freeing up this additional capital may make it easier to hire new, lower-cost or part-time staffers, or to compensate existing high-performing employees with additional pay. It may also help a financially struggling business gain better control over its finances and improve the viability of the company over the long term. If a layoff is prompted by a worker’s poor attitude or lack of performance, another subsequent positive result of a layoff could be improved morale and productivity in the workplace.

Disadvantages of Laying off Employees

Laying off employees can create an environment of uncertainty for remaining employees. In many cases, retained workers are required to pick up the slack of their former co-workers, which can result in poor morale, concern over job stability and overworked employees who may be more prone to mistakes. Laying off employees can also have a negative impact on levels of customer service. For example, if you run a retail store with six cashier stands and you lay off three employees, theoretically, customers will have to wait twice as long for service. This can result in loss or dissatisfaction of customers.

Financial Implications

While laying off employees saves money in payroll, it may increase money paid toward unemployment insurance, severance packages and the potential costs associated with rehiring and retraining for the vacant position in the future.

Every layoff has the potential to become litigious if an employee makes a claim of discrimination, harassment or unlawful termination. Employers must be sure to follow all guidelines outlined by the U.S. Equal Employment Opportunity Commission to ensure they are making the termination for lawful purposes and in a way that is non-discriminatory. Employers may find it beneficial to consult an employment law professional prior to laying off employees.