Voluntary layoffs might be a great solution if you need to tighten your company's finances. It's a strategy used in companies both big and small.
For example, after the pandemic sucker punched the airline industry, Boeing offered a couple of rounds of severance packages. American Airlines and several other major air travel companies followed suit. And more recently, Amazon sent out voluntary severance offers to many employees, trying to reign in company costs.
No matter the size of your company, voluntary layoffs are a viable option when it comes to downsizing. But that's not to say there aren't any downsides to going this route. Let's look more closely into the matter to help you decide if this is the right step for your business.
What's a Voluntary Layoff?
A voluntary layoff is when management offers a resignation package with pay and benefits to employees to encourage them to leave on their own. Those who accept the terms get the benefits defined in the package and end their time with the company.
Those who don't accept the package continue working with the company, although buyouts, restructuring, and other organizational changes might mean there's a new set of rules for them to play by.
Besides being a way to tighten finances, companies might go with this type of termination to encourage workers who've been thinking about retiring or moving on to take the plunge. This type of layoff allows the company to support those workers through the transition. It also helps your remaining staff feel more secure in their positions.
What's the Difference Between a Voluntary Separation and an Involuntary One?
Any rounds of cuts mean people lose their jobs, but the main difference between a voluntary and an involuntary layoff is whether the employee has any choice in staying or going.
In an involuntary separation, it's the management team that decides who gets laid off and calls those people to the office. These types of discharges are the more common of the two. They're the ones with the dreaded "pink slip" people used to talk about.
But voluntary terminations are when management announces the plan to downsize, lets the team know who is eligible, and the employees themselves volunteer to leave. Another important distinction? Those leaving voluntarily are typically not eligible for unemployment benefits. Still, this method is growing in popularity and is often seen as a more compassionate option when companies offer attractive severance packages.
Is a Layoff the Same as Being Fired?
Getting laid off is not the same thing as being fired. When you fire an employee, you often have a reason why in mind; they must have done something to make you show them the door.
With a layoff, the company is trying to reduce its staffing. It's not because of the actions of a specific employee but rather the business as a whole.
Benefits of Voluntary Separations
While it's never easy to let people go, this type of separation provides some benefits to both you and your employees.
- Helps build morale in a hard situation. Since employees can decide if it makes sense to leave or not and get to walk away with pay and benefits, there tends to be a more positive environment around the layoffs. That's much better than employees being scared they could be called in at any moment for the dreaded pink slip.
- Lowers your labor costs. This is probably one of your biggest expenses and can be considerably reduced if employees choose to leave. Do you need an easy way to see how much you're spending on every employee? Or team? You can see your labor costs in real-time with payroll and workers' comp app Hourly.
- You're left with a dedicated group of employees. After all, they decided to stick around.
- You're less likely to face discrimination or wrongful termination lawsuits. Since employees elect to go, you're reducing the risk of lawsuits. You're not choosing between specific team members, but rather offering something many different employees can take advantage of.
- The public views these types of layoffs more favorably. By letting employees decide if they want to stay or not, you're showing you care about their well-being. Those who need or want to keep their jobs can—and you won't be cutting off anyone's livelihood unexpectedly.
Drawbacks of Voluntary Layoffs
While this workforce reduction offers some benefits, there are still downsides.
- The employees who accept the package may not be the ones you want to let go. In which case, you'll be losing valuable team members.
- They can be expensive. You'll need to create attractive severance packages to entice employees to leave.
- Could create an increased workload for employees who stay. That can lead to a lot of overtime and eventually put a damper on morale.
- You may need to do some company restructuring. For example, if you have multiple locations and are closing one of them down completely, you'll need to do some serious schedule work to ensure everyone who remains employed knows where to go and when they need to be there.
- If not enough employees volunteer, you may still have to do traditional layoffs. And by that point, you may not have enough money left in the budget to offer as enticing of a package for those employees.
But despite the drawbacks, if you manage the transition carefully, you can make sure you're still left with a balanced workforce. To help keep things running smoothly, spend as much time planning as possible and think through the restructuring. That way, you're ready to move forward immediately after the layoff event. You'll also want to work closely with your HR department and legal counsel to ensure you're doing things fairly.
Do Voluntary Layoffs Actually Work?
Reducing your payroll costs can effectively save money and keep your company in the black financially. But as a business owner, you're probably wondering if doing so on a voluntary basis works.
