Business Slowdowns, Downsizing and Cost Reductions

Home > English > Articles > Business Law

Business Slowdowns, Downsizing and Cost Reductions

By: LawInfo

Published: 12/2009

Difficult economic times and unforeseen circumstances can negatively affect a business. A significant economic downturn can affect business and require businesses to make layoffs, for example. Or, a fire can destroy a place of business. In either case, business owners are faced with difficult emotional, business and legal decisions that must be carefully made.

Business Interruptions

When a natural or manmade disaster hits a business the effects can be catastrophic. Facilities can be destroyed, equipment can be ruined and conducting business can be impossible. Yet, the business may have legal obligations to deliver goods and may have an important interest in continuing operations so that the business can remain viable even if the business lacks the funds to replace what was destroyed. For these reasons, it is important for businesses to purchase business interruption insurance. Business interruption insurance can provide much needed funds to replace what the business needs to continue operating. Business interruption insurance is expensive so it is important to purchase an accurate amount of insurance that you need to meet your business’s legal obligations in the event of a catastrophe.

Layoffs

In addition to catastrophes that affect business property, economic or business conditions can create difficult times that force some businesses to face the difficult reality that they must downsize or lay off workers in order to reduce costs and survive. Few business owners make the decision to lay off workers lightly. Much thought and consideration goes into the effect of the layoffs both on the business and the affected individuals. Businesses may consider alternatives to layoffs such as reduced work weeks, salary reductions, and early retirement incentives, for example. Yet, sometimes layoffs are inevitable and careful consideration must be applied to the legalities of layoffs in order to avoid future litigation.

The majority of American workers are at will employees. That means that they may leave their job or they may be terminated at any time. However, the employer’s right to terminate employment is not unlimited. An employer may not terminate an employee for discriminatory reasons, for example. In order to prevent lawsuits based on discrimination it is important for employers who are conducting layoffs to:

· Have clear reasons for downsizing;

· Identify who made the layoff decision;

· Have accurate and complete written documentation of performance reviews;

· Have accurate and complete written documentation of other factors related to the layoff, such as the timeline of when employees were hired; and

· Follow all applicable state laws and union contract provisions related to terminations.

It is important to avoid even the appearance of discrimination. Accordingly, many businesses use the last to hire, first to fire rule when laying off workers. Other businesses rely both on longevity and performance reviews. It is an employer’s legal right to decide how layoff decisions will be made so long as the employer does not discriminate and protects the legal and contractual rights of the affected employees. In order to avoid the legal mind fields of downsizing, employers should keep careful documentation and make careful decisions.