Companies don’t make layoffs because they want to — they make layoffs because there’s no other option. Sometimes, after crunching the numbers to try to cut costs, organizations end up at the decision they tried to avoid: reducing headcount.

In the long run, there are cost savings associated with fewer employees. However, it’s important to understand the hidden costs associated with laying off employees, especially when the process is managed manually. 

Severance Pay Mistakes

When forced to make layoffs, companies should consider providing their departing employees with severance packages. Severance pay provides financial support to the newly unemployed as they begin job hunting. Although severance pay may seem expensive, it is usually worth every penny. 

By improving the employee exit experience with severance pay, your outgoing employees will feel more supported. Plus, by making the goodbye pleasant, companies are less likely to face wrongful termination suits. The cost of one wrongful termination suit can make severance pay seem insignificant. 

It’s important to audit — and audit again — severance pay amounts. Though only the most egregious severance overpayments make headlines, these mistakes are more common than you’d think. A simple clerical error — like an inaccurate date — could lead to severance overpayment. Though a few weeks of extra pay may not seem like much in an isolated incident, it can add up quickly if the mistake affects multiple employees. 

Microsoft made headlines after terminating 1,400 employees and overpaying their severance, then asking the laid-off employees for a refund. Once the press became aware of this news, Microsoft decided they didn’t need the money back after all — the employees could keep it. 

When severance pay mistakes are made, companies risk litigation and/or a tarnished corporate brand. Pay your departing employees, and get the total correct the first time.    

Legal Costs

To ensure layoffs are handled seamlessly, it’s important to involve legal counsel. For many companies, this means looking to outside employment counsel for advice, while larger companies may be able to enlist help from in-house counsel. 

Legal counsel often helps employers with documentation, such as creating compliant separation agreements. Since laws related to separation agreements vary from state to state, it’s important to invest the time needed to ensure legal compliance. Laws regulating final paychecks are also dependent upon the employee’s state, so this area requires legal involvement as well. 

Depending on the specifics of the reduction in force (RIF), documentation may also include waivers as required by the Age Discrimination in Employment Act (ADEA) and the Older Workers Benefits Protection Act (OWBPA). As we’ve written before, there are some common areas in which employers make OWBPA mistakes. Avoiding them is key.

Additionally, if a RIF meets certain thresholds, employers must adhere to the Department of Labor’s WARN Act and any state-based mini WARN Acts. The WARN Act protects employees and their local communities by requiring advanced notice for sizable layoffs. When employers fail to provide the mandated notice period, they shouldn’t be surprised if their former employees unite and file a lawsuit.

Last — but certainly not least — is the risk of employment discrimination, which legal counsel can help evaluate for and mitigate. If layoffs disproportionately affect a certain protected group, resulting in disparate impact, this can wreak financial havoc. The Equal Employment Opportunity Commission (EEOC) fields anywhere from 60,000 to 100,000 employment discrimination claims each year. If found guilty of wrongful termination, employers can generally expect to pay tens of thousands of dollars — even millions in certain circumstances. 

Payroll Costs

Though this may sound like common sense, employer costs per employee go well beyond compensation. This means that, when administering layoffs, each day — and even each hour — matters. In addition to employees’ actual pay rate, employers also pay out-of-pocket costs associated with their employment. 

As indicated by data from the Bureau of Labor Statistics, these costs cover items like paid leave, supplemental pay, insurance, retirement and savings, and other legally-required benefits. 

On average, employers pay between 1.25 and 1.4 times the employee’s salary to keep them on board. 

Once your company has determined that layoffs are necessary, it’s best to move as quickly as possible to avoid unnecessary payroll costs. A seamless process is better for everyone involved, particularly your Finance team.

To Sum it Up

When handled efficiently, layoffs cost money up front but lead to significant savings over time. However, if layoffs include severance overpayments, raise legal concerns, or take too long, bigger issues can arise.

Layoffs often make headlines. In the best case, the news is matter of fact. However, a layoff mistake can quickly turn into a public relations nightmare, resulting in a devastating impact on your corporate brand and reputation.

Separation technology can help you reduce hidden costs. By implementing separation technology, companies can protect their company and employees by improving compliance, reducing time spent and hard costs, and promoting equality, the employee experience and employer brand.