Many companies are undergoing painful reductions in force (RIFs) in an effort to streamline their costs in this tough economic climate. While RIFs can be very effective ways to save money and deal with excess capacity, if not done thoughtfully, they may result in only short-term savings while impairing the employer’s long-term strategic growth. RIFs also frequently hurt employee morale and create “survivor’s guilt” for the remaining employees in the short term.

Other options employers might consider in lieu of RIFs include employee furloughs, reduction in work hours (and pay), and across-the-board pay cuts. According to a January 2009 survey of 100 businesses by Challenger, Gray & Christmas, 25 percent of companies had cut workers’ hours, 7 percent had reduced the workweek to four days, and 7 percent furloughed employees in lieu of permanent layoffs.

Furloughs

Employee furloughs can be voluntary or, more commonly, mandated unpaid time off. For example, most automobile manufacturers are using unpaid furloughs for a set period of time to shut down production at plants with an overcapacity of cars. Other companies have allowed employees to choose the timing of the furlough within the parameters of their business needs. When considering a furlough, employers should be mindful that furloughs for overtime-exempt employees must be given in full workweek increments. In contrast, non-exempt employees may be furloughed in time periods shorter than a full workweek.

Pay Cuts and Reduced Hours

Some companies are cutting wages across the board in lieu of RIFs. For example, FedEx has cut executive pay by 10 percent and non-executive pay by 5 percent. Still other employers have opted to reduce work hours for some employees, reducing their pay commensurately.

The benefits associated with these various alternatives include: no severance payments, a likely reduction in legal liability exposure and litigation costs, and a quicker return on investment without the time-consuming and sometimes gut-wrenching process of deciding whose position is to be eliminated in a RIF. Since employers typically implement one or more of these alternatives in an across-the-board fashion, morale may even improve through the collective effort to avoid job loss. These methods also may permit the employer to quickly and more efficiently staff up when business improves.

Like RIFs, however, if done incorrectly, these alternatives may lead to legal problems for the employer, such as wage and hour claims, possible loss of employees’ overtime exempt status, and discrimination claims. Accordingly, you should contact legal counsel before instituting one or more of these cost-saving measures.