Put Down the Ax: Five Alternatives to Layoffs

TRYING TO KEEP the lights on is challenging for many small businesses these days. But while laying off employees can save the company the expense of salaries and paying for benefits, such a move is often not the most cost-effective answer.

In fact, layoffs can actually cost your business money, especially if you expect things to pick up once the economy recovers.

"It's hard to save money if the jobs will be refilled within a year or so," explains Peter Cappelli, director of the Center for Human Resources at the Wharton School of the University of Pennsylvania. "There are lots of costs of laying people off – severance, unemployment insurance, risks of litigation. And then there are the costs of re-hiring – search, training, productivity losses while waiting for performance to get up to speed."

So if you can't save money by letting people go, how can you balance the books? Here are five steps you can take to cut costs without cutting employees loose.

1. Tap into the SBA's new loan program

The Small Business Administration is making it easier to obtain some of its traditional loans by reducing fees, increasing loan guarantees and relaxing eligibility guidelines. And this week, it unveiled the American Recovery Capital (ARC) Loan Program, which offers loans to struggling small businesses that can prove they've been profitable in the past but are facing financial hardship now. The loans are given to businesses to pay down debt, thereby freeing up money for other expenses like payroll. (For more details on ARC loans, read our story.)

"We estimate that we'll be able to make about 10,000 [ARC] loans across the country," says Jonathan Swain, a spokesman for the Small Business Administration. However, businesses better act fast. "Based on the interest and the inquiries that we've been getting over the last several weeks, we do expect that these are dollars that will get out the door in a relatively short period of time," he says.

2. Participate in a Shared Work program

Shared Work programs offer partial unemployment benefits to employees whose hours have been cut. Offered in 17 states, these programs have been around for years, but have recently been gaining popularity. In the first few months of 2009 alone, the Department of Labor estimates that Shared Work programs prevented more than 75,000 workers from losing their jobs.

"When employers have to cut back, it provides an option for them, so that when you have workers who have specialized skills [you don't lose that knowledge]," says Alexandre Mas, chief economist for the Department of Labor.

States have the discretion to design their own programs. In New York, for example, an employee's hours can be reduced by 20% to 60% to qualify, and they can collect benefits for up to 53 weeks. More than 31,000 workers from over 1,300 businesses are currently enrolled in New York State's program.

"Our business is seasonal, and we found when we did a generalized layoff, when we were ready to go full-bore production again, generally with very little notice, it was very difficult to get our employees back," says Pam Thayer, director of human resources at Clarence, N.Y.-based New Buffalo Shirt Factory, where the Shared Work program has been in place for years.

The program, she says, reduces uncertainty for the company's 140-person production force – and helps create a team spirit. "Rather than picking 10 or 20 people and putting them on permanent layoff, everybody participates in the Shared Work program, and everybody is treated pretty much the same," says Thayer.

3. Institute a furlough

Furloughs are making a comeback. Even large companies like British Airways are asking employees to take a week (or more) of unpaid work time as a way to avoid layoffs.

However, this strategy must be navigated carefully since it's rife with legal issues. You should notify employees in writing, in advance, to protect yourself from potential wage complaints, says Ron Langley, the Small Business Liaison at the Washington State Department of Labor.

The rules are also different for hourly and salaried employees. Hourly workers aren't paid when they don't work, but salaried employees who are exempt from overtime must be paid for any week in which they work, according to the Labor Law Center.

During a furlough, employees can't perform any work, says Frank Kollman, a partner in Timonium, Md.-based law firm Kollman & Saucier, P.A., which concentrates on management, labor and employment law. Technically, even if an employee answers a work-related email or takes a business phone call during a furlough, they've done some work that week. And if they've worked, they're entitled to get paid for the entire week.

For more details on how the Fair Labor Standards Act relates to unpaid leaves, consult your state's labor department.

4. Ask employees for help

Some business owners are enlisting their employees as allies in the fight to keep the business afloat.

A growing number of business owners are sitting down with their employees, opening the books, and asking for ideas on how to keep them balanced, says Todd Klingel, president and CEO of the Minneapolis Chamber of Commerce. "We're even doing that at the Chamber, we're sharing the books every month," he says.

Employees will often choose to reduce hours or compensation for an entire team rather than see their colleagues lose their jobs. "I think one of the benefits, when this is over, is bonding through shared sacrifice will be a value that will go on when businesses emerge," Klingel says.

5. Don't cut

Sometimes the best approach to weathering a tough economy is a little counter-intuitive. For some businesses, spending more money during a downturn can ensure that they're well positioned to take advantage of a recovery.

"Recovery happens about six months before everyone realizes that it happened, so the trick is to be in it when it starts," says Langley.

"My philosophy is, in a down economy is when small companies can really shine and be aggressive," says Nick Romano, President of Sign Up 4, an Atlanta-based software service company that works with the meeting and events industry. "We're not going at it from the standpoint of trying to maximize revenue in the short term." In order to remain — and stay — competitive, Romano says he's even hiring new sales staff.

In a downturn, fortune may indeed favor the brave. "Those that continue their marketing and continue their efforts own more market share when the event is over," says Klingel. "It's hard to have that courage, but the reward is there for those keeping their heads up."