It’s not easy making the call to downsize your staff. Everyone may be working hard and doing exactly what they should. However, if your business just isn’t performing how you hoped or you simply need to move in a different direction, you’ll have to make the important decision whether to lay off your employees or offer them a buyout.

Purpose of Layoffs

If you need to slash payroll quickly because you are bleeding cash, you’re often better off laying off employees. Layoffs are quicker and easier. Your employees don’t really have a say when they are approached with a layoff; if you’re letting them go, they have no room to negotiate. Laying off an employee does give them the ability to come back to your company after a certain amount of time. You can build in recall rights in their employment contract. Also, you can predetermine the duration of the layoff. If you only want a temporarily layoff, you can outline how long your employee will be let go before they can return to work.

Putting Together A Buyout Package

If you’re looking to have an employee leave for good, a buyout is the way to go. This usually entails putting together a financial package to offer the employee. The understanding is if the employee is willing to take a severance package, they leave the company forever. In this case, the employee is agreeing to leave and in return, you’ll pay them money.

There’s no standard rules for what to include in a severance package. A buyout plan typically ties to what the employee was earning. For example, it could be an agreement to pay six weeks of salary or for every year the employee worked, the employee gets one week of pay. Your buyout plan can include some health insurance coverage for a specific period of time.

Should I Layoff or Buyout?

There’s a couple things to keep in mind when deciding between your two options. The most important thing to think about is employee morale. It’s bad enough you’re letting someone go. Offering that person a buyout – especially if they have been around your company a while or are approaching retirement — is a strong goodwill gesture. A buyout offer is almost more for the employees who are staying, as it is a way for you to demonstrate you care about your employees even as they are leaving.

Another important thing to consider is money. As much as you’d like to help an employee on their way out, you may be letting them go because business is suffering. You might not be in a position to give away a lump sum of cash. Also, if your employee accepts a buyout, they aren’t eligible for unemployment benefits from the government. Therefore, think about your employee’s next move; it may almost be better for them to be laid off.

It’s easier to put a positive spin about somebody accepting a buyout to voluntarily leave your company. Unfortunately, it’s more expensive and if it isn’t accepted, you’re faced with the tough call of laying somebody off. Before you downsize your staff, make sure you understand the short-term and long-term repercussions of laying someone off or buying them out.