Layoff

What Is a Layoff?

A layoff is the temporary or permanent termination of employment by an employer for reasons unrelated to the employee's performance. Businesses typically resort to layoffs to cut costs, often in response to a decline in demand for their products or services during an economic downturn.

A layoff is not the same thing as a firing for cause on the grounds of unsatisfactory performance, malfeasance, or breach of duty.

In its initial context, a layoff denoted a temporary loss of work in seasonal industries, but over time, the definition has evolved to describe permanent separation from prior employment for economic reasons. A layoff may happen when a business closes or relocates. Or it could result from a slowdown in demand for the employer's products or services during a recession.

Key Takeaways

  • A layoff is an involuntary separation from work through no fault of employees, often initiated by the employer for economic reasons to cut costs. 
  • A layoff differs from a firing for cause such as unacceptable workplace behavior, which generally does not qualify the fired worker for unemployment insurance.
  • Layoffs may lower the morale and productivity of the laid off workers' colleagues and inflict unexpected costs on the employer. 
  • Mass layoffs can damage the economies of the surrounding communities, especially those dependent on a single employer or industry.
  • Some employers may offer severance agreements to laid-off workers. It is essential to carefully consider the proposed text and to negotiate before signing such an agreement.

Understanding Layoffs

Layoffs typically affect groups of workers from several to thousands, as a result of an employer's effort to cut costs. That effort may be prompted by an economic downturn or corporate restructuring such as a bankruptcy or a leveraged buyout by a private equity firm.

Layoffs are understandably unpopular with workers whether employers call them "downsizing," "rightsizing," or "smartsizing." Layoffs may also be termed a "workforce reduction" or a "reduction in force."

Employees in a late-career layoff may be offered "early retirement," replacing a paycheck with retirement benefits. Companies seeking to avoid or minimize layoffs may also offer longer-tenured workers a buyout as an inducement to leave voluntarily.

In some cases, employers conduct layoffs even when their businesses are thriving, either to increase profits in or amid a shift in markets served or operations.

Layoffs vs. Furloughs

A layoff is distinct from a furlough, in which workers are idled for a time as a result of plant repairs or another event requiring a temporary work halt. In contrast with laid off workers, furloughed employees keep their job titles and employee benefits with the expectation that they will eventually return to work.

Furloughs may also affect government employees when legislators are unable to agree on the appropriations required to pay their salaries. During a government shutdown, non-essential workers are typically furloughed, while workers in essential services may have to work with pay delayed until a funding agreement is reached.

Furloughed workers may be eligible to collect unemployment insurance benefits depending on their state's eligibility requirements.

Example of Mass Layoffs

U.S. employers resorted to mass layoffs amid a drastic downturn in demand during the early stages of the COVID-19 pandemic, as restrictions and contagion fears halted travel, shut restaurants and idled many other service industries. U.S. employers cut more than 20 million jobs in April 2020 alone, and 22.4 million over a two-month period ended the same month, according to the U.S. Bureau of Labor Statistics (BLS).

To preserve jobs, the U.S. government offered the Paycheck Protection Program, loans subsidizing businesses' payroll costs that would be forgiven under certain conditions. The program encouraged businesses not to lay off workers during the pandemic.

Layoff Statistics

Because financial markets participants care most about total employment, they tend to overlook layoff statistics in favor of the fresher monthly data on nonfarm payrolls and the unemployment rate

The monthly Job Openings and Labor Turnover Survey (JOLTS), also from BLS, provides a combined count for layoffs and discharges—involuntary separations from employment, whether as a result of layoffs or for cause. In June 2022, BLS reported layoffs and discharges declined by 170,000 to 1.2 million in April 2022, the lowest monthly total in series history dating back to December 2000. In April 2022, layoffs and discharges affected 0.8% of the labor force.

Challenger, Gray & Christmas, Inc., a provider of career outplacement services, publishes a monthly report on layoffs announcements. In May 2022, it tallied 24,286 announced job cuts by U.S. employers in April 2022, a 14% increase from March and a 6% rise from a year earlier. Despite the increase, the nearly 80,000 job cuts announced by employers during the first four months of 2022 represented the lowest January through April total in the history of the survey dating back to 1993.

Special Considerations

While laid off workers bear the brunt of layoffs, losing wages and benefits along with the satisfaction, purpose and sense of security work can impart, mass job losses can also hurt the workers who remain, their communities and the broader economy, and even the employer.

For example, layoffs understandably disturb even the workers whose jobs are spared, increasing their anxiety and insecurity while lowering productivity and morale.

Diminished employee productivity as a result of layoffs can in turn erode the cost savings from a layoff. 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 can also inflict economic damage on the area where laid off workers live, lowering demand for other goods and services and lowering tax revenue, especially if the area relies on a single employer or industry.

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 former employer may offer. This may include provisions on severance payments, employee benefits, and healthcare insurance. 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 severance 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 a term of 18 to 36 months, under certain conditions. COBRA coverage is significantly more expensive than employer-provided health insurance, so it may be better to seek coverage through one of the plans offered under 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 insurance benefits 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 My 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 plan proceeds either to a new employer (if they offer a similar plan) or into an Individual Retirement Account (IRA). It is essential to transfer the balance through a direct transfer between financial institutions rather than allowing the administrator of your former employer's 401(k) plan to cut you a check. Otherwise, you may incur an avoidable tax liability.

Who Gets Laid Off During a Merger?

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

The Bottom Line

Layoffs are a painful but expected fact of life in a market economy exposed to competition and trade. Layoffs can be damaging psychologically as well as financially to the affected workers as well as their families, communities, colleagues, and other businesses. Government programs providing unemployment insurance and retraining can assist the newly unemployed.

Article Sources
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