Do voluntary layoffs really make sense?

A recent study suggest that organizations might want to reconsider this approach

Do voluntary layoffs really make sense?

Employee layoffs have been used at unprecedented rates during the COVID-19 pandemic. From February to May, roughly 250,000 employees per month were laid off. The average layoff rate was 12.4 per cent per month, according to Statistics Canada. Comparatively, the average rates during the prior three recessions ranged from 2.5 per cent to 3.5 per cent.

Until now, there has been minimal research comparing the decision factors and outcomes of these layoff implementation strategies. However, a research study I conducted provides evidence that voluntary layoffs may result in the exit of the wrong employees. Published in the Canadian Journal of Administrative Sciences, the study suggests that employers should reconsider the use of voluntary layoffs.

The study involved management and employee pairs in three Canadian companies. Each pair evaluated employee profiles to determine which factors led to voluntary layoff decisions (made by the employee) and involuntary layoff decisions (made by the manager). In total, 488 unique employee profiles were assessed.

Voluntary versus involuntary layoffs
Voluntary layoffs are used by a wide variety of employers. For example, Calgary-based Enbridge allowed employees to volunteer for a layoff when it had to reduce headcount by 800 workers in June. To deal with declines in the aerospace industry, Boeing offered voluntary layoffs in April.

There are many reasons why an employer might use voluntary over involuntary layoffs. Often, companies have no layoff policy in place, so shifting the decision-making responsibility to the employee helps speed up the layoff process.

Sometimes, companies engage in voluntary layoffs because they want the employee to be part of the layoff decision process. Organizations might feel that they maintain the reputation of being a “good” employer through voluntary layoffs. Also, voluntary layoffs may be viewed as more legally defensible for the employer, given that employees self-select into a layoff.

Unfortunately, too often, companies are focused on reducing headcount with minimal consideration for the composition of the workforce that remains. By shifting the decision-making power to employees, the employer loses control of who stays and who leaves, which impacts the skills and competencies available to the organization post-layoffs. Without the right employees, business recovery efforts might be compromised.

Involuntary layoff decision factors
In evaluating 488 employee profiles and involuntary layoff decisions, data analysis shows that strong performers were 70 per cent less likely to be selected by managers than poor performers. Essentially, management was largely focused on retaining the strongest employees because they were the best positioned to help the company succeed.

Managers were also focused on selecting employees with low job satisfaction or low organizational commitment for involuntary layoffs. It is possible that managers think that these employees will be less likely to engage in extra-role behaviours that are critical to organizational recovery or that these employees are likely to quit after the layoffs happen, which can lead to unexpected vacancies and replacement costs.

Unexpectedly, although layoffs are largely used as a cost-reduction strategy, the salary levels of employees had no impact on management’s layoff decisions. However, managers were six per cent more likely to lay off an employee who had a lower severance package than an employee with a higher severance package.

This suggests that managers take only a moderate cost-control approach to layoffs. They are more focused on subjective factors such as job performance, organizational commitment and job satisfaction. 

Voluntary layoffs decision factors
In evaluating voluntary layoff decisions, the biggest consideration for employees was the size of the severance package. Employees who were offered a larger severance package were 46 per cent more likely to volunteer for a layoff than those offered a smaller severance package, irrespective of any other consideration (such as job performance, job satisfaction, education level, tenure with the firm or gender).

Poor performers were only 14 per cent more likely than strong performers to volunteer for a layoff. Perhaps, they felt that they were at a greater risk of performance-based dismissal (being fired) or involuntary layoffs. As a result, they might self-select into voluntary layoffs to “save face” with co-workers or avoid the embarrassment of being fired.

In addition, single persons were 13 per cent more likely to volunteer for a layoff, regardless of any other factor. These employees may have greater geographic mobility since they do not have a partner’s job or geographic limitations to deal with to the same extent as larger households. Again, family size was not a consideration for management decisions during involuntary layoffs.

Evidence-informed decisions
The results demonstrate that, while the use of voluntary layoffs is popular in practice, they result in a mismatch of employee exit decisions when compared to involuntary layoffs almost half of the time.

Yet, employers continue to use voluntary layoffs as a knee-jerk reaction to environmental uncertainty. Clearly, employers need to reconsider their approach.

This research demonstrates the importance of taking an evidence-based approach to HR during times of change. For example, before executing layoffs, using an advanced analysis method such as the policy-capturing (or judgment analysis) method that this research used is a relatively quick and inexpensive method to help employers understand which factors influence decision-making during layoffs. This can allow the organization to identify potentially undesirable layoff decisions and prepare retention efforts or modify eligibility criteria accordingly.

This can also identify if any non-work-related factors impact layoff decisions during involuntary layoffs. If so, efforts to mitigate the use of potentially discriminatory factors in layoffs decisions (such as gender, age or family status) can help reduce wrongful dismissal claims.

Given the large influence of job performance on management decisions when it comes to involuntary layoffs, HR departments need to ensure that performance management systems prior to the layoff are effective, accurate and current. To be used effectively by managers during layoffs, performance assessments must also be reliable, valid and free from bias.

When executing voluntary layoffs, employers should consider offering standard or comparable severance packages to minimize the likelihood that the wrong employees volunteer for a layoff.  Eligibility for voluntary layoffs also needs to be clarified to help retain the strongest employees.

If clear decision criteria, effective performance management systems and standard severance packages cannot be offered, companies should consider abandoning the practice of voluntary layoffs. By adopting this approach, managers can ensure that their internal workplace composition remains aligned with organizational expectations. 

 

Nita Chhinzer is associate professor in human resource management and business consulting in the Department of Management at the University of Guelph in Ontario. She can be reached at [email protected]

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