How Do Companies Decide Who to Lay Off?

April 25, 2024 by Rebecca Ahn

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Layoffs are difficult for everyone in an organization. They are time-consuming and emotional. Although it might not seem like it to employees, layoffs are also extremely difficult for the HR professionals who have to execute them.

This is especially true when HR folks are laying off people whom they are close to. After all, some weeks we spend more time with our co-workers than our actual families. It also often goes with the HR job to build deep connections and trust with employees. So it makes sense why this could be quite difficult for a human resources professional to undertake.

Thinking rationally is one of the most important things you can do when preparing for a layoff. One of the best ways to remain rational is to focus on who you will be laying off and why.

Once you understand why and how people are getting laid off, the whole process will become easier. It might still be hard–after all, you’re not an emotionless robot–but this will make it easier for you to mentally grasp. Which will then make it easier to explain to the people you are laying off.

Choosing who to lay off isn’t just difficult on an individual HR level, but also on an organizational level. There is a lot at stake when layoffs are conducted. There is legal liability to think about, overall organizational morale, productivity, and long-term sustainability.

So How Do Companies Decide Who to Lay Off?

How do you choose who to lay off, taking into consideration all of these factors? There are a few common methods to help you determine who will be let go. These include:

  • Seniority-Based Selection
  • Employee Status-Based Selection
  • Merit-Based Selection
  • Skills-Based Selection
  • Multiple Criteria Ranking

Each method has its shortcomings, and what is right for each organization will vary. You need to review each method with your executive team and then make a decision based on your overall goals.

Now let’s dive into each of these employee selection methods to understand their pros and cons and what would make each the right layoff strategy for your organization. You can also download our free Essential Guide to Handling a Layoff below to learn how to best downsize your assets. Let us help your company decide who to lay off and considerately transition your employees on their way out.

The Essential Guide to Layoffs

Employee Layoff Selection Methods

1. Seniority-Based Selection

This is one of the simplest methods. The last employees to be hired become the first people to be let go. This makes sense logically. If they were recently hired, they probably haven’t become as strong of organizational assets yet. You could maybe even make the argument that the organization was doing fine before they started working however many days or weeks ago.

Another great benefit of this method? It can help protect you against age discrimination suits. Older workers with tenure at your organization won’t be laid off using this methodology, so it greatly eliminates your risk of impacting this group.

Although there are some great advantages with using this method–simplicity, lessened risk of age discrimination–there are also some shortfalls that we need to cover.

The first one is the fact that, just because someone was only recently hired, it doesn’t mean that they aren’t an important asset to your organization. For example, if you recently hired a seasoned industry expert as your VP of Strategy, that person is a huge company asset. So there are several exceptions like this example which can make this method shaky.

Another shortfall is the idea that, just because you are less likely to discriminate based on age, you aren’t necessarily safe from potentially discriminating against other protected groups. It’s important to keep these potential issues in mind when using this seniority-based layoff selection method.

2. Employee Status-Based Selection

This methodology focuses on providing more security to your full-time employees. Contingent workers at your organization–such as contractors and part-time workers–will be laid off, while your workers with full-time employee status will be given preference in keeping their jobs. Since your organization doesn’t have the same legal obligation to contingent workers as it does to full-time employees, this method is great for organizations that are looking to protect their legal liabilities.

It’s also good to note that most of the general public understands the difference between letting go of a contractor versus a full-time employee. While letting go of the contractor may not be good for your reputation, it is more easily understood than letting go of a full-time employee, which makes it slightly less damaging to your employer brand.

So while all of the above are definite perks of this method, there is one huge drawback. This method underestimates the impact that your contingent workers have on your overall business. It’s easy to assume that your contingent workers are less essential than your full-time employees, but you don’t necessarily know that.

You could have a contract-to-hire worker who is carrying the weight of three different positions, and a full-time employee (FTE) who is doing less than the work of one full-time role. So which layoff would be a bigger hit to the organization? If the whole point of downsizing is to become more efficient, exceptions like these create the opposite result.

Finally, many organizations in the last few years have become increasingly reliant on contingent workers. Outsourcing complete teams to specialty firms makes sense in some cases. If your organization is heavily reliant on these types of workers, then this employee status-based layoff selection method may not be for you.

3. Merit-Based Selection

This is one of the most popular methodologies for how companies decide who to lay off. And for good reason. It helps managers weed out poorly performing employees so that the organization doesn’t lose any valuable company assets that they might lay off using other methods.