The answer is yes, sometimes too well. Stronger employees tend to be more confident in their ability to find a job, and more of them may take the voluntary layoff than you'd like. Then, you'll be left with lower performing team members.
If, however, your employees share similar skills and strengths, then you can cut down on labor costs pretty quickly and still preserve your team's ability to function. But you have to make sure your severance package is enticing. For it to work, it needs to provide enough incentives to team members so they're willing to accept the offer.
If you do it right, you can save money without having to go through the negative effects of picking who stays and who leaves.
What's an Attractive Voluntary Layoff Package?
When it comes to these events, your termination package can make or break your offer. That's why these voluntary separations are often called "buyouts."
You know your team best, so you likely know what would motivate them to say yes. Your package might include a combination of the following elements:
- A lump sum severance payment or severance pay for a set number of months—usually five to six months' worth of salary. Ideally, it would be long enough for team members to take a breather and then look for a new job that's the right fit. When Verizon offered voluntary severance packages back in 2018, employees got three weeks' worth of pay for every year they'd spent with the company, up to a limit. FYI—Government agencies are authorized to offer up to $25,000 as a lump sum payment.
- Healthcare benefits for a certain period of time, such as six months or a year.
- Outplacement services (job-seeking assistance such as connections with recruiters, resume help, and career counseling).
- Vacation and other paid leave balances.
- Assistance with relocation expenses.
The Small Business Guide for Handling Voluntary Layoffs
There's no process set in stone for voluntary layoffs, but here's a guideline you can follow to make sure your business doesn't make any faux pas.
Step 1: Talk to the Human Resources Department
The HR department is going to be your lighthouse during this process. They'll make sure your company complies with all laws and coach you on the best path to communicating the separation package to employees.
A good HR team also makes sure everything is handled professionally. The last thing you want is to make sailing through your layoff process rougher than it has to be.
No HR department? No problem. Instead, you can reach out to an employment lawyer who specializes in labor law. They'll be able to help you navigate the legalities of this process.
Step 2: Create Attractive Severance Benefits
We discussed these above, but just a reminder—you'll want to offer a lump sum or payout over several months (usually about five to six months' worth of salary) and healthcare benefits.
Also, think about what other perks or benefits would make employees consider accepting the package and how much you can afford to provide.
Step 3: Develop a Clear Communication Plan
Once you have all the details, it's time to talk to your staff. They deserve a clear, concise explanation of the situation and what it means for them.
You'll want to discuss the following (probably in a company meeting):
- Why the company is taking this step.
- How being laid off is different from being fired. The employees who choose to leave haven't done anything wrong, and you feel no ill will toward them.
- The severance pay details, eligibility, and how employees can apply.
- Whether employees who decide to leave can apply for unemployment benefits. Some states allow for this, so make sure your team is aware of their options.
- A clear timeline. Let everyone know how long they have to think about their decision and if there's any time for them to change their minds afterward.
If your benefits vary based on employee type or length of time with the company, explain that they can come by your office (or HR) to discuss individual offers.
After saying all that you want to say, leave space for any questions your team may have.
Step 4: Be Prepared for Emotional Responses
This is a difficult time for everyone involved. Even if it's voluntary, an employee may be leaving a job they are passionate about and part of their life for many years. So, showing empathy and compassion is a must throughout this process.
How? Speak positively about exiting team members and offer to write a letter of recommendation or endorse them on LinkedIn. Have an open door throughout this process, so people who are considering separation can talk with you about it. You may also consider bringing on a counselor to meet with anyone who wants this service.
Before Going with Voluntary Layoffs, Consider These Questions
When deciding whether or not to go this route, there are some key considerations you should take into account. So, before you make a decision, ask yourself:
Why do you think this is a good option?
- Are you thinking about going with this route so you don't have to decide which employees to let go?
- Or, do you have some quiet quitters in mind you're hoping will jump on the deal?
If you have specific employees in mind that you're hoping will choose to leave, it might be better to have a traditional layoff so you have more control over the exiting team members. Otherwise, you may feel resentment if those you want to go choose to stay.
How will you feel if you lose your top talent?
The employees you're hoping will leave aren't always the ones who take you up on this offer. Can you be supportive of any eligible team member who chooses to leave?
Are you able to offer an enticing separation package?
- What can your company legitimately afford to offer exiting employees?
