A business will sometimes need to reduce its workforce size. Cutting back the workforce of a business is often done in order to improve business efficiency. While it is usually much easier for a business manager to deal with recruiting new workers, it is also a part of managing to make workers redundant.
Selecting new recruits and selecting workers to be made redundant are both important tasks of managers which must be done professionally – clearly and fairly.
However, sometimes businesses lose workers who are better skilled and more productive than workers who have been employed longer.
And sometimes, business managers will need to fire workers as well.
Why reducing the workforce size?
Due to changing circumstances of the business, it may need to, or wish to, reduce the size of its workforce in case of any of the following reasons:
- New technology. A business may introduce new advanced technology which automates tasks that workers currently do, so the worker is no longer needed. Manufacturing businesses may introduce new technology into the workplace which can perform the work of as much as several workers.
- Poor demand. Falling demand for the product that the worker produces. If demand does not increase, the business may need to reduce the size of its workforce because it is costly to employ workers who have nothing to do for any length of time.
- Economic recession. It may be necessary for businesses to survive when consumer spending declines and businesses may experience a decrease in revenue. This can lead to cutting costs, including their workforce.
- Cost cutting. Need for cutting cost due to high competition on the market or the need to remain competitive. Often, this is part of a company policy of retrenchment is linked with ‘budget cuts’ – to save on costs to restore profitability.
- Restructuring. Reducing workforce size is sometimes a necessary part of restructuring mainly due to a merger or takeover. It can also be done on its own the organization is facing financial difficulties.
- Relocation abroad. Sometimes businesses decide to relocate far away from their current location, perhaps even relocating to another country. When a business relocates its factory abroad, or into a distant place from its current site, it may not be possible for all workers to move or travel to the new location, hence, they will have to leave their jobs.
- Business closure. Sometimes a business closes down because the owners no longer want to run the business, or it has failed to do so. A result of the permanent cessation of all business activities by a company such as closing a factory, shop, branch or office closure reducing the workforce is a common step to ensure that the company has the resources it needs to complete the closure process in an orderly manner.
In all of these situations, the business may need to make some of its employees redundant – employment will be terminated.
Deciding which workers to recruit or make redundant
Some employers may use measurable criteria to select workers for redundancy such as:
– PRODUCTIVITY – How productive workers are? Keeping the more productive workers as they are better for the future of the business.
– ABSENTEEISM – How often workers have been late or absent from work in the past year? Keeping workers who are not late and rarely absent will because they are more productive as they are at work.
– AGE – How old a worker is? Keeping younger workers while making redundant those who are closer to retirement. However, this is very business-specific.
Making workers redundant can have a very serious effect on the staff who remain – loss of job security – and on the wider community. If a business is seen by the society to be acting in an uncaring or unethical manner, external stakeholders may then react negatively to this business.
Methods of reducing the workforce size
Human Resources (HR) Department in a business is not only in charge attracting, recruiting and training suitable employees, but it also must ensure that the termination of employment contracts is carried out efficiently.
Business organizations let employees go for a number of reasons. Overall, employment can be terminated in one of the two situations depending whose decision was that – either employee’s decision or employer’s decision. It is important to distinguish between these two situations.
A: EMPLOYEE’S DECISION
Staff may leave their job because of their own decisions in one of two ways:
1. Resignation. Also known as quitting. Resignation is termination of employment by the employee due to personal choice. This happens when an employee decides to leave the job voluntarily. Perhaps because he has found another job with a different employer or decided to take a brake from employment. There may be several reasons for choosing to change the job such as promotion, better pay, shorter working hours, working environment, location closer to home, etc.
2. Retirement. Retirement is termination of employment by the employee due to age. This happens when an employee reaches an age beyond which he does not need to work, therefore he withdraws from the workforce. In some countries which have a compulsory retirement age, workers must leave their job when they reach retirement age. In other countries which do not have a compulsory retirement age, workers can work to any age.
B: EMPLOYER’S DECISION
Reducing staff initiated by the employer can be done in one of two ways:
3. Dismissal. Also known as being fired or sacked. Dismissal is termination of employment by the employer. This happens when an employee loses his job because he is not performing work to the required standard or has broken company rules. With redundancy, the job loss is not the worker’s fault, but with dismissal, it is his fault.
After being dismissed, employees are not entitled to receive compensation (payment) also known as redundancy package, or severance pay. In most countries there are limited grounds for firing an employee. However, an employer may dismiss a worker from their job for a few reasons: due to incompetence, unsatisfactory performance or breach of discipline. Hence, dismissal is usually seen as being fair in the following situations:
- Incompetence. The worker does not perform tasks up to the required standard. This means being incompetent in carrying out job duties, underperformance in the job as well as a lack of ability, usefulness or effectiveness required to carry out the job.