That said, several caveats must not be overlooked. Firstly, to correctly execute this method, you need to have a strong performance evaluation system in place. A lot of the time, performance evaluations aren’t entirely objective and aren’t done regularly. This can lead to a lot of legal liability when managers don’t have sufficient documentation to back up their layoff decisions.

When executing this method, leaders also need to be aware of performance differentiation across various teams. It might not make sense to let go of three people on every team across the organization, because different teams might have a wide range of performance behavior.

For example, do you want to fire three people on your high-impact product development team, as well as three people on your poorly performing communications team? That wouldn’t make sense. You would want to keep all of the high-performing product development employees and let go of the poorer performers in the communications department.

That may sound simple enough, but this type of cross-department communication and collaboration is extremely difficult to achieve, which can lead to a lot of situations like the one described above. This merit-based method also doesn’t take into account which areas of a business are more high-impact than others. Why would you lay off employees on the only team that is making you money? These things have to be taken into account when deciding who and how many to lay off within each department.

4. Skills-Based Selection

This methodology takes into account the issue discussed in the previous section of retaining the employees who have the skills that are most impactful to the success of the organization.

To apply this methodology, your executive team must have a great understanding of the driving force of your business success. Is it your customer service? Your robust technology? Your product innovation? A great way to look at this is to assess what the impact would be if you got rid of an entire department. Or if you got rid of half of the department. If this impact would be so detrimental that your business would stop running, then that is a highly skilled department.

On top of that, this method requires that your executives are fed information from middle-level managers about which teams have highly skilled employees and which ones could potentially be reduced.

For example, if you are a media company that makes content about all things sports, you would need to look at the different verticals and content mediums to assess the business impact. If your hockey content team has the lowest amount of revenue per cost of human capital, while your basketball content team brings in all of your sponsorships and ad revenue, it would make sense to value the skills for your basketball content over that of the hockey analysis.

While this method seems great, it has one major issue. It can potentially set your organization up to discriminate based on age. Many times when using this method, more older workers are let go due to the newer skills that younger workers have.

For example, a recent college graduate engineer might know several more programming languages than that of an older engineer. This will especially be true if your company hasn’t been the best at providing personal development. Your executive team should do some very honest self-reflection about whether this lack of personal development for tenured staff will impact the organization negatively with a skills-based layoff selection method.

5. Multiple Criteria Ranking

This is the most difficult of all of the methodologies, but probably one of the most effective. It involves creating a list of deciding factors that are given different weights. This formula is then applied to each individual in a ranking system. Those who rank the lowest are laid off in that order until the organization meets its financial goals.

This method allows you to combine all of the different methodologies above into one solid formula that is customized to your organization. For example, you might want to give the most weight to an employee’s skills and merit, and less weight to seniority and employee status. We recommend having an HR data analyst help you make a model that will help you most effectively determine an employee’s score.

Here are some key tips for making this method work for you:

  • Set clear criteria: Clearly state what all of your criteria are, and give concrete examples of what types of behaviors merit certain rankings. For example, your tenure category criteria might look like this:
    <1 year tenure: 0 points
    1-5 years: 1 points
    6-10 years: 2 points
    10+ years: 3 points
  • Weight factors based on value: Review if you value some behaviors exponentially as opposed to linearly. In the example above, you might value employees who’ve been with the company for more than 10 years exponentially more than you value those who are in the 6-10 years range, because of their intrinsic knowledge. In this case, you could assign that longer-tenured category six points, while keeping the latter category at two points.
  • Review, review, review: Have your legal team and your analysis team go over your models and criteria exhaustively to make sure that you aren’t impacting any protected groups and thus reduce your legal liability.

Let’s Look at an Example

Now that you understand all of the methodologies and the pros and cons associated with each, let’s go over an example to apply this knowledge.

Here is the situation: You are an HR executive at a small manufacturing company. Your CEO informs you that you’ll need to lay off enough people to recover $1.5 million in human capital costs. Let’s review how each employee layoff selection method would play out in this scenario.

1. Seniority-Based Selection: Using this method you would analyze all of your employees in order of tenure. You would start with the most recently hired employee and then work your way backward until you reach your 1.5 million dollar savings goal. However, this method could fail to provide efficiency if you most recently hired new employees to one of the only areas of your business that is producing value.

2. Employee Status-Based Selection: To execute your layoff with this method, you would need to make a list of all of your contingent workers and then lay them off. However, using this method has a lot of holes. What if you don’t have enough contingent workers to produce the 1.5 million dollar savings? Or what if you have too many contingent workers, causing you to go over this savings goal? In both of these situations, you would need to combine this methodology with another approach to realize your end savings goal.

