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Managing labor costs in a down economy: initial considerations

The talking heads are abuzz about the potential for a double-dip recession. The stock markets over the last few weeks have been on a wild ride — down hundreds, up hundreds, down hundreds. News reports once again contain stories about massive layoffs at major employers — and layoffs at small businesses. At the end of the day, given the business and political climate, companies across the country are looking for ways to weather a storm.

Employers who take careful, managed steps to control labor costs can realize gains even in a down economy. Terminations, mass layoffs and plant shutdowns are not always necessary, though they may be warranted.

Over the course of the next few weeks, we will be posting guidance and thoughts on varying steps employers can take to control labor costs. This series of articles is intended to provide a roadmap for executives looking for ways to reduce labor costs gradually as the storm grows, sets and passes.

Posts in this series will focus on private-sector (non-government) employees and public-sector (government) employees. In addition, we will address other potential considerations such as one-off terminations, group terminations, full-scale reductions-in-force, early incentive programs, the Worker Adjustment and Retraining Notification Act (WARN) which addresses mass layoffs and plant closings, severance agreements and discrimination issues.

General Considerations in Managing a Down Economy

Economic downturns give rise to a host of difficult personnel issues that often involve reduced work strategies, reductions-in-force, furloughs, wage reductions or freezes, and severance and benefit obligations. Each of these issues implicates various employment laws — at both the state and federal level — that can drive decision-making processes. When reviewing your capacity and needs with respect to labor in an economic downturn, it is important to keep certain steps in mind as you consider your company’s human capital needs now and in the future.

One initial step is to identify the decision makers with respect to personnel decisions. It may be preferable to include individuals from all levels of management within the organization to ensure appropriate strategic vision as well as knowledge of on-the-ground operations. Human resource professionals, of course, should play an important role in this process. If collective bargaining agreements exist, those agreements will need to be consulted.

Another general consideration is to, up front, identify target staffing levels. Identifying a target number of positions or a specific amount of labor costs to save will help drive the discussion away from individual employees and make it more focused on the business needs of the company. This can help the company defend against claims of discrimination or other unlawful activity down the road, if necessary. An important consideration at this point, especially if you plan to look at the possibility of securing a release of claims from employees in exchange for severance payments, is the level of the company at which the downsizing will occur (e.g. regional, plant-specific, etc.).

Finally, companies should consider all the alternatives. There are many ways to save labor costs, some more draconian than others. If a company starts early, small policy changes can result in significant savings, potentially reducing the need for more long-term changes such as mass layoffs or plant closures. Alternatives include, among other things, limits on overtime, furloughs, voluntary early retirement programs, temporary reductions in pay, temporary shutdowns and involuntary reductions-in-force.

Watch this blog, or set up a reader or RSS feed, for future posts addressing each of these alternatives to saving labor costs in a down economy.  Future posts will also address furloughs in the private and public sectors.

September 29, 2011

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