How Do Companies Decide Who to Layoff? A Closer Look

Introduction: Understanding How Companies Approach Layoff Decisions

Layoffs are a challenging and often distressing process for both employees and employers. They are typically a last resort for companies facing financial difficulties, restructuring, or shifting strategic goals. 

The decision-making process behind How Do Companies Decide Who to Layoff involves several factors and considerations to ensure that the process is as fair and strategic as possible. 

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Here’s a detailed look at how companies decide who to lay off:

How Do Companies Decide Who to Lay Off? Exploring the Key Factors Behind Layoff Choices

Everyone in a company finds layoffs painful. They take a lot of time and are sensitive. Layoffs are very difficult for the HR professionals who have to implement them, even though it may not seem like it to the employees.

This is particularly true when HR personnel remove close friends or family members. After all, there are weeks when we spend more time at work than with our own family. 

Establishing strong relationships and trust with employees is another common aspect of the HR role. It follows that this could be a challenging task for a human resources specialist.

One of the most important things that you can do to get ready for a layoff is to think logically. Focusing on who you will be firing and why is one of the finest strategies to stay cool under pressure.

The process will become simpler if you comprehend the reasons behind and methods used by those who are being laid off. You’re not a mindless robot, so it might still be difficult, but this will help you understand it more mentally. which will ultimately facilitate your explanation to the employees you are terminating.

Selecting which employees to fire is challenging for the firm as a whole as well as for individual HR. When layoffs are implemented, there are many factors involved.

Considerations include long-term viability, productivity, general company morale, and legal liability. Learn more about how professional services can assist in maintaining business communication during tough decisions in our article on Unlocking the Potential of Professional Email Hosting.

So How Do Companies Decide Who to Lay Off? 5 Common Methods Companies Use

With all of these variables in mind, how do you decide who gets let go? You can decide who will be let go using a few standard techniques. Among these are:

• Seniority-Based Selection
• Employee Status-Based Selection
• Merit-Based Selection
• Skills-Based Selection
• Multiple Criteria Ranking

Every approach has disadvantages and what works best for a given organization will not always be the same. After discussing each approach with your executive team, you must decide what to do depending on your overarching objectives.

Let’s now examine each of these techniques for choosing employees to determine the best layoff plan for your company based on their advantages and disadvantages. To get more advice on how to efficiently reduce your assets, you can also obtain our free copy of the Essential Guide to Handling a Layoff below. 

Allow us to support your business in determining which staff to fire and how to send them off politely.

1: Selection Based on Seniority: Why Experience Often Plays a Role in Layoffs

Among the easiest approaches is this one. The last workers employed end up becoming the first laid off. This is logically consistent. They most likely have yet to develop into as potent organizational assets as they may have if they were hired recently. Perhaps you could even argue that the company was operating successfully before it began operations, no matter how many days or weeks before.

One more fantastic advantage of this approach? It may be able to shield you from lawsuits for age discrimination. This approach significantly reduces the danger of hurting your organization’s more senior, tenured employees, as they won’t be let go.

This approach has a lot of benefits, like simplicity and a lower chance of age discrimination, but certain drawbacks need to be discussed.

First off, just because someone has recently joined your company doesn’t indicate that they aren’t a valuable member of the team. 

For example, the VP of Strategy you recently appointed is a valuable asset to the business. She is an experienced industry professional. Thus, there are many exclusions, such as this one, which could cast doubt on this approach.

The notion that you are not always impermeable from perhaps offending against other protected groups merely because you are less likely to discriminate based on your age is another flaw. It’s crucial to consider these possible problems while applying this seniority-based layoff selection process.

2: Selection of Employees Based on Employment Status: Full-Time vs. Part-Time Considerations

Giving your full-time staff more security is the main goal of this practice. Employees who are not considered full-time employees, such as contractors and part-timers, will be let go from your company, with preference given to those who are. 

This approach is ideal for businesses trying to minimize their legal risks because contingent workers are not subject to the same laws that apply to full-time employees.

It’s also encouraging to see that the majority of people in the public know the difference between firing a contractor and firing a full-time employee. Although firing a contractor might not be beneficial for your company’s reputation, it is less harmful to your employer brand than firing a full-time employee because it is easier to understand.

Although the mentioned benefits of this approach are undeniable, there is one significant disadvantage. This approach undervalues the impact that your contract employees have on your company as a whole. It’s simple to think that your contract workers are not as important as your permanent staff, but you may not be aware of this.

