Layoffs are an inevitable part of every business cycle and represent one of the most challenging and delicate actions organizations can take. They come with risks that, if not appropriately managed, can jeopardize the organization and its prospects for success.
Reducing headcount may lead to operational disruptions, especially employees who are retained must manage increased workloads, which can strain productivity and delay critical projects. The loss of institutional knowledge can hinder continuity in workflows and decision-making, impacting both short-term performance and long-term strategic goals. Employee morale can also take a significant hit, leading to disengagement, increased turnover, and difficulty maintaining collaboration and innovation.
Legal and financial risks are also prominent, with potential wrongful termination lawsuits, discrimination claims and compliance violations under various labor laws. Severance packages and other associated costs can add significant financial burdens. Additionally, layoffs can damage corporate reputations, making it harder to attract and retain top talent as candidates may view the company as unstable or lacking loyalty to its employees. The company’s brand may also suffer in the eyes of customers, investors and partners, leading to lost business opportunities and weakened competitive positioning.
Effective risk management during layoffs requires transparent communication, legal due diligence, support for departing people, and a focus on maintaining the morale and engagement of remaining employees. The following are some steps organizations can take to mitigate layoff risks:
Clearly Communicate with Necessary Parties
The first step in managing layoff-related risk is transparent communication with stakeholders. CEOs should share the reasons behind the layoffs with their employees, the criteria used for making decisions and the organization’s future direction. Transparency helps to mitigate the fear and uncertainty that often accompany layoffs. It is essential that leaders communicate openly and honestly, providing as much information as possible to prevent misinformation and speculation.
The reality is that business needs, not individual performance, drive most widespread layoffs. Clearly articulating this can ease employee concerns and help people within the organization rally around the reasons behind these decisions.
Leaders should proactively communicate with customers, investors and business partners about the rationale for layoffs and the company’s plans for recovery and growth. This helps reassure stakeholders that the company remains stable and committed to its goals, reducing the risk of lost business or diminished investor confidence.
Support Departing People
A clear, compassionate layoff strategy should extend to comprehensive support for departing people. Providing such support reduces risk to the business and helps protect the organization’s reputation. According to Harris Insights and Analytics, 80% of employees said that receiving career transition support would make them less likely to speak negatively about a previous employer.
Legal risks can also be a significant concern during layoffs. The U.S. Equal Employment Opportunity Commission (EEOC) reported over 61,000 discrimination charges in 2021, many related to layoffs. Organizations must ensure compliance with all relevant laws and regulations to mitigate these risks. Further, making outplacement resources available to departing people can materially reduce legal risks, with the Center for Organizational Research reporting a 72% decline in legal action by displaced employees for employers using outplacement services.
Support for people transitioning out of a company has traditionally been inflexible, expensive and hard for people to engage with. New outplacement support technology can provide a broad array of tools and services that organizations can tailor to their needs and resources. As part of a severance package, these resources give departing people greater autonomy over career coaching, resume writing assistance and access to reskilling services that can aid in their transition to future opportunities. Organizations providing outplacement support to laid-off employees experience increased goodwill and can see a reduction in litigation risks.
Future-Proof Employee Skills
The loss of institutional knowledge and expertise brought about by layoffs can hinder an organization’s ability to execute its strategy and achieve its goals. According to Harvard Business Review, organizations that cut staff by more than 10% can see a 15% to 20% decline in productivity. To mitigate these risks, organizations should commit to reskilling employees to meet future demands brought about by technology, market forces and changing business needs. Employees may need to take on broader responsibilities post-layoffs, making agility and adaptability key skills. Enabling continuous learning sets up employees for success, preparing them to handle various tasks and adjust quickly to shifting priorities. A focus on digital literacy is essential, and providing training in key areas like data analysis, artificial intelligence and automation equips employees to work efficiently with new tools, adapt to the digital changes in their roles and can help prepare them for the jobs of the future. These jobs will certainly require different skills—the World Economic Forum predicts that 50% of employees will need reskilling by 2025 due to technological advancements.
Managing risk during layoffs requires a strategic and holistic approach, prioritizing transparent communication, legal compliance, operational continuity, and comprehensive support for affected and remaining employees. By focusing on these key areas, organizations can navigate the risks associated with layoffs while maintaining stability, engagement and resilience.