The Right Way to Downsize

I have been personally involved in leading several successful restructuring and downsizing exercises in my effort to support organizations to be more competitive, and believe that successful downsizing or rightsizing is a very important part of organization restructuring for future success of the organization.

While previously, restructuring and downsizing are only done when organizations are in dire need to survive in an economic turmoil, many organizations today are doing it in order to be more competitive and to be ready for any economic eventuality.

Based on the current global economic uncertainty, many organizations are either thinking about or have initiated downsizing, rightsizing, staff cuts, retrenchment, or managed redundancy. Whatever you call it, having properly planned strategies for downsizing will minimize the damage to those employees being laid-off and the downsizing survivors who remain to carry out the organization future business plan resulting in “new” organization that excel. Doing the downsizing exercise correctly and effectively will reduce legal liability, and result in better organization with maintained staff morale.

A Harvard study finds that the manner restructuring and downsizing is accomplished has tremendous impact on whether the result is improved productivity from people who survived the exercise and remain in the organization

No one, from the operation floor to the board-room, enjoys downsizing; but when the need for a reduction in staff is unavoidable, a downsizing can be accomplished in such a way that the problem is fixed and the organization excels.

Strategize and Plan the Workforce Downsizing

Having a clear, well-defined vision of the company is imperative before the downsizing is executed. Management should know what it wants to accomplish, where the emphasis will be in the new organization, and which employees will be needed. Will the new restructured organization be more effective that it outweighs the cost of the “one-time charge” of downsizing?

Pre-downsizing Justification

Employees want to know that the organization has taken all other actions to improve its business before downsizing exercise is taken. There should be clear actions and programs from the management that the company is only considering downsizing as a last resort. Programs like company-wide cost cutting measures, compensation restructuring, and many other initiatives that are implemented purely on voluntary basis must be well communicated to employees. When the actual downsizing exercise is done, employees know that the organization has done everything it could to save their job, hence reducing the anger of loosing job.

The Do’s and Don’ts of Downsizing

There is a need to ensure that downsizing is done with a just cause in order to avoid legal implication and to avoid long term effect of the downsizing to the “new” organization.

Organization must be well verse with the dos and don’ts on downsizing based on the existing laws in the country – without compromising the organization’s needs for an improved organization after the downsizing exercise.

When a retrenchment exercise – resulted from restructuring and downsizing – is to be done, the followings should be followed.

The organization must inform the nearest Labor office 1 month before the retrenchment exercise through Form PK.

Employees’ rights on termination benefits under the labor laws are as follows:

1.        Retrenchment benefits based on year of service as required in the Employment Acts (EA)1955 should be followed as a minimum requirement. Under the Acts, employees who have served less than 2 years are entitled for 10 days of wages per year of service. Employees who have served 2 years but less than 5 years are entitled for 15 days wages per year of service. Employees who have served more than 5 years of service are entitled for 20 days wages per year of service. The EA 1955 requirements are a minimum requirement payment. The market practice on payment of retrenchment has been ranging from 1 month to 2 month salary per year of service.

2.   Notice period or payment in lieu of notice.

3.   Payment for the balance of annual leave, if any.

Employees who loss their jobs should also be assisted in filing their claims with the Employment Insurance Scheme office. Up to 31st December 2018 employees who loss their jobs are entitled to designated Interim payment up to 3 months. This benefit will be improved comes January 2019 where employees who loss their jobs are entitled to benefits from Employment Insurance Scheme, including payment of designated allowance of up to 6 months, training, training allowance and job placement. Claim must be filed within 60 days of loss of job.

Employees on fixed term contract have the following rights under the General Contract Principle on termination benefits:  

1.   An employee under fixed term contract is guaranteed that he will be employed up to the end of his fixed term contract, unless he is terminated due to disciplinary issue. Thus, if an employee on fixed term contact is terminated before the end of the fixed term contract he is entitled to be paid his wages for the remaining period of his fixed term contract.

If the company decides to just give the contractual notice period to terminate the contract of service of an employee on fixed term contract, the employee may refer the case to the Industrial Relations department under section 20 of the Industrial Relations Acts and the case may eventually be referred to the Industrial court.

Terminating an employee by giving the contractual notice, amounts to termination simpliciter. The remedy for an employee under fixed term contract will be the wages for the remaining period of his fixed term of contract.

2.   Notice period or payment in lieu of notice.

3.   Payment for balance of annual leave, if any.

What often practiced, however, in terminating a contract short of the contract period is an agreed quantum for separation between the company and the employee. The common quantum often agreed is half of the remaining period of contract or 6 months salary, whichever is higher. 

In making sure that the retrenched employees’ benefits are optimized when they are terminated, the term used in the downsizing exercise is very important. In order to help employees who are terminated in the downsizing exercise, the term “Retrenchment” should be used in the termination letter issued to employees in order for them to be given a tax relief for up to RM10,000 per year of service on the retrenchment compensation that they receive.