A full-time employee (FTE) who is performing less than the work of one full-time role and a contract-to-hire worker who is shouldering the responsibilities of three separate roles could be present. Which layoff would therefore hurt the company more? These kinds of exclusions have the reverse effect if the goal of reducing is to increase efficiency.

Ultimately, throughout the past few years, a lot of companies have relied more and more on contingent labor. In certain situations, it appears logical to outsource entire teams to specialized companies. 

This employee status-based layoff selection strategy might not be appropriate for your business if a significant portion of your workforce consists of these categories of individuals.

3: Selection According to Merit: Performance and Productivity-Based Layoffs

One of the most widely used processes used by businesses to determine who needs to be laid off is this one. And with good cause. It supports managers in eliminating underperforming staff members to prevent the loss of important company assets that they could terminate through other means.

But there are a few warnings that should not be neglected. First and foremost, a robust performance evaluation system must be in place for this strategy to be effectively executed. 

Performance reviews are frequently not conducted regularly and aren’t objective. When managers make layoff decisions without enough documentation, it can result in significant legal exposure.

Leaders must also be mindful of how different teams perform from one another when using this strategy. Because several teams can show a wide variety of performance behaviors, it might not be wise to fire three members of each team within the company.

Do you wish to terminate three members of your highly effective product development team and three members of your underperforming communications team, for example? That would be logical. In the communications department, you would want to get go of the low performers and retain all of the top performers in product development.

That sounds easy enough, but it may be very challenging to accomplish this kind of cross-departmental communication and collaboration, which can result in several situations similar to the one mentioned above. likewise, the merit-based approach ignores the sections of a firm that have more impact than others. 

If your only profitable team has employees, why would you remove them? When determining who and how many employees to promote within each department, these factors must be taken into consideration. For more up-to-date articles, check out articles like Why Accessibility Is Essential for Websites.

4: Selection Based on Skills: The Importance of Relevant and Adaptable Skill Sets

This approach considers the problem of keeping the workers who possess the abilities most critical to the organization’s performance, as covered in the preceding section.

Your executive team needs to have a thorough understanding of what makes your firm successful to implement this process. Is it what you do for customers? Your powerful technology? Your innovative product? 

An excellent method to approach this is to consider the consequences of eliminating a department as a whole. or if the department was reduced by half. That is a highly skilled department if this influence is so severe that it causes your business to cease operations.

Also, this approach demands that middle-level managers provide their bosses with information regarding which teams have highly talented workers and which ones may be reduced.

For example, to evaluate the business impact, a media organization that produces material about sports in general would need to consider the various verticals and content formats. 

It would make sense to give your basketball content team’s skills more weight than your hockey analysis if your hockey content team generates all of your sponsorship and advertising money while your basketball content team generates the least amount of revenue per cost of human capital.

This approach appears to be excellent, yet it has a significant flaw. It can make it easier for your company to discriminate against older employees. When employing this strategy, more senior employees are frequently let go because younger employees have more advanced skills.

An engineer who recently graduated from college, for example, might be more fluent in numerous programming languages than an experienced engineer. This will be particularly true if personal growth hasn’t been your company’s strongest suit. 

Your leadership team should examine deeply whether the organization’s use of a skills-based layoff selection process would be negatively affected by the tenured staff members’ lack of personal growth.

5: Ranking Based on Several Criteria: How Companies Use Multiple Factors to Make Layoff Decisions

Of all the approaches, this is the most challenging, but it’s also perhaps the most successful. It involves creating a list of decisive elements with varying weights. Each person is then given a scoring system based on this methodology. The lowest-ranking employees are let go in that sequence until the company reaches its financial targets.

With this approach, you may combine all of the previously mentioned approaches into a single, reliable formula that is tailored to your company. 

For example, you may wish to place more value on an employee’s abilities and merit and less value on their position and seniority. To help you create a model that will enable you to ascertain an employee’s score as efficiently as possible, we advise consulting with an HR data analyst.

For more guidance, check out our article on How to Fire a Client Who Doesn’t Respect Your Work.

Let’s Examine an Example: A Breakdown of Layoff Selection Methods

After you are aware of all the approaches and their pros and cons, let’s discuss an example to put your newfound understanding to use.

This is the current state of affairs: You work for a modest manufacturing company as an HR executive. Your CEO tells you that to recoup your human capital costs of $1.5 million, you will have to fire enough employees. Let’s go over each employee layoff selection process’s possible outcomes in this case.

