Making the Tough Decisions on Layoffs

It's a position no remodeler wants to be in, but with a slipping economy and work dropping off, many owners are having to make the tough decision to lay off employees.

August 31, 2008
5 tips for successful layoffs

It's a position no remodeler wants to be in, but with a slipping economy and work dropping off, many owners are having to make the tough decision to lay off employees.

While it's not an easy call, deciding to let employees go may be the only way to survive the current downturn. Labor's the biggest expense for most companies but also their greatest assets. For remodeling company owners, its can be even harder to make these decisions. They aren't CEOs of large corporations letting 1,000 faceless employees go. In many cases, these are friends, people who are almost like family.

“The question is what's most important, and to me it's saving the entity, the business,” says Jim Strite, president of Strite Design + Remodel in Boise, Idaho. “We have to make the decision: do we run a company into the ground because we desire not to let anybody go, or is the goal to run a viable company so that when the market does turn around we provide an opportunity for those that were let go to come back?”

Making the Call

One of the most difficult parts can be knowing when to make the decision to lay off employees. Is a downturn a temporary blip you can weather or is it a more serious problem that requires action?

For Strite, the answer became obvious this spring as leads dropped to 50 percent of the average. Those jobs that were coming in were much smaller than what the company had taken on before.

“Since we're an open-book company, it's a little bit easier because we share the numbers with the folks every week,” Strite says.

It was at a weekly Thursday meeting earlier this year that the management team (made up of Strite, the office manager and the production manager) explained the situation to the employees and asked for their suggestions by Monday on how to save money.

The team came up with several suggestions from reducing hours for all employees across the board to taking the water cooler out of the office. In the end, the management team opted to lay off three employees (a design assistant, a project manager and a field craftsman), cut the office work week from 40 to 32 hours and take a large salary cut themselves.

“The numbers tell a story, so we had to rebuild the budget for the year based on the number of calls we were getting and the close ratio,” Strite says.

It was a similar situation that prompted Jason Kirkpatrick, president of Kirkpatrick's Construction, to release two of his four lead carpenters this spring. While the Centreville, Va., firm usually has work lined up months ahead of time, the company was working almost week to week by this spring.

“For four months we had about five leads,” Kirkpatrick says. “I used to go on five leads in one week. It was crazy.”

Kirkpatrick decided he either had to put all four lead carpenters on a part-time schedule or let two go. He decided he was better off keeping his two best employees than trying to save everyone. Since then, things have turned around and the company is booking enough business to easily keep the two leads busy.

“I had to make a decision on how to keep my 'A' players,” he says. “I didn't want to risk losing them in an effort to keep everybody. I feel like I really made the right decision in doing what I did.”

While some companies are using the downturn to get rid of sub-par employees, Strite says it wasn't easy to lose any of the team.

“All of them were key personnel, so we had to look at what would have the least impact on us,” he says. “It came down to whose work we could pick up with the remaining personnel.”

Remodeling Designs also took a business-based approach to deciding which employees to lay off when cuts became necessary last fall. After a record first six months of 2007, work vanished in the second half of the year, as the local Dayton, Ohio, economy was hurt by slowdowns at General Motors and in the mortgage industry. By the end of September, the company had to let five of its eight project managers go, most of them longterm employees.

The company chose which ones to lay off by looking at the gross profits of their jobs over the past year. The three with the highest job profitability kept their jobs.

“It took the personal part of having to lay people off out of it,” says Vice President Kelly Eggers. “It made sense from a business perspective, and it reinforced with our project managers how important it is to be profitable on their jobs and to come in on time and on budget.”

The company has been able to bring back all but one of the project managers after work picked up earlier this year. (And that employee didn't come back for non-economic reasons.) All along, Eggers believed the downturn would be temporary and wanted to take care of the employees during the time off. So Remodeling Designs continued to pay the health insurance for the employees and their families while they were out of work.

“I worried about their families, and I did not want them going without insurance,” she says. “I figured if I at least showed good faith and paid for their insurance, it gave them one less thing to worry about.”

Typically, the company pays 100 percent of the employees' insurance and puts $100 a paycheck toward the families' coverage. Once the employees came back on board, Eggers set up a payment plan for them to pay back the family portion of insurance, which the company had covered at 100 percent during the layoff.

“These were all good employees and I wanted them all back, so we did what we could to help,” Eggers says.

That loyalty paid off for Eggers as employees turned down other job offers during the layoff so they could come back to Remodeling Designs when business picked up.

Communication is Key

However the decisions are made, making sure employees know the situation is important, for those who leave and those who remain.

That's another advantage of an open-book approach, Strite says. When employees have been seeing the company numbers for years, they're going to be more likely to trust the owner that there's a problem.

“It's important to keep everyone abreast of what's going on,” he says. “Without clear communication, they start creating their own stories and spreading those stories, and that's very difficult to turn around. Open communication cuts through all that talk.”

Kirkpatrick says he also tries to keep his team up to speed in weekly company meetings. Once he let the second lead go, the two remaining were understandably nervous.

“I just flat-out told them the truth,” he says. “I let them know where we were in the pipeline, that I was out there looking for jobs. The feedback that I got was that my guys really appreciated it.”

Communication is important not only with the employees, but also within the management team, Strite says. Whether it's a team like his or a husband-wife team, having someone to talk the problems over with can be important.

“Remodelers want to please people, so letting people go isn't easy,” Strite says. “You've asked them for dedication, and then to have to turn around and let them go is not a comfortable position.”

Kirkpatrick says that the feeling of failing his employees was the worst part of the experience.

“It's my job to have work lined up and give them job security,” he says. “It was really hard, sitting in a company meeting Monday morning, telling guys we have no work for the week. I felt in some capacity that I somehow let my staff down.”

Eggers echoes that sentiment.

“These guys are like family,” she says. “The toughest part is you just worry about the guys putting food on the table and making ends meet.”


5 tips for successful layoffs

Attorney Dan Levine specializes in labor and employment law for Shapiro, Blasi, Wasserman & Gora P.A., in Boca Raton, Fla., and has handled thousands of employment disputes.

He says that layoffs can be especially challenging for small businesses that don't have set policies for handling them. He recommends five things small businesses can do to avoid exposing themselves to legal and financial risk:

1. Get a release – The importance of getting the employee to sign a “release from all claims” during the termination process cannot be overstated. This document can help shield the business against future civil suits. However, companies need to make sure the release conforms with age discrimination guidelines.

2. Offer a severance package – It's a mistake to think that severance packages are only offered by big corporations to high-level executives. The reality is that any business can put together a reasonable severance package for its employees. These don't have to be expensive, and they can be tailored to any employee. Severance packages can go a long way in cooling off an angry or hostile former employee.

3. Cut your losses – Don't challenge unemployment claims. This mistake probably leads to the most revenge-motivated discrimination suits.

4. Avoid the IC Mix-Up – Know the legal definition of an independent contractor. An independent contractor may technically qualify as a company employee, which increases a company's liability when terminating them.

5. Be Nice – Generate goodwill on the way out. Pay for accrued vacation/sick time, company cell phone bills, etc. By being nice — even to those whom you feel don't deserve it — a company can avoid motivating an ex-employee to get even by filing a lawsuit, grievance or claim.

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