What Is a Layoff?

A layoff describes the act of an employer suspending or terminating a worker, either temporarily or permanently, for reasons other than an employee's actual performance. A layoff is not the same thing as an outright firing, which may result from worker inefficiency, malfeasance, or breach of duty.

In its initial context, a layoff was meant to denote a temporary work interruption, but over time, the term has morphed to describe a permanent lack of work. A layoff may happen to a displaced worker whose job has been eliminated because an employer has shuttered its operation or relocated. A worker may likewise be replaced due to a production slowdown or cessation.

Key Takeaways

  • A layoff is the unpleasant act of an employer terminating a worker for reasons other than an employee's actual performance. 
  • A layoff vastly differs from an outright firing, resulting from an inefficient on-the-job performance or unacceptable workplace behavior.
  • Layoffs may have a psychological impact on the workers who remain employed, causing increased concerns over their job security. 
  • Significant layoffs can cause ripple effects in the surrounding community, especially in single-industry towns.
  • Some employers may offer severance agreements to laid-off workers. It is essential to carefully consider and negotiate before signing such an agreement.

Understanding Layoffs

Layoffs may happen for various reasons that may affect an individual or a group of workers in the public and private sectors. Generally, layoffs are conducted to reduce salary expenditures to increase shareholder value. Layoffs may also occur when an employer's strategic business objectives or processes change, in the face of declining revenue, the adoption of automation, or offshoring or outsourcing.

Given that layoffs are understandably unpopular with workers, the term has several synonyms, as well as several euphemisms. For example, layoffs may also be referred to as "downsizing," "rightsizing," or "smartsizing." 

Similarly, a laid-off worker may become unemployed as part of a "workforce reduction," "reduction in force," "redeployment," or an "excess reduction."

Employees in a late-career layoff may be given "early retirement," meaning they will stop working and cease collecting a paycheck but remain eligible for retirement benefits.

In some cases, employers conduct layoffs even when their companies are thriving because they foresee economic uncertainty, and so they preempt tough times by boosting earnings.

Layoffs vs. Furloughs

A layoff is distinct from a furlough, in which workers are temporarily relieved due to a plant shutdown, reorganization, or another event in which work cannot proceed as usual. Unlike layoffs, furloughed employees keep their job titles and work benefits, with the expectation that they will eventually return to work.

Furloughs may also affect government employees when legislators are unable to agree on funding for the upcoming fiscal year. During a government shutdown, non-essential workers are typically furloughed, while workers in essential services may have to forego payment until a funding agreement is reached.

Unlike layoffs, a furlough is when workers are temporarily unemployed, with the expectation that they will soon return to work. Although furloughed workers lose their paychecks, they are still officially employed and may still be eligible for benefits.

Example of Mass Layoffs

Following the 1994 passage of the North America Free Trade Agreement, many American companies struggled to compete with the cheap labor costs in Mexico and other countries in the free trade area. Some manufacturers, particularly in the automotive industry, outsourced their production lines to other countries, laying off large sections of their domestic workforce.

These layoffs were particularly painful in rust belt towns, many of which relied on manufacturing as a source of employment. The federal government has attempted to redress these layoffs through job retraining programs, but these have primarily proved ineffective. Manufacturing layoffs due to trade policy became a major campaign issue during the 2020 elections.

Another example of mass layoffs occurred during the coronavirus pandemic in the U.S., when many service-industry companies announced partial or permanent layoffs, particularly of consumer-facing employees. Within a few months of the start of the crisis in March 2020, employers had laid off nearly 30 million employees.

To encourage companies to maintain their employment rolls, the U.S. government implemented the Paycheck Protection Program, a set of business loans that would be forgiven if the borrowers continued to pay their employees. By offsetting the labor costs of affected businesses, the government hoped to keep workers employed until the end of the pandemic.

Special Considerations

While workers bear the brunt of layoffs with lost wages and the uncertainty of unemployment, the effects of layoffs are also felt in local and national economies. They likewise impact the workers who remain employed, following such workforce reductions.

For example, workers who have witnessed their colleagues being laid off report greater anxiety and increased concerns over their job security. This often results in reduced motivation and employee attrition. Workers who have been laid off may also feel a level of distrust toward future employers, which is why some companies may try to lay off multiple workers at once to soften the psychological blow and make sure people do not feel singled out.

In some cases, the cost savings from layoffs may be counterproductive due to decreased employee morale. According to some economic studies, layoffs "are more costly than many organizations realize," and companies that reduce their workforce without other changes are unlikely to see long-term improvement.

Large layoffs also create a sizable impact on the economy and tax base of the community, especially if that community relies on a single employer. This is also detrimental to businesses due to both reduced consumption and the costs of unemployment insurance and other social services, which may be financed through business taxes.

The Bottom Line

Layoffs are a painful but an expected fact of life in an economy increasingly driven by globalization and international competition. Layoffs can be psychologically damaging, not only to the workers who lose a source of income but also to their families, communities, and other businesses, due to the ripple effects of mass unemployment.

While there are no easy ways to recover from a layoff, there are some government programs, such as unemployment benefits, to assist the newly unemployed.

What Should You Do When You Get Laid Off?

The first step after a layoff is to carefully review your contract of employment, as well as any severance package your soon-to-be-former employer offers. This may include provisions on severance payments, employee benefits, and healthcare. Employers may attach conditions to severance agreements, such as requiring you not to claim unemployment insurance. It may be a good idea to negotiate your settlement agreement and have an attorney review any paperwork before you sign.

What Happens to Your Health Insurance When You Get Laid Off?

In most cases, your employer will stop paying for health insurance if you are laid off at the end of the month. After that, the federal COBRA program allows you to receive continued insurance for between 18 and 36 months, depending on certain conditions. COBRA insurance is significantly more expensive than employer-provided health insurance, so it may be a better choice to seek coverage through the Affordable Care Act.

How Long After Being Laid Off Can I File for Unemployment?

According to the U.S. Department of Labor, you should file for unemployment as soon as possible if you become unemployed. In order to be eligible for unemployment insurance, you must be laid off or fired through no fault of your own, and meet certain wage and work requirements, such as length of time at your previous job. Some states may have additional requirements.

What Happens to Your 401(k) After a Layoff?

Depending on the size of your 401(k), you may be able to leave it with your former employer. However, it may be a better idea to transfer your savings, either to your new employer (if they offer a similar plan) or into an IRA. It is essential to transfer the balance through a direct transfer between financial institutions rather than have your old 401(k) administrator cut you a check. Otherwise, you may incur a taxable event.

Who Gets Laid Off During a Merger?

During mergers and acquisitions, many companies seek to eliminate redundancies in their new combined workforce. This will typically affect the C-suite and any other area where the new company has two departments with similar tasks. Since it's hard to predict which workers will be laid off, mergers are a common source of employee anxiety.