Alternatives to Layoffs & Retrenchment During COVID-19

The economic consequences of COVID-19 have been formidable, several businesses have closed down while others teeter on the brink of closure. Vendors are faced with force majeure clauses invoked by cash strapped clients. Cash flow concerns exist along the supply chain and affect the end-consumer as well, who has either taken a pay cut or is out of a job. These circumstances have forced employers to undertake several cost-reduction/downsizing measures such as layoffs, retrenchment, compulsory leave, early retirement schemes etc. In this scenario, it is important to examine the efficacy of such employer actions from an HR perspective. This is because the current situation is one wherein all parties are afflicted by a common problem; thus it is important to examine whether there exists a way to find an effective solution that caters to the needs of all stakeholders?

This article begins with an examination of various employer actions and their resultant effects on employee morale, governance, and the financial health of an organization. These employer actions are then juxtaposed to determine their suitability to differing sets of circumstances as the one-size-fits-all solution is impractical owing to the varied circumstances companies might find themselves in.

Layoffs and Retrenchment: Explained

The term layoff is defined under Section-2(kkk) of the Industrial Disputes Act, 1947 as the failure of an employer to give employment to a workman whose name is on the muster rolls of an establishment and who has not been retrenched. This employer action can be due to shortage of coal, power, raw materials, accumulation of stocks, breakdown of machinery, natural calamities, or related reasons. Therefore, under the framework of the Act, layoffs must be justified by one or more of the above-mentioned reasons.

To understand the full import of this we must examine the definition of retrenchment under the Act and analyze their combined effect. The term is defined under Section-2(oo) of the Act as being the termination of service by the employer for any reason other than punishment by way of disciplinary action. Retrenchment does not include voluntary retirement, retirement on reaching the age of superannuation, termination due to non-renewal of contract on its expiry and termination on the ground of continued ill-health.

From the above, it is clear that retrenchment is a full and final termination of services whereas layoffs are changeable, as employees can be recalled once the layoff span ends. Therefore, we can conclude that layoff is an employer action that is used to deal with temporary situations whereas retrenchments are strategic decisions taken with lasting effects. It is important to note however, that these definitions are only applicable to establishments falling under the scope of ‘industry’ as per Section-2(j) of the Act. Therefore, it is inapplicable to businesses, IT companies, as well as shops and establishments.

The Shops and Establishments Act is the law regulating the conditions of work and employment of workers in the above-mentioned establishments. It, however, does not provide any definitions of the above terms, nor does it give any alternate terminology to define the removal of employees. It merely provides for a mandatory notice that must be provided before removal or compensation in the form of wages based on the length of the period for which services were rendered.

The last factor that must be taken into consideration while analyzing these employer actions is the employment agreement. These are contracts drawn up between employers and employees based on a shared understanding of the company’s workforce management policies.

Now that we have understood their functions as employer actions, let us examine their relative merits and demerits in the context of COVID-19.

The Effects of Layoff & Retrenchment

It is clear from the above that layoff and retrenchment serve distinct, although not mutually exclusive purposes. The advantage of layoff as defined in the Industrial Disputes Act, 1947 is that they leave the employer with the option of recalling workers. However, the term used in its colloquial sense simply means reducing the number of employees in the workforce due to advances in technology, unpredictable market conditions as well as increase in competition.

We shall examine the merits/demerits of layoffs in the latter sense as well because it applies to establishments other than industries. IT giants and e-commerce companies had already begun downsizing due to the emergence of automation and AI-enabled tools. However, the pandemic situation has acted as a catalyst leading to job cuts on a large scale across the board.

Data on layoffs has revealed however, that they are a mixed bag when it comes to their viability as a solution. It is well accepted that they are a short-term financial solution with regards to their impact on the reduction of costs. However, other factors such as a decline in job performance of workers, loss of workers trained by the organization and the loss of an individual who understands the network of relationships within and outside the organization are drawbacks that are often ignored by managers. The decline in performance of workers is linked to a decrease in morale of the workforce and short-term productivity hikes are due to fewer workers covering the workload that a larger number of workers were responsible for. There is also evidence to suggest that layoffs lead to a decline in innovation in companies and adversely affect the relationship between salespersons and customers.

Thus, the link between layoffs and increased profitability is one that is difficult to establish, moreover, owing to the factors mentioned above they put a significant burden on a company’s human resource team due to lowered morale, productivity and the vacuum left by seasoned employees. Add to this the supplementary cost of having to pay workers if they are retrenched and the viability of downsizing as an employer action can be viewed as the last resort.

This might prompt one to question whether there are employer actions more effective in coping with the financial impact of COVID-19? If yes, the next question raised would be what are these employer actions and how are they more successful than layoffs from an HR perspective?

