Layoffs are not the only, or even the best, way to manage labour costs during a downturn in your business cycle.

One of the most important line items any user of financial statements looks at is the cost of labour. From the owner- manager’s point of view, lowering labour cost is always desirable but not always possible. Skilled people are hard to find in the first place and hard to replace after a layoff. As product demand increases with an economic recovery and you have to replace those lost workers, you may regret your cost-cutting decision when the outlook for demand was the darkest. Maybe you could have kept those valuable employees after all!

Time off vs. Extra Pay

From the employee’s point of view, a regular paycheque with maybe some overtime thrown in makes life a lot less stressful then being laid off and having to wait for better times. Although some employees welcome overtime and its higher hourly rate, others look at their work/leisure balance and see the increased income as not worth the effort because the hours required to earn it cut into their lifestyle.

Owner-managers and workers may seem to be diametrically opposed on the question of remuneration. Both parties, however, have in common the desire to keep the company in business. Owner-managers want their business to survive so that they can make a decent income, and employees want your business to survive so they too can make a decent income. This common interest can be the basis of joint decisions that will maintain employee morale, avoid layoffs and improve the bond between you and your employees.

Consider the following:

  • Find out which employees would prefer to take time off instead of being paid extra money for working overtime hours. Employees with children may want more family time or be willing to do personal errands such as visit the doctor during these days off rather than using the company’s time. Allowing employees to choose, and knowing who has opted for time and who for money, will ease work scheduling, better define labour costs and stabilize cash flow requirements.
  • Ask employees whether they would rather spread their annual holidays over three- day weekends instead of the traditional two weeks. In many families where young adults and spouses are working, this option would be welcome since arranging holidays together is already problematic. For you, the employer, losing a key employee for one day is less of a problem than trying to find a replacement for two weeks – or more.
  • Approach your employees to find out who would prefer to work extended hours in order to take time off at a later date. Those working from nine to five, for example, may be willing to extend the day to 6 p.m. for four days, take a shorter lunch break and leave at noon on Fridays. Others may prefer to extend the workday for nine days (excluding weekends) and take every second Friday off. Employee morale benefits from long weekends because they save travel time and costs and get to relax away from office responsibilities. Employers benefit as their employees are able to work on projects or just plan tomorrow’s schedule in that “after five time” when the office is quieter. This extra hour each day can mean a significant increase in individual employee productivity.Periods of working from home may make sense for some employees.
  • Examine your work processes and see whether periods of working from home makes sense for some employees. Owner-managed businesses certainly can’t have people working at home five days a week since most work still requires an employee to be in the office or at a client’s office. Communication via Skype and encrypted email makes possible face-to-face conversation or delivery and receipt of confidential documents. Such secure systems would have the same security as internal communications within the four walls of the office. There is little downside for employers since the lines of communication are always open to get updates on how the project is progressing; employees enjoy the benefits of saving travel time and the associated costs.
  • Negotiate with employees on how to handle those inevitable cyclical downturns when reduced demand for your goods or services might otherwise require layoffs. The goal would be to keep the business alive while keeping everybody’s job. If each employee is willing to take a reduction in regular hours worked for the duration of the crisis, all employees would keep their jobs and you, the owner-manager, would be able to keep the staff you will need during the equally inevitable recovery. Labour costs could be adjusted to the level appropriate to the crisis and the costs of hiring and training new people during the recovery would be avoided. Perhaps the decision on the cutback could be decided by an employee vote. For this “all for one and one for all” proposal to succeed, a very positive corporate culture would have to be cultivated during the good times.

Business Survival Requires Imaginative Solutions

As entrepreneurs, you rightly focus on managing labour costs as a key element in the management of overall costs. It has been engrained in your thinking patterns that reducing staff reduces cost. In the short term this may be true, but in the long run of a business owner- managers must consider whether this approach is the only or the best solution. Alternatives that enhance the lifestyle of all employees while minimizing the impact on the bottom line may do more to maintain good employees and ensure the survival of your business than the traditional reduction of staff.