Should You Lay Off Employees During COVID-19?

The coronavirus pandemic is causing global economic uncertainty, and many small businesses are in a financial crisis. For most organizations, payroll and staff salaries are the largest fixed cost. As business revenue falls, owners are looking to lay off staff in an effort to save their business. 

If you’re a small business owner, it’s important to know what your options are. Here’s our step-by-step guide to understanding whether you need to lay off staff, the financial assistance you can receive, and various other considerations.

Calculate How Much Revenue You Are Likely to Bring In During the Financial Crisis

As a business owner, it’s vital you have enough money so that you can survive. We’ve got a complete guide on how to calculate your costs and trim your expenses. Once you’ve worked out your likely revenue and how much you need to spend to keep the light on, you can look at reducing non-staff expenses. 

Understand Your Staff Payroll and Other Expenses

You need to understand how much employing your staff is costing you during the crisis. That includes:

  • Basic salary and wages
  • Bonuses you pay
  • Cost of health insurance
  • Cost of other benefits
  • Employer taxes like payroll tax, FUTA, and SUTA
  • Any other expenses you make to keep people employed, like providing equipment and a working environment

Once you know the total cost of employing staff, you can examine that against your current and likely revenue to see if you have the cash flow to keep employing them. If not, you still have a couple of options before you start laying people off.

Get Financial Assistance From the Federal Government

The US government has introduced the CARES Act, which provides two loans as financing to keep your small business afloat during the COVID-19 recession. Both are administered by the Small Business Administration (SBA):

  • The Paycheck Protection Program (PPP) allows businesses to access emergency funding so that they do not need to layoff workers, or so they can rehire those that have been laid off. This program is currently expired, but an upcoming extension is possible.

  • The Economic Injury Disaster Loan Program (EIDL) provides a combination of a cash grant and a loan that can be used for many types of business expenses.

You apply for the Paycheck Protection Program through an SBA-approved lender, like a bank. You apply for the EIDL directly with the SBA. We have a complete guide to eligibility and applying for these loans.

The good news is that up to the first $10,000 of grant money provided through the EIDL program is forgivable, so you don’t need to pay it back—although any money you borrow in addition to this is repayable.

Money provided as part of a PPP loan does not need to be paid back either if you use it to retain staff or to rehire staff that you need to lay off. The maximum amount that you can get through PPP is equivalent to 2.5 times the average monthly payments to employees over the 12 months before you apply for the loan.

Furlough or Lay Off Employees During the Recession

Once you’ve examined your revenue, calculated your employee costs, and reviewed government assistance programs, you might still decide you need to lay off some or all of your staff.

  • Furloughing staff means enforcing a temporary leave of absence, during which staff will not be paid. During a furlough, businesses normally continue to provide benefits to employees, like health insurance, but suspend their salaries. It’s generally understood that after a furlough, staff will be able to come back to work.
  • Laying off staff means removing them from your payroll altogether and issuing them with a termination of employment notice. Lay offs can be temporary or permanent. If you lay off staff, you typically stop providing a salary or other benefits to employees.

Instead of furloughing or laying off staff, you might see if they are willing to work for a reduced salary, if you can do that with your current cash flow. You can also explore reducing hours, reducing or deferring bonus payments, job sharing, and other options.

Note that the requirements for reducing salaries, laying off, or furloughing staff may change from state to state, so check with your state’s Department of Labor to see what the rules are.

Communicate Furloughs and Layoffs to Employees

This is an extremely difficult time for any business. If you have to take the very hard decision to remove staff, you will need to communicate it carefully:

  • Make the communication personal
  • Be straightforward and honest about why you had to make the decision
  • Apologize, and state that you know the uncertainty this will cause
  • Offer help to impacted employees. For example, if you’re a restaurant, you might give them food
  • Provide resources on what they can do next, like a link to unemployment claims for the state
  • If you are furloughing employees, or you lay them off with an intention to rehire, let them know
  • If you expect the layoff to be permanent, let them know that too
  • Be responsive, kind, and gentle, and listen to what they have to say
  • If you are planning to bring the employees back in, continue communicating with them during the period they are not coming into work to let them know the latest circumstances and your plans

Furloughed or laid off staff can claim unemployment benefits through the relevant state department. In most cases, they can also get an extra $600 a week as part of the government’s coronavirus support.

Understand that Financial Assistance and Unemployment Programs are Under Severe Strain

US federal and state agencies are not set up to deal with the extreme financial pressure and pain caused by the coronavirus recession. Record numbers of unemployment claims and loan applications are resulting in significant delays and issues with getting monetary assistance to employers and individuals. Your business and your staff may have to wait several weeks for loans or unemployment payments to be processed. 

Government guidance, support, and stimulus packages may also change over time. Make sure you review the latest government guidelines for businesses when making financial decisions.

This is an extremely difficult and trying time for everyone, and you need to make the right decisions for your business to survive. That will sometimes mean laying off or furloughing staff, and we hope this guide has helped.

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