Put Down the Ax: 5 Alternatives to Layoffs

From the Wall St Journal

By Sarah Morgan
| SmartMoney

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.

"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."

Correction: The name of the chief economist
for the Department of Labor quoted in this article is Alexandre Mas. A
previous version of this article incorrectly stated the name as
Alexander Moss.