How to Approach Reductions in Force

The third installment in the ABD M&A Advisory series Finding the Upside in the Downturn

When the recession hit, I got a lot of phone calls from clients asking if they could adjust the estimated exposures on their policies downward in the middle of the policy period. This is highly irregular, but we were able to get underwriters on board to make this concession.

Lowering the estimated Sales to rate General Liability, or the estimated Payroll to rate Workers’ Compensation, meant that my client was feeling the impact of the recession, so they needed to lower their insurance expense as soon as possible.  Unfortunately, it also meant that they were planning to reduce their workforce.

The emotional toll that this took on my clients was obvious. Making decisions about someone’s employment is never easy. Especially when it’s due to market performance and not individual results. After my clients determined that a layoff or reduction in force (RIF) was the answer, it was clear that many of my portfolio company clients did not have experience dealing with a reduction in force of that magnitude before, and they struggled to form a plan. In the weeks after the RIF, many of them found that their cuts were too deep, and they found themselves in fast need of talent.

Since 2008, many private equity firms have added experts in human resources in order to drive better decisions at their portfolio companies when difficult decisions like these have to be made.  For portfolio companies that do not have access to these resources, we offer the following advice on how an effective RIF strategy should be structured.

BEFORE A RIF BECOMES NECESSARY

I spoke to one our resident experts on our SharedHR team, Chana Anderson, about how firms can best adjust for a tightening budget before resorting to laying people off. Chana has 21 years of human resources experience and specializes in organizational strategy, design and navigating California’s complex employment laws.

In times of crisis, she insists that mass layoffs should be the last choice and that companies should consider the following options before making drastic cuts:

  1. Reduce or stop employer contributions to retirement plans. While employer contributions to 401(k) and other retirement plans may be a generous benefit during good times, reducing or eliminating these contributions can save money before employees notice a hit to their incomes or jobs.
  2. Reduce or drop some benefits and coverages. Although employees may sooner feel the impact of changes to their benefit plans, reducing benefits is likely to be a more sustainable change than wage cuts, so they’re worth considering.
  3. Reduce office footprint. Downsizing office space or relocating to smaller offices can reduce overhead costs significantly. Switch from large offices or cubicles to open concept, shared desk layouts or encouraging employees to work remotely can help your organization save considerably.
  4. Implement regular furlough days. Adding furlough days on a regular schedule, such as once a week or twice monthly, can reduce payroll costs without dramatically altering the lives of your employees or flow of your workplace.
  5. Freeze wages. Before cutting wages or laying off employees, consider freezing wages by eliminating bonuses and future raises. Institute this change universally across all employees, including those in senior positions, and communicate the reason and timeline for this change.
  6. Cut wages. If reducing employees’ pay becomes necessary, it may still be preferable to mass layoffs. Cut wages by the same percentage (5%, 10%, etc.) universally to minimize the impact on morale and workplace culture.
  7. Outsource some positions and contractually obligate vendors to hire employees. Many vendors will accept conditions that require them to take a clients’ employees in exchange for your continued business.
  8. Offer voluntary resignation packages. When it becomes obvious that you’ll need to reduce your workforce, offer generous resignation packages to any employees who are willing to voluntarily leave the company. This could reduce costs while not alienating your most loyal employees.

BEST PRACTICES FOR A REDUCTION IN FORCE

We know that in some cases, especially in the event of a sudden market downturn, you may still find yourself facing mass layoffs even after exhausting all of the previous options. Chana suggests following the steps listed below in order to ensure that layoffs are handled in a compassionate, compliant manner. Doing so will help further problems down the line and minimize difficulties for your employees.

  1. Thoroughly understand the nature of your business and the structure of your workforce. Before making any drastic moves, work to understand how your different teams and departments work together so that any reductions in your workforce will be the most efficient cuts for your company. Further, if your employees are unionized, a bargaining agent must be involved from this step on.
  2. Involve legal counsel. There are too many possible ramifications for not complying with the WARN Act, a federal law requiring advance notice before mass layoffs to protect workers and their families from mass layoffs, to not consult a labor lawyer.
  3. Create a timeline and stick to it. Open and consistent communication about the nature of your company’s reduction in workforce will make the process easier for everyone involved. Decide from the start which group you are going to release and make sure that there is a solid business rationale for this decision. Determine which details you are going to share and when.
  4. Determine the severance package you intend to offer. Only you know what makes the most sense for your company – decide on a package that is compliant, fits your finances and respects your employees’ contributions.
  5. Write the separation agreement. Consult your legal counsel to ensure that the document is compliant with WARN and state-specific laws regarding layoffs and notification.
  6. Consider a retention package. Used to ensure that employees you determine are crucial to the success of your business stick around amidst the uncertainty that can affect the remaining workforce in the time before and after layoffs.
  7. Solidify your message. Clear communication and a consistent story will make the layoff period less painful and difficult to navigate for both your current and former employees.

Understanding and managing a reduction in force can be difficult, especially during times of economic crisis. A sudden downturn can happen to any company, so don’t let it catch you off-guard. Contact the ABD Team today to learn more about how to be proactive about risk management.

About the author(s): Josh Warren is a Senior Vice President and M&A Advisory Practice Leader at ABD Insurance and Financial Services.  Prior to joining ABD, Josh spent 15 years at Equity Risk Partners, an insurance brokerage and consulting firm that concentrated exclusively on private equity firms, venture capital firms, and family offices.  Josh was twice named a Power Broker by Risk & Insurance Magazine in the Finance – Private Equity category. He was also named to multiple “40 Under 40” lists, including Business Insurance magazine, Risk & Insurance magazine, and the M&A Advisor.  He can be reached at josh.warren@theabdteam.com, or 312-300-5759.

Chana Anderson is a Senior Executive HR Consultant for ABD’s SharedHR practice.

 

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