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Handling Employee Layoffs as a Small Business Owner

FinanceHiring & Firing

We often think of layoffs as a cost-cutting strategy reserved for larger corporations and employers who lack the day-to-day operational flexibility of smaller businesses. Much of this perception stems from the fact that many small business owners are able to employ a variety of strategies to help them stay profitable and retain employees during difficult economic times.

But when all available options for keeping your workforce intact have been exhausted, downsizing can quickly become a hard fact of life for many small business owners.

Layoffs, as with , are governed by labor laws and regulations that protect both the employer and the employee. The government has compiled lots of useful information and tools to help small business owners (and their employees) understand their rights and responsibilities during this difficult time.

Below is an overview of the applicable laws and associated resources that can help you cover all your legal and regulatory bases when conducting layoffs.

Layoff advance notice law

There are certain laws that protect workers facing layoffs by requiring employers to provide advance notice of plant closings or layoffs. The law applies to companies of certain sizes only; here’s what you need to know:

  • If you employ 100 or more employees: The Worker Adjustment and Retraining Notification (WARN) Act requires you to provide at least 60 calendar days advance written notice of a closing or layoff that affects 50 or more employees at a single site.
  • If you employ less than 100 employees: Many states have enacted similar laws of their own while some have added provisions to the WARN Act that apply to smaller businesses with less than 100 employees. Read about specific state requirements here.

Read more about the provisions of the WARN Act and how, as an employer, you can understand the requirements of the act.

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Severance pay

While there is no legal requirement in the Fair Labor Standards Act to provide severance pay, it is offered at the discretion of the employer and usually based on the length of employment. If you have an employer-employee contract, you should check whether any specifications for severance pay are outlined. And, of course, if you value your employee’s contribution and want to keep your good name, do the right thing on this one.

When and how you provide the final paycheck is also something to consider. The federal government doesn’t legislate on this, but your state might.

Continuation of health insurance coverage

Companies that had 20 or more employees on more than 50% of its typical business days in the previous calendar year are subject to COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985). COBRA provides continuation of health coverage at group rates for former employees, retirees, spouses, former spouses, and dependent children.

For a good overview of this issue, read A Small Business Owner's Guide to COBRA Coverage.

Additional resources

Profile: Caron Beesley

Caron Sharp has over 14 years of experience working in marketing, with a particular focus on the government sector. She writes the Government Resources for Business blog on AllBusiness.