How do companies choose who to lay off?

Layoffs are difficult for employees and HR professionals alike. Employees are affected by the emotional rollercoaster of losing their job, and the instability, and financial challenges that come with that. They may not realise it, but the layoff process is difficult for their HR colleagues too. Not only is the process complex and time-consuming, HR professionals may find they have to lay off people they’re close to. After all, we spend most of our waking hours at work, so it’s only natural that we build bonds with the people we work with. It’s also part of the HR role to build connections and trust across the business, and a period of uncertainty can rock that trust.  

When preparing for a layoff, clear, rational thinking is your best asset. One way to do this is to focus on who to lay off and why. When you have this clear in your mind, you’ll find the process begins to get easier. You’ll be more equipped to explain the rationale and selection process to those affected, even though this certainly won’t be your most enjoyable day at work. 

Choosing which employees to lay off is difficult on a personal, team, and organisational level. There’s a lot at stake, from legal ramifications to organisational morale, long-term productivity, and sustainability. 

With all these factors at play, how do companies choose who to lay off? Well, it really depends on the company and its needs, but these are a few common methods to consider: 

• Seniority
• Employment status
• Merit
• Skills
• A combination of criteria

Each method has its benefits and drawbacks, so it’s worth reviewing each with the layoff team, and making a decision based on corporate objectives. 

Let’s take a close look at each of these criteria, to examine their pros and cons, and to help you decide on the best layoff strategy for your business. 

The seniority-based selection method is one of the most straightforward. It’s essentially a last-in-first-out process, whereby the most recent hires are the first to be retrenched. The logic behind this is that, as they’re new to the business, they probably aren’t such a strong asset as someone who is more established within the company. 

Another key benefit of this selection criteria is that it can help to protect against age discrimination claims. Older workers with longer tenure won’t be impacted, which mitigates the risk. 

Despite the advantages of this method, we’d be remiss if we didn’t also mention the pitfalls. The first one is the obvious fact that, just because someone is new to the business doesn’t mean they’re not important to the business. They may have a specialist area of expertise that could help the company grow at this challenging time. 

It’s also important to remember that, just because you’re cushioning the company against age discrimination claims, it doesn’t mean that you’re not potentially discriminating against other groups, such as graduates. Keep these issues in mind when deciding whether to select by seniority. 

Selecting staff for layoff based on their employment status gives more security to your full time employees. For example, you may choose to retrench part-time or contract workers, while those with full-time, permanent employee status keep their jobs. 

This method can protect your employee brand, because letting go of a contractor is more easily understood by the general public than letting go of a permanent employee. While this is a huge perk, there’s also a drawback to this method of selection. 

Selecting by employment status underestimates the impact that part-time and contract workers can have on your business. While they can sometimes be seen as less essential than full-time, permanent staff, that’s not always the case. Not all full-time workers pull their weight, and contractors often shoulder more than their share of the burden. Which layoff would affect the business more? If you’re aiming to create efficiencies with the downsizing process, cases like these can have the opposite effect, and should therefore be considered carefully before implementation. 

Finally, many firms rely almost entirely on contract or remote workers, which makes sense for some business models. If that applies to your company, this layoff selection criteria probably won’t work for you. 

This is a very popular method of selection, for good reason. It enables the business to lay off poor performers, so that valuable assets are retained. 

Do bear in mind, though, that to successfully implement this selection criteria, the company must already have a strong performance evaluation system in place. Often they are an afterthought, or not completed regularly, which can negatively impact legal liability when managers don’t have the documentation to back up their choices. 

It’s also important to consider which departments get laid off first. That means you’ll need to understand performance differences between teams. For example, rather than retrenching three staff from a high performing team and three staff from an underperforming team, it may make more sense to retain all high performers and lay off all poor performers, regardless of which team they’re on. This sounds simple, but doesn’t take account of which teams have the biggest impact on the business, and requires extensive cross-departmental collaboration to make the decisions. If one team is making more money than another, it needs to be taken into account when deciding how many staff to retrench within each department. 

This selection criteria takes into account the above-mentioned issue of retaining high-impact employees by keeping those with the skills that affect the success of the business. To apply it effectively, the layoff team must thoroughly understand exactly what affects business success. Whether it’s customer service, cutting-edge technology, or innovation, knowing your business drivers is crucial to making this work. 

To identify whether this method would work for your business, assess the impact of retrenching an entire department – or even half the department. If the impact would put a stop to business operations, that’s a highly skilled team that should be retained. You’ll need information from team managers about the skill level of their teams. 

This method works well, but has one major drawback. It could potentially result in age discrimination. Often, it results in older workers being retrenched as younger workers have more up-to-date skills. For example, a Computer Science graduate might know more programming languages, and be more informed about new technology, than an older Engineer. 

This is even more pertinent if your company hasn’t kept up-to-date with providing professional development opportunities. The layoff team needs to reflect honestly on whether a lack of development for tenured staff will negatively impact a skills-based layoff process. 

