Layoffs Create Pitfalls for Executives Looking to Cut Costs

Companies, particularly those that enjoyed strong revenue growth during the Covid-19 pandemic and increased the size of their workforces, are starting to tighten their belts as they face high inflation and rising interest rates. They are increasingly looking to layoffs as a way to preserve capital, alongside other measures, such as hiring freezes.

Finance chiefs play a key role in this by determining which costs to cut and setting companies’ financial targets, said advisers who work with companies during staffing cuts. Hardik Sheth, a partner at Boston Consulting Group, said CFOs are increasingly part of the initial discussions about whether job cuts are needed. They also help management understand the range of options available to them to boost performance, including adjusting the business model or product offerings, Mr. Sheth said. 

Moreover, CFOs are setting the financial goals that layoffs are meant to achieve and working closely with human-resources departments to help assess where to make cuts, said Susan Gunn, a partner at management consulting firm Bain & Co. They also set severance amounts, she added. Well-handled layoffs take two or three months in the U.S. and require a sound strategy as well as empathy and transparency, Ms. Gunn said. 

Under pressure to move quickly, however, some companies run the risk of giving improper notice to employees, said David Santacroce, a law professor at the University of Michigan Law School. The federal Worker Adjustment and Retraining Notification Act, or WARN Act, requires companies with 100 or more employees to give minimum 60 days’ notice before layoffs occur if they affect at least 500 full-time employees at a single location, or at least a third of workers at one site when there are fewer staff cuts. 

States such as New York and California have adopted lower thresholds for notice. Some employees at Twitter Inc., which recently cut roughly half of its workforce, are now pushing back against the dismissals. In a federal lawsuit this month, plaintiffs alleged that the company violated the WARN Act and California’s equivalent by not providing enough notice of a mass layoff. San Francisco-based Twitter in a legal filing last week said it had met its legal obligations by giving workers 60 days’ notice of their termination along with pay and benefits. Twitter didn’t immediately respond to a request for comment. 

“If the economic outlook changes dramatically and very fast, then cuts have to come more quickly and less thoughtfully,” said Andy Challenger, senior vice president at Challenger, Gray & Christmas. “That’s when it can go poorly.”

Layoffs will likely increase as the economy weakens, Mr. Santacroce, from the University of Michigan Law School, said. “So too does the number of lawsuits alleging employer [WARN] Act violations. There seems little reason to believe that will change.”  

But layoffs might not help companies in the long run.

Companies that lay employees off don’t typically outperform their counterparts that haven’t cut staff, said Wayne Cascio, a professor emeritus at the University of Colorado Denver Business School who has for decades studied the costs of downsizing. Mr. Cascio together with two finance professors looked at the impact of layoffs at more than 4,000 public companies over a 37-year period ended in 2016.

Companies that downsized as a “quick fix,” or as an easy option to restore profitability, didn’t outperform their competitors who were patient amid deteriorating economic conditions, Mr. Cascio said, pointing to the study that was published last year.  Labor costs are often a large part of companies’ operating budgets, and so an easy target as executives look to preserve cash, according to Mr. Cascio. “The danger is that when the economy turns around, are you going to have to recruit the very same people that you laid off?” he said. “The quick fix never seems to work.”

—Kristin Broughton contributed to this article.

Write to Jennifer Williams-Alvarez at [email protected]