Deciding to terminate an employee is never easy, and it only becomes more difficult and complex when organizations must eliminate multiple employees. Mass layoffs are common when organizations downsize. Organizations downsize for many reasons, but it’s most common during times of market volatility or poor financial performance. Whatever the reason, successfully downsizing can be challenging and is rarely risk-free. It can have a lasting impact on an organization and its reputation. However, a strategic and careful approach to downsizing can mitigate potential damage and put a struggling organization on the road to success.

What Is Downsizing?

Downsizing is the process in which organizations reduce their operational costs by reducing headcount. This may include reducing the workforce’s size by offering voluntary separation or early retirement programs, closing facilities or involuntarily terminating employees through layoffs.

Why Do Organizations Downsize?

Organizations downsize for many reasons, including the following:

  • Cost reduction
  • Improved efficiency
  • Increased profits by reducing overhead
  • Technological advancements
  • A recession
  • Industry decline
  • Mergers and acquisitions
  • A national disaster or crisis
  • Industry competition
  • Market trends

Depending on the organization and industry, employee compensation and benefits can sometimes account for at least half of an organization’s total operating expenses or, in some cases, even more. As such, many organizations reduce headcount as an effective and immediate way to cut costs.

Approaching Downsizing Strategically

Due to the complexities and potential risks involved in downsizing, organizations need to be strategic and organized about their approach. Downsizing is rarely risk-free, so careful planning can help identify and address concerns and potential issues. Employers must plan to manage their remaining employees and proactively address potential morale issues. In addition, they also need to consider how best to deal with benefits administration, reference requests, employment verification, unemployment insurance claims, and potential lawsuits from former employees.

Organizations also need to consider the costs associated with their decision to downsize. This may include effectively addressing decreased employee productivity, talent loss, future hiring challenges, and the costs of early retirement and severance packages.

Considering Layoff Alternatives

Layoffs are not the only option for employers seeking to reduce costs by decreasing headcount. Before resorting to layoffs, an employer needs to evaluate the potential consequences of downsizing. Employers need to ensure the value created by streamlining the organization outweighs potential risks, including legal liabilities, reputational damage, and decreased employee morale. Employers may want to consider the following alternatives:

  • Job sharing
  • Furloughs
  • Reducing employee pay, benefits, or job perks
  • Hiring freezes
  • Contract or temporary employees
  • Part-time employees
  • Shortened workweek
  • Voluntary separation or early retirement programs
  • Reductions in force
  • Wasteful practice elimination or reduction (e.g., high-cost travel and free employee meals)

Successfully implementing an alternative—or a combination of alternatives—requires planning. In some situations, alternatives may be more effective in helping employers achieve their organizational goals than layoffs.

Choosing Which Employees to Layoff

Downsizing typically requires employers to decide which employees or groups of employees to terminate. Many organizations establish criteria for selecting which employees to lay off. Common selection criteria may include:

  • Seniority
  • Employee status (e.g., full-time, part-time, or contingent)
  • Merit
  • Skills

In many situations, relying on a combination of criteria can be the most effective approach. Employers opting for this approach can rank the criteria based on their organization’s goals, needs, and values. Choosing objective criteria when letting employees go can sometimes help protect employers from federal, state, and local violations.

When organizations downsize, employers must notify impacted employees that they’re being laid off. Sometimes employers are legally required to provide notice under federal, state, and local laws. Clear communication keeps employees informed about what’s happening and can help organizations rally employee morale and productivity. In most situations, layoffs are permanent, but sometimes employers may rehire employees after restructuring. If layoffs are permanent, employers can provide employees with adequate time to search for new work or receive training to reskill. If layoffs are temporary, offering employees details about anticipated timelines for returning can help them plan for when they will be without work.

Selecting which employees to lay off may bring other changes, such as being forced to close facilities or consolidating locations or departments. An organization’s day-to-day operations may need to change as well. In some situations, employees may need to take on new roles and responsibilities to compensate for fewer employees.

Understanding Potential Legal Risks

Employers need to consider legal risks when downsizing. Terminating a single employee can present a host of legal issues, but downsizing multiples that risk with each additional employee that’s let go.

When deciding to downsize, employers must consider the various federal, state, and local laws and regulations that employee layoffs may trigger. Typically, employers need to consider the following federal laws and regulations:

  • Worker Adjustment and Retraining Notification Act
  • Title VII of the Civil Rights Act of 1964
  • Age Discrimination in Employment Act of 1967
  • Older Workers Benefit Protection Act
  • Fair Labor Standards Act
  • Family and Medical Leave Act
  • Uniformed Services Employment and Reemployment Rights Act
  • Employee Retirement Income Security Act of 1974
  • Consolidated Omnibus Budget Reconciliation Act
  • Health Insurance Portability and Accountability Act of 1996

In addition, employers may need to review state laws or local requirements regarding unemployment insurance, severance pay, accrued and unused paid time off, vacation pay, sick or other leave, and personnel records.

This article only provides an overview of potential legal concerns resulting from downsizing and an introduction to some of the applicable laws. Employers are encouraged to seek legal counsel to discuss specific issues and concerns.


It’s in an organization’s best interest to ensure that downsizing is done competently and efficiently. Organizations can accomplish this through planning properly and understanding the various options and risks. Downsizing may be necessary for some organizations, but the right practices can mitigate risk and set an organization up for long-term success.

For more workplace resources, contact SouthGroup Insurance Agency.


This HR Insights is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice. © 2022 Zywave, Inc. All rights reserved.