Layoffs Being Used As Debt Relief, But Is It A Good Option?


Many businesses are looking to layoffs as a method of finding debt relief, but research is showing that this knee-jerk reaction to the economy isn’t always a good option. Peter Cappelli, director of the Center for Human Resources at Wharton School, stated, “It’s hard to save money if the jobs will be refilled within a year or so.”

The reality is that it costs to lay people off. There are severance costs, and unemployment insurance, not to mention possible litigation costs. In the end, there’s also the cost for rehiring and retraining replacement employees once the business gets going again. Here are some ways to cut back before resorting to layoffs.

New SBA programs

The Small Business Association is creating easier ways of procuring traditional loans by decreasing fees, increasing guarantees and changing eligibility requirements. A new program also was unveiled called the American Recovery Capital Loan Program, or ARC for short. It offers struggling small businesses loans if they can prove they have been profitable in prior non-recessionary years.

The purpose of these loans is to allow businesses to find debt relief by paying it down substantially. It also can be put toward freeing up money for other day-to-day expenses like payroll. Jonathan Swain, spokesman for the SBA, stated, “We estimate that we’ll be able to make about 10,000 ARC loans across the country. 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.”

Shared work programs

Another way to avoid layoffs is using a shared work program. These are programs that offer partial unemployment benefits to employees whose schedules have been diminished. The Department of Labor estimates that Shared Work programs have prevented more than 75,000 workers from completely losing their jobs. Chief economist for the Labor Department Alexandre Mas stated, “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.”

Each state can design their own rules for Shared Work programs. For example, in New York an employee’s work schedule can be cut by 20 to 60 percent to qualify for the program. They can collect benefits for up to 53 weeks. Pam Thayer of New Buffalo Shirt Factory stated, “Our business is seasonal, and we found when we did a generalized layoff, when we were ready to go full-bore production again it was very difficult to get our employees back.” Instead of laying off people, the company opts for the Shared Work program. A shared work program can also help employers find seasonal debt relief, without completely losing their workforce.


A furlough is another strategy to avoid layoffs. A furlough is when employees are asked to take a week or more of unpaid time off to avoid layoffs. It can end up saving thousands of dollars in pay, freeing up money for other expenses.

A furlough, however, must be done under strict legal guidelines. Employees need to be notified in writing well in advance. There are also very different rules for salaried and hourly employees in terms of how furloughs work, so employers should check with an attorney. Employers can also check with the Fair Labor Standards Act for more information.

Layoffs aren’t an easy answer

Although layoffs sound simple, in the end they are not as cost-effective as an employer might hope. Employers should try other options to find debt relief prior to resorting to layoffs. Government assistance, Shared Work programs and furloughs are all options to look at.

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