TOOL Limiting Layoffs With Creative HR Cost-Cutting

By Joyce Hanson

Apr. 30, 2009

If your business employs a small yet dedicated staff, chances are that you’re anxious to survive this recession without having to resort to layoffs. Or, if you have already had one round of layoffs, you want to avoid another that will cut even more deeply into your workforce.

Experts say the instinct to avoid layoffs isn’t just human; it’s good business practice.

“Reduction in force is the most dangerous option,” says Margaret-Ann Cole, senior consultant in the organizational effectiveness practice at consulting firm Watson Wyatt Worldwide. She points out that layoffs may leave a company flat-footed when the economy picks up, and that layoffs can also be surprisingly expensive when severance packages are figured in.

Here are some ideas for cutting your labor costs without laying people off:

Freeze or cut salaries … prudently
Many companies have already instituted hiring freezes or eliminated bonuses. These steps are often part of a small business’s first response. But any reductions in salary ought to be done carefully, and, surprisingly, the first principle shouldn’t be fairness.

Though it’s important that everyone in the company share the pain, business owners should still try to compensate their top producers more, says Howard Levine, a principal in Mercer’s human capital consulting business.

The number of companies cutting salaries shocks compensation experts.

“In my 25 years, I’ve never seen anything like it,” says Levine, who considers it a drastic move. Again, an across-the-board salary cut may hurt the organization in the long term if the move turns off top performers.

Reduce contributions to pensions or matches to retirement plans
Companies with defined-benefit plans don’t have much flexibility, because they need to make sure they are meeting the legal requirements for how much money is in their funds.

Reducing or eliminating a company match for a 401(k), on the other hand, is a step that’s fairly easy for companies with defined-contribution plans. Small businesses that used a standard format for setting up their 401(k) plans will probably find that they have flexibility about whether and how much they match. In addition, employees will likely accept a one- or two-year reduction in the 401(k) match if a company communicates the reasons.

Raise employees’ contributions to health plans
An October survey by Watson Wyatt found that this option was one of employers’ first moves to reduce labor costs. A quarter planned on increasing the share of health plan costs paid by employees this year. Small businesses that have been very paternalistic in the past may have lots of room to ask employees to contribute.

Shorten the workweek
The 35-hour workweek has become an institution in many European countries, as well as in Asia. Reductions in work hours–and corresponding reductions in pay–are considered far preferable to layoffs, Cole says.

Why not try it here in New York City? Treat the 35 hours as a base, and award extra leave to compensate for any excess hours worked. You’ll win the loyalty of the hourly workers you haven’t fired and have rewarded with time off.

President Barack Obama even gave the policy a nod of approval in his inaugural address, referring to the selflessness of workers who would rather cut their hours than see friends lose their jobs.

If you employ hourly workers, be careful, says leadership and human resources expert Kirsten Ross of Focus Forward Coaching in Warren, Michigan.

“You must cut out the additional work hours as well as the pay,” she says. “If employees work the overtime, they must be paid, or you run the risk of being noncompliant with the Fair Labor Standards Act.”

Though the same federal laws don’t apply to professional workers, you will risk a backlash if the 35-hour workweek is just a 40-hour stretch under another name.

Turn attrition to your advantage
When you lose an employee to resignation or retirement, replace that person with a contingent worker.

A contingent worker is a part-timer, contractor, temp or self-employed freelancer who can easily be released by a firm and who doesn’t get the same benefits as other workers. As more companies lay off full-time employees during this recession, a deep pool of talented but unemployed individuals will be available for contingency work, says John Sullivan, professor of management at San Francisco State University.

When the economy turns around, if your contingent workers have proved their value, you can always bring them into your full-time fold.

“The key in down times is to increase innovation and do more without spending money,” Sullivan says.

Lure top performers with flexible hours
Employing top-notch people can actually keep your costs down, because they produce at higher rates. But how to lure and retain them? One key is flexibility.

Sharon Psyhojos, office manager for Greenwich Financial Services in Greenwich, Connecticut, has been putting in two-day workweeks for the mortgage-backed securities broker since 2001. Business is seriously off for the four-employee company, she says, but the small firm is weathering the downturn and getting organized for the time when the bond market kicks back into operation.

Psyhojos, who has kids at home and a husband with a full-time job, has found that the downturn has given her even more flexibility about which days she goes to the office.

“My boss doesn’t care when I come in or what I do, so long as my work gets done and he can reach me at any time,” she says.

For small companies, using flexibility on a temporary basis is a great way to go during a recession, says Laurie Young, a principal with Flexible Resources Inc., the staffing firm that placed Psyhojos.

“In a downturn, companies want to keep their costs down. We encourage them to look at output, not face time,” Young says. “Companies that can’t give bonuses or pay raises right now can get just as much productivity without the higher costs by hiring people who want more flexibility.”

Redeploy your workforce
There’s an old saying in the Army: “Never volunteer.” But in today’s uncertain workplace, Sullivan says, managers should warmly encourage staff to volunteer to move from areas of low return to areas of growth.

Pay a PEO to help reduce HR costs
If dealing with human resources issues really isn’t your cup of tea, think about hiring a professional employer organization.

A PEO can manage everything from managing payroll and health insurance to meeting legal requirements for hiring and firing. A PEO may be able to negotiate lower rates on insurance for your company or find other ways to reduce costs. A PEO acts as a company’s employer of record, thus assuming legal risk in the case of HR-related lawsuits.

“They’re not just vendors; they’re the co-employers,” says David Grant, president of Manhattan-based public relations firm LVM Group Inc., which hired a PEO called Administaff to manage his company’s HR issues.

For more information about PEOs, go to the National Association of Professional Employer Organizations’ Web site,

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