Benefits and Compensation

Layoff, Furlough, or Pay Cut: Which Is Best?

When you’ve trimmed all the fat you can trim from operations and marketing and the budget still isn’t balanced, companies have to turn to labor costs. But what’s the best option? There are advantages and disadvantages to each.

Hiring Freeze

Instituting a hiring freeze is an almost knee-jerk reaction in many organizations. But there are some problems:

  • The freeze is unpredictable. It depends on employees choosing to resign or retire. As a  commentator on www.city-data.com points out, with a bad economy, fewer want to quit, so the hiring freeze becomes less effective.
  • No one can institute a true freeze. No matter how fervent the company is, some positions will have to be replaced because the company can’t run without them.
  • You can’t control who leaves. If it’s mostly key people that leave (and they are the most likely to find other opportunities), that’s a double whammy—you’re losing good people and you have to violate the freeze to replace them. With a layoff, you can retain those key workers.

Furlough

A furlough is generally defined as a temporary, forced unpaid leave.  This might be a week, or it might be Fridays for a period of time. Furloughs don’t produce the amounts of savings as layoffs do. You’re typically not reducing benefits costs, and you can’t reduce hours below the number required to qualify for benefits.

Furloughs do produce predictable savings, however. And you are less likely to lose top people.


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Layoffs

A layoff is a more permanent reduction in force. In most circumstances, legally, there’s no difference between a layoff and a termination, although there may contract obligations that define layoff return rights.

Laying off is also more cost effective than furloughs or wage reductions. If you reduce wages by 3%, your labor costs are reduced somewhat less than that because the company is still paying benefits. As www.city-data.com notes, when you lay off 3% of the labor force, the company will save not only on wages and benefits, but additional dollars by disconnecting surplus phone lines, office equipment, software licenses, etc.

What Do Employees Prefer?

According to a Library Worklife poll, when asked whether they would accept a pay cut to avoid a layoff, about 90 percent of respondents said yes.

However, most changed their answer as the percentage of the pay cut rose. Most would accept a 5 or 10 percent pay cut, but considerably fewer were ready to take a 15 or 20 percent cut.

When asked about their reasons, many respondents stressed the importance of loyalty to one’s institution and co-workers. One respondent stated “that to keep any business going the employees should be willing to do anything to help. If that means taking a pay cut, then that is what it takes.”

Another respondent agreed, but with the caveat that the workers should be able to examine the company budget so they could assure themselves that the cuts were truly necessary.

Other respondents wanted the company to guarantee that if they took pay cuts, so would top management, and that no one would receive a bonus. Another wanted company cars returned and travel curbed.


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Another finding of the survey was that some employees said they would accept the pay cut, but would immediately start looking for a new job.

Respondents to a similar survey by MSNBC.com were less likely to accept a pay cut, says library Worklife. Only half of those surveyed by MSNBC (46.4 percent) would definitely accept a salary decrease, compared to 90.3 percent of respondents to the Library Worklife survey, and nearly a quarter of MSNBC’s respondents (23.8 percent) would rather give up their jobs than accept a pay cut.

In tomorrow’s Advisor, legal entanglements around layoffs, plus an introduction to a timely webinar that goes in-depth on this issue.