The macroeconomic crisis created by COVID-19 is having far-reaching consequences for businesses across the globe. Unfortunately, many founders will have to make painful cuts to survive. If you’re planning on layoffs, here’s the right way to do it:
What: As soon as you think you’ll have to lay people off, let the team know it’s a possibility. Informing people of layoffs on their last day of employment is a bad option, and in some cases it can get you into legal trouble as an employer. Be sure to act early, for example, you might call an all-hands meeting to let your team know that: “Payroll costs need to be cut by 25% within 30 days. No decisions have been made yet and we will keep you updated on the process”.
Why: The warning you provide will give your teammates much needed time to prepare their personal and financial responsibilities. These times can be very difficult, and you owe it to those who believed in you, to not make it worse. You may also find this early communication reduces the need for layoffs, as people may leave voluntarily or take reduced salaries.
What: If at all possible, provide outgoing employees a fair severance package. Aim to offer a minimum of one month salary, you may have to cut executive pay to zero and defer some vendor payments in order to do the right thing. For example, you might give 2 weeks warning on potential layoffs, with another 1 month’s salary as severance pay, along with 90 days of health insurance coverage.
Why: This small financial buffer for outgoing colleagues while they find a new job builds goodwill, which can be very helpful if you need to collaborate in the future. Some companies also use the severance money as an exchange for signing a claims release and non-disparagement agreement.
What: On the day people leave, send them off with a great reference, in writing and over email. It should be written by their manager and include their wins, as it will likely be shown to another potential employer. For example, someone laid off in marketing might receive a 500-word reference highlighting how they increased traffic and generated leads through their work on SEO landing pages.
Why: Finding a new job after getting laid off is far from easy and it’s even harder during an economic downturn. A great reference can be a huge and timely confidence boost, while also improving your teammate’s chances of securing a new role, sooner.
What: Talk to your lawyer at least 2 weeks in advance, to prepare the necessary paperwork. Confirm that you have read the documents carefully, as lawyers make mistakes too. Always have 2 people in the room when you’re letting someone go, ideally a teammate in HR, to provide a friendly witness if the departing employee gets combative.
Why: Lawsuits, as a result of layoffs, can be costly and partially defeat the purpose of the process. Reasonable legal and HR preparation help you avoid future problems.
Layoffs are one of the toughest jobs for a founder; but if survival is on the line, doing layoffs the right way will give you the best chance of coming back stronger.
This article is part of a series on Startup Hiring & HR.
Where to Find the Best People
How to Hire Great People
How Interview Projects Stop Bad Hires
How Startups Make Offers People Sign
7 Reasons to Give Employees More Equity
Why You Have to Fire Fast
How to Cut Your Startup’s Costs Without Layoffs
Doing Layoffs the Right Way
Sterling Road invests in pre-seed B2B startups based in North America. Full process here: sterlingroad.com/process.
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Photo by Dominik Scythe