Workforce Change Philosophy

Before discussing alternative employer actions, it is pertinent to discuss the importance of a workforce change philosophy/strategy that a company must have in place. This means having fundamental concepts that address questions such as the value brought in by employees, expectations with regards to employee engagement, loyalty, and flexibility as well as the role played by employees in the formulation and implementation of workforce change. The impact of a workforce change philosophy is felt even during recruitment as employers seek to identify talent whose skill set is in consonance with the policy. For example, companies might begin hiring people based on their potential rather than compartmentalized roles to allow for flexibility during restructuring. It is important to note that the elements of a workforce change policy or philosophy are linked to the nature of a business undertaking, prevailing market conditions, availability of talent and the position a company finds itself in, therefore the author believes that providing a set of essentials for a workforce change policy would be futile.

The author must, however, stress on the need for a clear method to explore alternatives to layoffs and implementing workforce change. Businesses must lay down a formal process for workforce change based on their individual needs. Consulting all stakeholders involved and understanding their respective positions is fundamental to ensuring that the process runs smoothly.

Alternatives to Layoffs

While a workforce change policy helps employers examine suitable alternatives to layoffs and retrenchment, it merely acts as a guide towards identifying alternatives. To choose a particular alternative over others it is important for employers to know the relative advantages and disadvantages it possesses. Thus under this heading, the author will be examining different approaches to coping with pandemic related difficulties.

Compulsory Unpaid Leave

This is essentially a furlough that employees are asked to take to reduce the operating expenses of a company while ensuring that valuable talent is retained. However, this measure is not easy to implement as it requires mutual agreement between employer and employee. Forcing employees into taking leave should not be adapted as it destroys any goodwill the employer has and burdens the employee with financial hardship. This is a measure that must be resorted to only in situations where it is absolutely necessary to prevent loss of jobs and preserve cash flow.

Wage Cuts

They have been a common phenomenon across industries irrespective of size, with companies opting to protect long term financial interests. This marks a departure from traditional management approaches that advocate downsizing and dismissing a set of workers as opposed to lowering pay for everyone. A major reason for companies opting for wage cuts over layoffs are the expenses – both monetary and time related, associated with replacing employees. Another benefit of enacting a wage cut is that it applies across the organization and thus provides for a shared sense of sacrifice. Top executives tend to give up a vast share of their base pay to ensure that individuals in non-executive positions receive a larger share of their own wages. This is beneficial as it allows retention of employees while ensuring top executives are adequately compensated. It has been observed that most of their compensation comes in the form of stock awards which are not affected by wage cuts.

The advantage of employee retention is that it places companies in a better position to rebound when the economy begins recovering. This has been observed empirically as well, research found that firms that cut down their workforce during the 2008 recession were not ready when the economy eventually rebounded. This is why several companies have even adopted a no-layoff policy to promote employee loyalty.

Early Retirement Packages 

With the risk factors for COVID-19 being particularly high for workers above the age of fifty, several companies have offered early retirement packages. The contents of the scheme are diverse depending on a company’s policy, but they generally involve payment in lieu of a few month’s salary, the option to retain employer-sponsored health insurance for a specified period as well as reduced working hours. Thus, an early retirement package can be seen as a voluntary severance payment with both parties mutually agreeing on the mode of payment (either a lump sum or as a salary continuance over-time).

Redeploying & Restructuring

Several companies have handled internal and external business pressures without resorting to layoffs by deploying individuals in certain roles into positions that are more profitable. This involves taking individuals in roles where automation can be utilized, or manpower can be reduced and trained to perform other tasks. For example, when demand drops due to a recession or a global pandemic as is the case, salespersons might find themselves with a reduced workload, leading to a situation wherein their labour capital is not being utilized. In such a situation transitioning these individuals from a sales-oriented position to a customer service job might help retain existing customers. Since both roles involve a basic level of personal interaction skills and dealing with people, the transition would not be a monumental task as well.

Conclusion

Through the course of this post, it has been made clear that layoffs are a short-term solution and must be utilized as a last resort. Their impact on human resource utilization and creation of costs in terms of recruitment is significant. Its effects on employee morale and the ability of a firm to capitalize on market recovery are adverse and have been discussed in depth. To this end, it is beneficial for companies to have a workforce change philosophy/policy that guides leaders in situations where such decisions are required to be taken. The use of specific employer actions as alternatives to lay-offs depends on the distinct challenges faced by businesses and there is no universal formula with regards to the same.

If you are an employer, HR leader or an employee, do let us know how your business has coped with the challenges posed by COVID-19. If you believe there are more innovative ways to deal with this, drop your thoughts in the comments below.

Disclaimer: This blog is meant for informational purposes and discussion only. It contains only general information about legal matters. The information provided is not legal advice and should not be acted upon without seeking proper legal advice from a practicing attorney. Simpliance makes no representations or warranties in relation to the information on this article.