This may be the most complex methodology, but it’s also one of the most effective. As the name suggests, it involves creating a list of different layoff criteria with each given a different weight. The formula is then applied to every individual, to rank them. Those with the lowest ranking are laid off in order, until the company meets its financial objectives. 

The greatest benefit to this method is that it allows you to develop a unique layoff methodology customised to the specific needs of your business. For example, you may decide to give most weight to employee skills and employment status, and less weight to seniority and merit. Working with an HR Data Analyst will enable you to develop a strong model to determine an employee’s ranking. 

Set clear criteria. State what the criteria are and give examples of what merits each ranking. For example, the tenure category could look like this:

• Under 1 year: 0 points
• 1 – 5 years: 1 point
• 6 – 10 years: 2 points
• 11 years+: 3 points  

You can also weight factors based on their value to the business – for example, if you value long-term employees, you could change the “11+ years” category to 5 points, keeping the “6 – 10 years” category at 2 points. 

Review. Seek input from the legal team and data analysis team, asking them to review your layoff model and criteria in detail to ensure you’re not negatively impacting any protected groups. This will minimise your legal liability and help to protect your employer brand. 

We’ve discussed the common criteria, and the pros and cons of each, so let’s look at an example. 

An HR Executive at a manufacturing company needs to retrench enough people to recover 20 million SGD in human capital costs. How would each selection criteria work in this scenario?

Selection based on seniority

Employees are ranked in order of tenure. The most recently hired employee is retrenched, working backwards until the financial goal is reached. This could backfire if a new hire is contributing in an area of the business that is producing value. 

Selection based on employment status

This involves making a list of all part-time or contract workers, and laying them off. However, problems arise if the company doesn’t have enough contingent workers to cover the required cost saving, or has so many that the savings goal is exceeded. In both situations, this criteria will need to be combined with another selection methodology to make it work. 

Selection based on merit

To execute this method, historical performance reviews are evaluated to identify under-performing employees. A list, in order of performance, is created, with the worst-performing employees retrenched in order until the savings target is met. This will work well if the company has a strong performance review process in place, but otherwise it can be difficult for managers to objectively evaluate staff under pressure from impending layoffs. In this case, evaluation criteria must be clearly communicated to managers.

They could include: 

• Operates with few to no errors
• Excellent attendance record
• Expert knowledge of manufacturing technology

Selection based on skills 

This method requires HR to discuss the most impactful areas of the business with the layoff team. For example, if manufacturing product A is highly profitable, employees involved in this process should be safe from layoffs. However, if the company has a few staff with skills they don’t want to lose, it may be better to combine this approach with another methodology. 

Selection based on multiple criteria

In this case, it’s necessary to develop a formula that allocates different weights to different criteria, with the most important criteria given the most weight. The formula is applied to each employee, with employees then ranked according to their score. The lowest scoring employees are retrenched, until the savings target is achieved. 

For this example, weights could be assigned to criteria such as: 

• Tenure
• Employment status
• Merit
• Skill set 
• Potential for promotion or leadership
• Threat of competitor poaching
• Impact

Every employee would be ranked on a scale for each criteria, with rankings factored into the weighted formula. 

Whichever method the company chooses, selection should be made through a collaboration between HR, the executive team, the layoff team, the legal team, and the analytics team to ensure fairness and long-term business success.  

So how do companies choose who to lay off? If you’re planning a workforce reduction, this is a difficult and sensitive question that needs to be approached carefully and fairly. A robust methodology will ease employee communications and legal liabilities, making an unpleasant process more bearable for everyone. 

The employee layoff selection methods that we’ve outlined can provide a fair framework that will ease the decision about which employees to retrench and which to retain. 

To summarise: 

• Selection by seniority: Pros: simple to execute and avoids age discrimination. Cons: overly simple and may result in other kinds of discrimination. 

• Selection by employment status: Pros: easy to implement and helps to protect employer brand. Cons: may underestimate an organisation’s reliance on contingent workers and needs to be used alongside another selection method. 

• Selection by merit: Pros: enables the company to get rid of poor performers and is easy to execute if a performance review process is embedded. Cons: a subjective approach can lead to liability issues, and the method doesn’t account for the impact of different departments. 

• Selection by skills: Pros: keeps talent in profitable areas of the business. Cons: requires a lot of cross-departmental collaboration. 
• Selection by multiple criteria: Pros: can be customised based on the bespoke needs of the business. Cons: complex to set up and implement. 

At Careerminds, we believe it’s important to be ready for major changes, such as a reduction in force. We combine expertise and new technology to support your organisation and provide outplacement services that help your organisation to positively navigate retrenchments.  

Click below to contact one of our experts and find out if we’re the right partner for you.

Jen David

Jen is a careers writer and CV specialist, with over 13 years' experience in the job search sector. Find out more by connecting with her on LinkedIn or visiting her website.