3. Merit-Based Selection: In this scenario, you would evaluate historical performance reviews to let go of your poorly performing employees. You would create a ranked list of the most poorly performing employees and work your way backward in ascending order until you met the 1.5 million dollar cap. This method is pretty solid if you have a great performance review system. If not, it can be difficult to have managers objectively evaluate their workers under the pressure of looming layoffs. If you do ask your managers to do this, make sure the criteria are very clearly stated to them.

For this example, these performance criteria might include:

  • Employee runs manufacturing with little to no errors
  • Employee has no attendance problems
  • Employee has expert knowledge of manufacturing technology

4. Skills-Based Selection: While this method is one of the hardest to execute, it can be the most helpful to your organization when done successfully. In this scenario, you would need to have a discussion with your executive team about the most impactful areas of your business.
For example, if manufacturing product A is the most impactful, then all employee stakeholders involved in this process should be safe from layoffs.

It would make the most sense for the manufacturing company to use this methodology if they have a process or product that is costing more money than it is bringing in. (Think of a computer hardware company still trying to sell floppy disks.) However, if the company only has a small group of employees with skills that they don’t want to eliminate, they may need to combine this approach with another method. For example, the manufacturing company could keep everyone involved with Product A, and then use the merit-based approach with the rest of the staff to meet the 1.5 million dollar savings goal.

Multiple Criteria Ranking: To use this methodology, the manufacturing executive would need to come up with a formula that designated different weights to various criteria. More important criteria should be given greater weight, while less important criteria should be given little weight in the formula. This formula would be applied to each employee. Then all of the employee scores would be sorted from lowest to highest. Employees who scored the lowest would be let go first, in order, until the savings goal is met.

In this example, the HR executive could assign weights to the following criteria:

  • Tenure at the company
  • Employee status
  • Merit
  • Value of skillset
  • Potential for promotion and leadership
  • Threat of competitor poaching
  • Impact of work

For each of these criteria, the manufacturing employees would be ranked on a scale. Those rankings would be factored into the weighted formula. Then the HR executive could lay off employees with the worst scores.

When researching different methodologies to use, always consult your legal and HR analytics teams. Every state has different laws around layoffs and you should always work with these stakeholders to ensure you are compliant.

Choosing Who to Lay Off: Final Takeaways

So how do companies decide who to lay off? If you are asking this question for an upcoming reduction event, this is an extremely difficult and delicate decision that needs to be navigated carefully, from employee selection to layoff communication and support for both departing and remaining employees.

The employee layoff selection methods shared here can provide a solid framework to help you more prudently choose which employees to let go. The key takeaway of these selection methods include:

  1. Seniority-Based Selection: Lay off employees based on the shortest tenure at your organization. Benefits include its simple methodology and help avoiding age discrimination. However, it could be overly simplistic and fail to help you avoid other types of discrimination.
  2. Employee Status-Based Selection: Lay off employees based on their part-time or contingent worker status. Once again, this is an easy method to implement and can help you better protect your employer brand. However, it doesn’t take into account the organization’s reliance on contingent workers, and may need to be used along with another selection method.
  3. Merit-Based Selection: Lay off your poorest performing employees. This method helps get rid of poor performers, and is easy to executive if you have performance reviews. However, performance reviews can be subjective, which can lead to legal liability issues. This method also doesn’t take into account the differing importance of more or less high-impact departments.
  4. Skills-Based Selection: Retain employees with skills most impactful to your organization, and lay off those not in this category. On the plus side, this helps keep talent in areas that are helping to improve your organization’s bottom line. But on the downside, it can be difficult to achieve the amount of cross-department collaboration needed to pull this off, and could open up your organization to age discrimination.
  5. Multiple Criteria Ranking: Create a weighted formula that emphasizes the criteria most important to your organization, and then lay off employees who rank poorly. This method is easy to customize to reflect the factors that are most important to your organization. However, it can also be difficult to set up and must be exhaustively tested against discrimination laws.

At Careerminds, we believe that it is vital to be prepared for a transition as important as a reduction in force. Our arsenal of layoff resources, templates, guides, and outplacement services can help you navigate your upcoming reduction event. Click below to get in touch with one of our experts and see if we are the right partner for your organization.

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Rebecca Ahn

Rebecca Ahn

Rebecca is a writer, editor, and business consultant with over 10 years of experience launching, managing, and coaching small to midsize companies on their business, marketing, and HR operations. She is a passionate people advocate who believes in building strong people, teams, and companies with empowering culture, content, and communication that facilitates meaningful results at every level and touchpoint. In her spare time, Rebecca is an avid traveler and nomad who also enjoys writing about travel safety and savvy. Learn more on her LinkedIn page.

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