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Layoffs not only hurt employees but businesses too. While it seems like a quick solution, in reality, sacking staff has rarely ever positively impacted a business. During the recurring layoff season going on globally, it’s crucial to understand how firms choose whom they need to let go and the key factors behind these decisions. From financial burdens to strategic shifts, this article delves into the reasons companies resort to layoffs and the criteria they use to make these tough choices. Discover why layoffs often do more harm than good and why companies should consider fairer alternatives.

Why do companies lay off employees?

Before understanding how a business decides whom to show the pink slip let’s quickly see why they do so. While various factors include economic conditions, inflation, business seasonality, etc, here are some common ones.

Financial burden

Typically when a business faces financial pressure, they are likely to downsize their workforce. For instance, if a firm’s investors have backed out or severely low sales can cause a business to bear loss. This can impact majorly on a company’s profits, putting them in a tricky financial position.

Change in business strategy

When a firm realises one of its business strategies did not perform up to the mark, it may shut it down. So, closing operations and working on a better plan could affect those hired to run it.

Acquisitions and mergers

If two companies decide to merge to reduce competition and get more profits or if a firm gets acquired by another, the business will go under restructuring. This could also impact roles that have low ROI leading to layoffs.

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Decreased operations

Generally, a company can downsize their offices and operations to minimise financial loss or liabilities. Hence, employees need to apply for a role in the new branch but not all secure a position causing them to lose their jobs.

How do companies decide whom to lay off?

Here are some primary criteria based on which a company determine which employees need to be laid off.

Performance

Employees’ work performance is generally measured among their co-workers also known as stack ranking. This system can be utilised to retain productive workers and eliminate those who fall at the bottom. Apart from that, managers also prefer staff with ideal qualities such as strong work ethic, flexibility, ability to handle pressure, etc.

Skills and knowledge

With a new business strategy in mind, a firm needs to restructure its team to meet its goals. So, managers prepare a list of ideal job roles and skills that will help the company execute the strategy. These skills and requirements can be used to compare with existing staff. As a result, redundant or outdated roles could be eliminated.

Cost

Employees who earn high but provide the same or less output than low-paid staff are at risk of being laid off. Ultimately, it comes down to curtailing expenses that can be saved and used to either pay back debt, fix cash flow issues or simply strengthen their financial position.

Tenure

Workers who have been in the company for the longest will require big severance packages that businesses can’t afford amidst layoffs. Hence, staff that recently joined the company could be shown the pink slip. However, there have been cases where employees with more than 5 to 10 years of experience were shown the door. This could be because long-term staff get paid high salaries, including perks such as medical bill coverage.

Who makes layoff decisions?

Generally, a firm’s management team decide which employees need to be let go. In such circumstances, the human resources department provides the relevant employee metrics and analysis to help the management make data-driven decisions while also being fair.

The bottom line

For a business, layoffs are the best short-term solution to eliminate costs. However, this could do more harm than good as it can invite issues such as voluntary resignations, bad publicity, low motivation, etc. This is why companies whether big or small should handle layoffs with utter fairness and better alternatives.