- Will you include health insurance benefits or job-seeking services?
Companies typically offer four to five months' worth of salary to those leaving, as well as healthcare benefits. That doesn't necessarily mean you have to do that, but if your package won't sustain team members long enough for them to look for a new job—and choose the right fit—you might have a hard time convincing them to go.
What state laws dictate layoffs?
Do you need to give employees advance notice of the termination, or can you just offer them the package without much prior warning?
What's your timeline?
- Once you announce the event, how long do employees have to make a decision?
- Is there any wiggle room for negotiations if they want bigger benefits?
- When is the last day of work for these employees?
- What's the effective date for their COBRA or other benefits?
The process will go more smoothly if you figure out these details upfront.
- Will you require employees to have worked a certain amount of time to qualify?
- Or, do they need to work certain shifts or be a specific type of employee, such as those in the manufacturing department or a cashier?
What restructuring needs to be done afterward?
After some employees leave, you'll need to make sure your company can still do everything that needs to be done.
- Will you need to hire some part-time or temporary personnel to ensure this happens?
- Or are you going to shift your remaining employees around to get the coverage you need?
- If there is restructuring, how might that affect your employee morale and engagement?
What other options do you have?
Laying people off isn't always the right solution. So be sure to consider other alternatives, such as a temporary dismissal, reducing hours, furloughs, or implementing a hiring freeze.
A furlough is a temporary, unpaid leave of absence for employees. However, it's expected that, eventually, this worker will be back on the payroll. During a furlough, employees might continue to receive health insurance or other benefits. If you just need to cut payroll costs for a short time, it might be a good option.
Shared work may also be available in your state. It's where employees work fewer hours and collect unemployment for the remaining hours to help make up the difference. It allows you to keep trained personnel on your payroll, so you can quickly grow your team again when your business picks back up.
Besides staffing decisions, take time to explore other ways to reduce costs, like renegotiating contracts with suppliers and vendors.
What Does a Good Voluntary Layoff Policy Include?
Before you announce your voluntary separation program, you need to create a policy that outlines how this layoff is going to happen. This gives you a written document to follow and helps ensure you're following employment laws. Once you've drafted this policy, have a lawyer review it. This step can go a long way in protecting your company from a lawsuit.
Here's a look at the components your policy should have:
- Reason: What are your goals with this event? Are you trying to reduce your workforce by a certain percentage or cut costs by a specific factor? This will help soften the blow for employees by showing them it's not about their individual performance.
- Glossary: The vocabulary related to layoff events may not be understood by all of your employees. This section explains all of the terms (such as voluntary layoff and severance pay) in easy-to-understand ways.
- Eligibility: Specifically, which employees are eligible for this voluntary separation? Do they need to work in a specific part of the company or have been employed for a certain number of years?
- Process: What steps do employees need to take to either accept or deny the separation? How long do they have to think about it? Is there any time to reconsider if they change their mind? Spell out the procedure for your team so everyone knows what to expect.
- Procedures: Once a team member decides to leave, what do they need to do? Who do they need to notify? How much longer do they need to report to work? Can they accept a different position during that time frame?
- Documentation: Paperwork is essential when making any kind of personnel decisions, and this one is no different. Your policy should include the forms your separating employees will receive and list the documents you'll keep for the company records.
While your employee handbook might have a generic voluntary separation policy, you'll want to update it for each specific event. This way, you have everything lined up to help the process go more smoothly.
What If Not Enough People Decide to Go?
Of course, there's always a chance that not enough people will take the voluntary offer and you'll have to resort to traditional layoffs in the future.
If that happens, it could leave employees who opted not to leave feeling disgruntled, especially if the traditional package isn't as generous as the one that was initially offered.
The best way to avoid this scenario from happening is by doing your research beforehand and predicting how many people will take you up on the offer. You may wind up being off in your calculations, but all you can do is your best. Sometimes, these programs just don't work out like you thought they would.
Letting Employees Go Is Never Fun
Voluntary layoffs can be difficult for any business, but sometimes it's the right path forward. If you need to let people go, take the necessary steps to ensure the process is carried out professionally, legally, and compassionately. This helps minimize the impact on employee morale and helps the transition go more smoothly.
The most important thing is to make sure all your employees understand their rights and what options are available to them. Then, with clear communication, sympathy, and attractive severance packages, you can ensure your team's morale doesn't decline drastically during this difficult time.