One of the worst parts of being a manager is occasionally having to lay people off. While I have no problem terminating people who have done something to deserve it, after 35 years in business, I still lose sleep over laying off good people and who we simply can't afford during a downturn. Fortunately I've only had to do this four times in 35 years, but it's never easy. However, not doing it when needed results in far worse consequences. Over the years I have seen too many companies go out of business because management was too goodhearted. Instead of some people in the company losing their jobs, everyone lost their jobs, and in some cases the owner lost his home and everything else he had worked for over the years. Which scenario is sadder? As an entrepreneur I won't hesitate to tell you that the latter scenario is much more disconcerting to me.

When do you lay people off? Most people do it later instead of sooner. Why is this? Well, from first-hand experience, I know that aside from the humanitarian reasons for not wanting you do a layoff, one of the other main reasons is those of us who own businesses spend a lot of time interviewing, hiring, and training people. Therefore, we are all loath to lay people off in whom we have made a big investment. I do like to wait at least two or three months from the beginning of a downturn to ensure that the decrease in sales is a trend and not just a blip. To lay people off after just one bad month is too reactive, but to wait six months or more is too long. I've generally waited to do layoffs until we've had three consecutive bad months, and when industry forecasters say it's not going to get better anytime soon.

Another reason to lay people off is that most of us who own businesses have bank loans. With bank loans come loan covenants, which are rules that, if broken, can cause the bank to call your loan. I will admit to having broken loan covenants in my career but when I have done so I have quickly met with my lender to explain what happened and how I am going to get back in compliance with the covenants. Bankers don't want to see pie in the sky projections of sales increases getting you back in compliance with covenants. Sales increases may or may not happen. During a downturn, they probably won't happen. However, overhead reductions are guaranteed. Nothing makes a banker feel more comfortable about waiving a covenant violation or redoing your covenants like a definitive plan to lower overhead enough to get back in compliance with covenants.

Who do you lay off? Well, unless your business is unionized, I recommend that you don't do it by seniority. We lay off people based on the following criteria:

  • Hiring mistakes. We all make hiring mistakes that we rationalize during good times. When I begin to make a layoff list the first group of people I look at are people that, after having been on board a while, I wish we had never hired. This is your opportunity to rectify hiring mistakes. Don't let it pass.
  • People with bad attitudes. I don't think any of us in management knowingly hire people with bad attitudes but, some people who fool you during the interview process surface rather quickly after coming on board. Bad attitudes rub off on everyone else in the company to varying degrees. People with bad attitudes can be dangerous to your business in good times but I submit to you that they can be lethal in bad times.
  • Poor performers. Some people never come up to speed the way you hope they will when you first hire them, and some people have their performance degrade over time for a variety of reasons. You can't afford poor performers in good times and you really can't afford them during bad times. Here is your opportunity to let them find a new career.
  • New people who have not yet come up to speed. Laying off people in this category can be hard because sometimes you are convinced that they are really going to be top performers in one -three years. However, during bad times you simply can't afford the luxury of letting them come up to speed. However, this is the first group of people I call back when business improves.

How do you lay people off? Many years ago a mentor of mine told me that you should do all of your layouts at once, similar to pulling a Band-Aid off all at once instead of one hair at a time. When you lay off people one at a time over a period of months, everyone is nervous and looking over their shoulders and not doing their job. Even worse your best performers start to look for a new job while they are still employed. I have found it to be best to cut deeper than you think will be necessary and to do it all at once. Then hold a company meeting or, if you have multiple locations, do a conference call immediately thereafter, and let everyone know that you don't envision the other shoe dropping. Let them know that you have laid off all the people that you think you will need to cut to get through the downturn. I have even, in some cases, given a 5 or 10% raise to the remaining associates, out of the savings from the layoff, to compensate them for having to do more work. Nothing tells an associate that their job is not in jeopardy like giving them a raise right after a layoff.

What day of the week is best to lay people off? This is also hotly debated. I have found that it's better to lay people off at the beginning or middle of the week that the end of the week. If you lay people off then they can immediately start looking for a job but if you lay people off on a Friday they generally can't start networking and interviewing until at least the next week. Instead, they stew over the weekend and become even more bitter.

Should you provide severance and/or outplacement counseling? Unless your business is in such poor shape that you simply can't afford severance, I think that severance should always be given for humanitarian reasons. How much severance to give is a matter of what you can afford and how long each person has been with you and how high up they were in your organization. The higher someone's income, the longer it takes him or her to find a new job so I tend to give more severance to people at higher levels and people who have been working with me for the longest period of time. I almost always also give outplacement assistance to people who were higher up in the organization because, again, it is harder for them to find a similar job. Outplacement counseling generally isn't outrageously expensive and nothing helps to salvage a relationship with the person you've laid off than helping him or her find a new, and in some cases, better, job in the shortest time possible.

Also, your remaining associates look at how you treat the people you lay off. If you treat them fairly and humanely it sends a strong signal to your remaining associates that you didn't take this action lightly or cavalierly.

Should you give reference letters to the people you lay off? If people are laid off rather than terminated for cause, I have no problem providing a reference letter, upon request. If that will help the laid off person get a new job sooner, rather than later, I am happy to do so.

In summary, layoffs are never fun but not laying people off when times call for it is even worse. My advice is to do it quickly but humanely, and the impact on the morale of your remaining associates will be minimal. And remember, you're not taking advantage of a small percentage of your workforce, you are protecting the jobs of the majority of your workforce. Failure to do a layoff has had disastrous consequences for many people I have known over the years. Don't let it happen to you.

Jim Sobeck is president of New South Construction Supply, West Columbia, S.C. This article originally was posted on Sobeck's Biz 101 blog. Copyright 2010 by Jim Sobeck. All rights reserved. This information may be reproduced as long as full credit is given to the author.