1: Selection Based on Seniority: Practical Application in Layoff Scenarios

You would examine each of your employees according to tenure using this strategy. Until you reached your 1.5-million-dollar savings target, you would work your way backward, starting with the most recent hire. However, if you have just added new staff to one of the few profitable departments in your company, this approach may not be effective.

2: Selection Based on Employee Status: How Employment Type Impacts Layoff Decisions

Creating a list of every contingent employee and then terminating them would be the first step in carrying out your layoff with this approach. There are many flaws with this approach, though. What happens if you don’t have enough temporary employees to save the $1.55 million? 

Or what happens if you hire too many contractors and surpass this savings target? To achieve your ultimate savings target in each of these scenarios, you would need to combine this process with an additional strategy.

3: Selection Based on Merit: Evaluating Employees Through Performance Metrics

In this case, you would review past performance reports to let go of underperforming staff members. Making a list of the worst-performing staff members, you would then go backward in ascending order until you reached the 1.5-million-dollar threshold. 

This approach is quite effective provided your performance review system is strong. If not, it may be challenging for managers to accurately evaluate their employees while facing impending layoffs. Make sure your managers are fully informed of the requirements if you ask them to complete this task. 

These performance standards for this specific situation could be:

• Manufacturing is conducted by employees with few to no faults.
• The employee doesn’t have any issues with attendance.
• The employee is well-versed in manufacturing technologies.

4: Selection Based on Skills: Prioritizing Employees with In-Demand Skills

Although this approach is among the most difficult to implement, when done right, it may be the most beneficial to your company. In this case, you would need to discuss the most important aspects of your firm with your executive team.

For example, all employee partners involved in this process should be protected from layoffs if manufacturing product A has the greatest impact.

The manufacturing company would be best served by using this practice if they have a product or process that is losing money faster than it is making. (Consider a corporation that sells computer hardware and continues to market floppy disks.) 

However, the business might need to combine this strategy with another tactic if it just has a small number of workers with abilities that they wish to keep. 

For example, to reach the 1.5-million-dollar savings target, the manufacturing company could keep trying to engage all personnel in Product A while using the merit-based strategy for the remaining staff members.

5: Multiple-Criteria Ranking: Weighing Multiple Factors for a Balanced Decision

The manufacturing executive would have to devise a formula providing different weights to different factors to apply this methodology. Less significant criteria should be given less weight in the calculation, while more significant criteria should be given more weight. Every employee would be subject to this formula. 

Afterward, the employee scores would be arranged in descending order. The lowest-scoring employees would be let go first, in that order, until the savings target was reached.

The HR executive in this situation could give weights to the subsequent criteria:

• Tenure at the company
• Value of skillset
• Potential for promotion and leadership
• The threat of competitor poaching
• Merit
• Employee status
• Impact of work

The manufacturing staff members would be ranked according to a scale for each of these characteristics. These ranks would be taken into account in the weighted calculation. The HR executive could then fire the workers who had the lowest scores.

Your legal and HR analytics departments should always be consulted while investigating various approaches. Layoff regulations vary from state to state, so you should always consult with these parties to make sure you comply.

Final Thoughts on Selecting Who to Fire: Ethical and Strategic Considerations

So how do businesses choose which employees to fire? 

If you are asking this question with an impending reduction event, you should be aware that this is a very tough and sensitive issue that requires careful consideration at every stage, from hiring decisions to communicating layoffs and both departing and remaining staff members.

You may choose which employees to let go of more wisely by using the employee layoff selection strategies offered here as a strong framework. These selection techniques’ main lessons are as follows:

• Seniority-Based Selection: Fire staff members who have worked for your company for the least amount of time. Its straightforward approach and support in preventing age discrimination are advantages. It may still be really basic and ineffective in helping you avoid other forms of discrimination.
• Employee Status-Based Selection: Terminate staff members following whether they are contingent or part-time workers. Once more, you may better safeguard your employer brand by implementing this simple technique. But it ignores the company’s reliance on contract labor, thus it could have to be combined with another selection technique.
• Merit-Based Selection: Fire your underperforming staff members. If you have performance reviews, this strategy makes it easy to terminate underperforming employees. However, there is a chance that performance reports will be biased, which could result in legal problems. Moreover, this approach ignores the varying significance of relatively high-impact departments.
• Skills-Based Selection: Fire individuals who don’t fit this description and keep those whose skills will have the most impact on your company. Positively, this keeps personnel focused on areas that increase the bottom line of your company. On the downside, it could expose your company to age discrimination and be challenging to attain the kind of cross-departmental cooperation required to make this work.
• Multiple Criteria Ranking: Use a weighted formula to identify the criteria that are most relevant to your company. Based on this method, fire employees who receive low ratings. It’s simple to adapt this approach to your organization’s priorities by changing its key components. It must, however, be thoroughly evaluated against the law against discrimination and may prove challenging to put up.