- Poor conduct. The worker breaks the rules such as is often late for work, ignores his supervisor’s instructions, puts himself and other workers in danger or ignores health and safety procedures.
- Misconduct. The worker is persistently late for work all the time, has unexplained absence, exhibits unacceptable behavior to others, beaches the employment contract, harasses other employees, is rude to customers and frequently misses deadlines.
- Gross misconduct. The worker has committed an illegal act such as theft of company property, an assault on another employee, an assault on a customer, fraud, is drunk at work, etc. Gross misconduct can lead to instant dismissal with immediate effect without any warning.
- Legal requirements. The employee is unable to perform the job he was hired to do because he has been dishonest about his qualifications, abilities and experiences during the recruitment process, has lost legal qualifications to do his job such as his driving license or is be imprisoned. If an employee does not have the necessary skills or requirements for their job, then the employer can legally dismiss the worker. For example, a worker may have been dishonest about their qualifications, abilities and experiences.
Dismissing a worker is not an easy matter – a worker loses financial support and social status. That is why employees will usually get several warnings (both verbal and written) for their poor conduct or misconduct before being dismissed for real. Evidence must be gathered and presented at all stages of the dismissal process. The Human Resource (HR) department shall support the employee to reach the required standard and stay within conditions of employment by offering training and guidance. The Human Resource (HR) Manager has to present a good case for dismissing an employee, as well as in a fair and legal manner when handling the case. Employers also need to show evidence of providing support and opportunities for the employee to make improvements. After the dismissal is done, the decision should be communicated with the rest of the team, who may be concerned about their own jobs, to maintain motivation.
4. Redundancy. Also known as lay-offs or retrenchments. Redundancy is termination of employment by the employer. This happens when an employee loses his job because he is no longer needed – a business can no longer afford to employ the worker, the job that a worker does is no longer needed, or when the job ceases to exist. With dismissal, the job loss is the worker’s fault, but with redundancy, it is not his fault. It is not due to any aspect of his work being unsatisfactory as he did not do anything wrong. It is the job function that is ‘redundant’, not the person, hence the firm is not legally allowed to replace a person with someone else doing the same job. If redundancies are to take place, then set guidelines are followed to ensure that the correct person is made redundant. After made redundant, employees are entitled to receive compensation (payment) also known as redundancy package, or severance pay. The amount depends on the workers’ salary and benefits as well as the length of time worked for the organization, such as three months’ worth of pay. When laying-off workers, a firm has two main methods:
A. To ask for voluntary redundancies. These voluntary redundancies happen when the employer asks for volunteers to leave the business. Whilst the organization will often offer excellent incentives to staff willing to leave the firm such as financial compensations, enhanced benefits or larger pension, an invitation to leave might be a high-risk strategy because good workers may easily be employable elsewhere by competitors.
B. To impose compulsory redundancies. These involuntary redundancies occur when the employer has to select which workers to make redundant. The organization makes the choice based on a number of criteria. There are three main ways they can do this:
a) Willingness to leave. This includes willingness to leave the job. Some workers may agree to leave on their own, if they can get higher redundancy payment. This method is the least likely option to cause conflict and hardship to the workforce.
b) LIFO (Last-In, First-Out). The LIFO method makes the newest recruits in the team redundant – workers who have been employed for the least amount of time will be the first to be made redundant. This method is perceived by employees to be fair although the firm might lose productive workers in this way.
c) Retention by merit. The following factors help a business to decide which workers to make redundant and which ones to keep. The least productive workers are made redundant first. Workers with essential skills or whose skills could be transferable are retained. Other criteria to judge merit can include age, experience, skills, qualifications, behavior, effectiveness in job, attendance, etc. This method can be perceived as highly subjective, but it can be beneficial if unproductive and inefficient workers are removed from the business.
From time to time, a Human Resource (HR) manager may need to discipline an employee when he fails to meet the obligations as stated in the contract of employment.
Is reducing the workforce size always necessary?
Many businesses that face the problem of having to lose some members of the workforce will often try to do so ‘naturally’ – not replacing all of those who leave.
Some businesses may choose to reduce pay instead of making some staff redundant. Reducing pay instead of making some staff redundant is a difficult decision that employers may face when they need to cut different types of costs. It is important to weigh the pros and cons carefully before making a decision. It also might be legal implications to reducing pay.
Another option is to redeploy staff which means transferring employees from a department or branch that no longer requires their services to other areas of the business where vacancies exist. It is quite popular in large businesses with operations in many locations. However, it can cause anxiety and demotivate workers who are transferred to an unknown environment.
In summary, reducing the workforce size is a part of workforce planning when the employee is no longer required. The position is not going to be filled in by a person doing the same job. It is usually a result of conditions of the business environment such as worsening economic conditions, poor financial situation, introduction of new technology or different business strategy.