While doing the downsizing in line with the existing laws in the country is important, it only contributes 20 percent to a successful downsizing exercise. Many organizations pay too much attention only to this – forgetting that downsizing involved people, emotion, pride and livelihood.

Communication, Communication and Communication

The importance of communicating to employees during downsizing cannot be overstated. Throughout the layoffs and downsizing process, communicate the facts as honestly as you can and with great compassion. People must walk away from meetings and one-on-one discussions with the feeling that decisions were fair and legitimate.

They must feel the decisions were good for the business and their future. They need to understand the context in which decisions were made. They need to hear that a rational, well-thought-out decision making process occurred. Express empathy for those who have lost coworkers with whom they shared relationships. You should over-communicate during a downsizing exercise.

Design an effective communications strategy for before, during, and after the downsizing. It is the critical factor in making sure that your workforce quickly aligned to the new organization vision, mission and structure. Effective communication ensures the success of the new organization’s strategies.

Downsizing with Dignity and Empathy

Having employees locked out from the company premise or escorted out the door with their belongings by security personnel or a supervisor standing guard immediately after they are told that they are retrenched will create an angry and long lasting bitter feeling from the people being laid off. This will increase the probability of them finding fault in the downsizing exercise, leading them to pursue legal action against the company. It is also not an effective way to assist the downsizing survivors to feel warm and fuzzy about the organization.

It is much better allowing these people being retrenched to clear their belongings, with assistance from their supervisor, in the evening when most other employees have gone home or in the coming weekend when the supervisor will have an opportunity to find out how the former employee fairing several days into the unemployment. This way they will not feel that they are being “kicked out” from the organization that they have spent major part of their life with. 

A more humane way would be as what the company I was working for did when the company was forced to do a downsizing exercise during the financial crisis of 1998, where we gave employees to be laid-off choices of either to be paid in lieu of notice or they may serve the notice period. This way, not only we got them to return the downsizing letter with their signature on it, indicating their choice, they also felt that the company did not “kick them out of the door” in an instance. While they would naturally feel sad and uncertain, they were not overly bitter with the decision that the company has taken in its downsizing exercise.

Downsizing involved people and emotion. Therefore, to downsize effectively you have to have empathy with the people who are losing their jobs. 

Supports for those Downsized

To ensure that people know that the organization has empathy with them losing their job, there should be a genuine effort on the part of the organization to organize an outplacement program for the downsized employees. Caring employer would try to match the skills that their downsized employees have with the need of other organizations within the same industry that may need some of the skills and competencies that these employees have. 

Organization should organize program that teaches these unfortunate people on how to continue their career and life after the downsizing with confidence. For those who want to find a new job, there will be some who have not applied for job for a very long time. They may not even know how to write an effective CV or how to be successful in a job interview.

As for those who want to take the opportunity with the retrenchment compensation that they received to start a business, they may not have the faintest idea on how to start a business. Here is where organization can help by providing the necessary knowledge and skills for these people to pursue what they want after the downsizing through training programs to equip them with the necessary knowledge and skills to either get a new job or start a business. Having a motivational program to put them into the right frame of mind and attitude during their unemployment period would also be beneficial to these downsized people.

An organization may ask why should it spend any money or time to organize all these when the downsized people are no longer its employees. Firstly, these programs will assist those unfortunate people who lost their job to start a new. This should also reduce any unconscious guilt feeling that management may have for having to do downsizing. Secondly, when employees see that their former employer still care about them even after the downsizing, going to the lawyer to complain about them being retrenched will not be the first thing in their mind after the downsizing, hence reducing the probability of any legal complication. Thirdly, and most importantly, it will assist the downsizing survivors, who remain in the organization to feel warm and fuzzy about the organization leading them to support the new organization’s initiatives and directions.

Morale and Motivation of Downsizing Survivors

Effective downsizing should lead to a more efficient and effective organization. This will only happen if employees who survived the downsizing are motivated to carry their new added duties and responsibilities with vigor. Employees’ confidence of the organization would be dented during the downsizing exercise. It is important that their confidence of the organization be reinstated. There should be rigorous communication and employee relations activities after the downsizing. Having some things not change can provide stability in the midst of the downsizing. It also sends message that life at work does move on. 

 Continue to hold regular events, functions, and programs that employees are familiar with before the downsizing. Keep the familiar meeting structures unless the group decides to change them. Do not cancel committee or work group because everyone is too busy or you feel there is a lack of interest. 

At the same time, managers and supervisors must be strong leaders, decisive yet participatory. They must inspire confidence at this time, so people feel the leaders can be depended upon as they take the first steps into the unknown future of the “new “organization.

With the current global economic turmoil, organization downsizing may be inevitable. But having a well planed and thought out downsizing exercise will minimize the negative impact it may have to the organization and the people involved and increase the probability of creating the new organization that excel.  

Che Ros, CEO and Business Turnaround Expert

Fauzi Che Rus, CEO of Ramli Capital Holdings Sdn Bhd. Fauzi has a successful background assisting CEOs in business turnaround as well as elevating organizational performance. He is a guest author on Halalop.