At ARZ Host, we think that being ready for a change as significant as a force reduction is essential. You can manage your impending reduction event with the use of our extensive library of layoff tools, templates, instructions, and outplacement services. 

To speak with one of our specialists and determine whether we are the ideal partner for your company, click the button below.

FAQs (Frequently Asked Questions)

1: What criteria do companies typically use to decide who to lay off?

Companies often use a combination of criteria when deciding who to lay off, depending on their specific goals and financial situation. 

Common factors include:

• Performance: Employees with lower performance ratings or those who have received negative feedback may be more likely to be laid off. Companies often retain high-performing employees who contribute significantly to business goals.
• Seniority: In some cases, companies may consider the length of service. However, seniority may be a secondary factor, especially if it conflicts with performance considerations.
• Skills and Experience: Employees with specialized skills or experience that are critical to the company’s plans may be retained, while those with redundant or outdated skills might be at higher risk.
• Role Redundancy: If a company is restructuring or downsizing, roles that are duplicated or no longer necessary may be eliminated.
• Business Needs: Companies may prioritize retaining employees who are essential to critical operations, ongoing projects, or future growth areas.
• Financial Considerations: If a company is under financial stress, it might focus on reducing costs by laying off employees with higher salaries or benefits.

2: Are layoffs determined solely by an employee’s performance?

No, layoffs are not determined solely by an employee’s performance. While performance is a significant factor, other considerations come into play. For example, even high-performing employees might be laid off if their roles are deemed redundant due to a company restructuring or if the business shifts focus to different areas. Additionally, external factors like economic downturns, mergers, or budget cuts can also influence layoff decisions, regardless of individual performance.

3: How do companies ensure fairness in the layoff process?

Companies aim to ensure fairness in the layoff process by following a structured and transparent approach. This typically involves:

• Clear Criteria: Establishing and communicating clear criteria for layoffs, such as performance, role necessity, and business needs.
• Objective Evaluation: Using objective data, like performance reviews and measurable achievements, to evaluate employees.
• Involvement of Multiple Stakeholders: Engaging HR, management, and legal teams to review layoff decisions, ensuring they align with company policies and legal requirements.
• Diversity and Inclusion Considerations: Companies may also assess the impact of layoffs on diversity and inclusion goals to avoid disproportionately affecting any particular group.
• Communication: Providing clear and respectful communication to affected employees and offering support, such as severance packages or job placement services.

4: Can employees predict if they might be laid off?

While predicting a layoff is challenging, there are signs employees can watch for that might indicate potential risk:

1. Company Financial Struggles: If a company is publicly facing financial difficulties, it might lead to layoffs.
2. Departmental Changes: Employees in departments undergoing restructuring, downsizing, or experiencing reduced budgets may be at higher risk.
3. Performance Issues: Employees who have received negative feedback or performance warnings might be more vulnerable during layoffs.
4. Decline in Workload: A noticeable decrease in workload or the elimination of key responsibilities could signal that a role is becoming less critical.

However, even if these signs are present, layoffs are ultimately a business decision that can be difficult to predict with certainty.

5: What legal protections do employees have during layoffs?

Employees have several legal protections during layoffs, although these can vary depending on the country and jurisdiction. In the U.S., for example:

• WARN Act: The Worker Adjustment and Retraining Notification (WARN) Act requires employers with 100 or more employees to provide 60 days’ notice before mass layoffs or plant closures. This allows affected workers time to seek new employment or training.
• Anti-Discrimination Laws: Layoffs must not be discriminatory. Employers cannot target employees for layoffs based on race, gender, age, disability, or other protected characteristics.
• Severance Agreements: Some companies offer severance packages, which may include additional pay, benefits continuation, or job placement assistance. Employees are often required to sign a severance agreement that may waive certain rights, so it’s advisable to review these carefully.
• Unemployment Benefits: Laid-off employees may be eligible for unemployment benefits, depending on their circumstances and state regulations.

Employees concerned about their rights during layoffs should consider consulting with a legal professional to understand their specific situation better.

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