How to Save Money on Payroll: Furloughs, Layoffs, and Other Options

Nobody really wants to think about it, but a realistic grasp on your company’s financial situation sometimes means looking for budgetary items you can safely cut. In some circumstances, that will mean a payroll review and staffing cuts. Knowing how to save money on payroll with the least amount of damage or conflict is a tough skill to learn, but could be a crucial one.

If you find yourself struggling to maintain employees’ wages, there are a handful of options to consider:

  1. Layoffs
  2. Furloughs
  3. Reduction of Hours or Pay

Staffing reductions are hard to think about, and even harder to talk about, but it’s always important to have a plan before you need it. It’s also crucial to consider the legal ramifications of any method you use, as the laws around hiring, firing, furloughs, and pay changes can vary from state to state and by circumstance.

Now let’s go through each of your options.

1. Layoffs

Full separation for an employee should be avoided where possible, but it may be inevitable. While many factors in a layoff follow the usual pattern of termination, there are a few key differences.

First, you should draft a termination letter detailing the layoff to the affected employees and encourage them to apply for unemployment benefits as quickly as possible. Consider also how you will handle the influx of unemployment claims to ensure a smooth process: for example, to contest one employee’s claim while not contesting others is discriminatory.

When a former employee files for unemployment, you will receive a “Notice of Unemployment Insurance Claim Filed” in the mail. The notice provides general information about the claim, including the reasons the employee says they are no longer working. It’s important to respond within 10 days, or you may see a change in your tax rate.

While your reasoning for layoffs may be sound, you should prioritize clear communication to remaining staff so they know their jobs are safe and understand the process behind the layoff. Keeping up motivation and engagement is difficult no matter which method you choose, but workers will of course wonder if they’re next. Managing these anxieties is as important as the decisions around the cuts themselves, as your workforce is more limited.

How to Save Money on Payroll: The WARN Act

If considering a mass layoff, be aware of the requirements in the federal Worker Adjustment and Retraining Notification (WARN) Act. The WARN Act requires companies with 100 or more employees to provide at least 60 days’ advance written notice of a mass layoff affecting 50 or more employees at a single site. The WARN act typically excludes those who have worked fewer than six months in the last 12, and those who work fewer than 20 hours a week. When laying off workers, it’s crucial you meet the requirements of both state and federal laws.

2. Furloughs

Temporary, unpaid leave is called a furlough, another worthwhile example of how to save money on payroll. Furloughed employees are still eligible to receive health benefits and can file for unemployment. There are several reasons why you might consider furlough over layoffs.

  • An employee furlough reduces labor costs upfront.
  • A furlough incurs no additional costs, such as severance packages.
  • Since furlough is a temporary practice, you’ll see fewer disruptions when jobs resume because the returning employees retain their knowledge, skills, and ability.
  • New employees require recruitment, selection, socialization, and training—which can be expensive.

While a furlough is in some ways a relief for your workers (compared to a layoff), it’s still unpaid, which can have severe consequences on your workers and their families. This makes a furlough more difficult in some ways because you can’t be sure all your employees will return.

Anyone you’re expecting to come back who instead finds other employment represents a loss of the time, energy, and money you’ve put into their career path. If you’re looking at key departments or staff, consider reducing pay while retaining their services.

3. Reduction in Hours or Pay

Reduction in pay, or in hours for non-exempt (hourly) employees, is a simple solution. It’s the middle ground between unpaid furloughs and full layoffs, and scales easily. If you are committed to reducing your workforce by 30 percent, for example, it’s much easier to do this in a fair and productive way.

Always start by reducing the incomes of company leadership and managers first, then work your way down the corporate ladder until you’ve arrived at your desired bottom line. This is how to save money on payroll equitably, and ensures the fewest downstream effects and shows respect for your workers and their contributions.

Rather than simply reducing hours, you can also keep up production by alternating work schedules between employees. Other creative solutions exist, when looking for options on how to save money on payroll—but keep in mind that you may need to explain your methods in the future, so it’s probably best to keep it simple and equitable.

In any case, keep in mind that significantly reduced hours mean employees may be rendered ineligible for insurance benefits. This is another major effect of pay reduction and could make the difference for your employee between staying on or looking elsewhere for steadier and better pay.

All Your Payroll Questions, Answered

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Legal Disclaimer: None of the information provided herein constitutes legal advice on behalf of Monster.