A layoff is the temporary or permanent termination of a worker’s employment for reasons unrelated to the individual’s performance on the job. Employees may be laid off when companies decide to cut costs due to a decline in demand for their products or services, seasonal closure, a change in the business’ direction, or an economic downturn.
Employees who are laid off lose their wages and company benefits but qualify for government-sponsored unemployment insurance or compensation for a period of time. Laid-off employees do not lose their investments in company retirement plans such as a 401(k).
The federal law known as COBRA (Consolidated Omnibus Reconciliation Act) gives laid-off employees the right to continue their company health plan coverage, at their own expense, for 18 to 36 months.
Key Takeaways
- A layoff is an involuntary job termination, usually initiated by the employer as a cost-cutting measure.
- Workers who are laid off qualify for government-sponsored unemployment benefits, unlike those who are fired for cause.
- Some employers voluntarily pay severance to laid-off workers, usually based on their length of employment.
- Mass layoffs can damage the economies of the surrounding communities, especially those dependent on a single employer or industry.
Understanding Layoffs
Layoffs typically affect groups of workers rather than single individuals. They are a cost-cutting measure that may be prompted by a company’s change in strategy or financial difficulties. They often occur as a result of the sale of a company as a new owner consolidates departments.
Layoffs are understandably unpopular with workers, whether their employers call them “downsizing,” “rightsizing,” or “smart sizing.”
Companies seeking to avoid or minimize layoffs sometimes offer their workers a voluntary buyout with financial inducements to leave voluntarily. Older employees may be offered early retirement, replacing a paycheck with retirement benefits. In some cases, employers conduct layoffs even when their businesses are thriving, either to increase their profits or as part of a shift in operations.
Layoff vs. Furlough vs. Firing
A layoff is generally intended to be permanent, although rehires are not unknown if a company backtracks on a decision. A furlough is intended to be temporary and is usually due to a short-term production shutdown. Workers who have been furloughed may keep their job titles and employee benefits with the expectation that they will eventually return to work.
Public service employees face a furlough when legislators deadlock on the budget appropriations that are required to pay their salaries. During a government shutdown, non-essential workers may be furloughed while workers in essential services are forced to work with their pay delayed until a funding agreement is reached.
Furloughed workers may be eligible to collect unemployment insurance benefits depending on eligibility requirements, which are set by the states.
An employee may be fired or terminated on the grounds of unsatisfactory performance, malfeasance, or breach of duty. An employee who is terminated with cause generally does not qualify for unemployment insurance.
Example of Mass Layoffs
U.S. employers resorted to mass layoffs amid a drastic downturn in demand during the early stages of the COVID-19 pandemic, as restrictions and contagion fears halted travel, shut restaurants, and idled many other service industries.
U.S. employers cut more than 20 million jobs in April 2020 alone, according to the U.S. Bureau of Labor Statistics (BLS).
To preserve jobs, the U.S. government offered the Paycheck Protection Program, with loans subsidizing businesses’ payroll costs that would be forgiven under certain conditions. The program was intended to encourage businesses to keep their workers on through the pandemic.
Layoff Statistics
Statistics on layoffs are a key component of the larger numbers on total employment, such as the monthly data on nonfarm payrolls and the unemployment rate.
The monthly Job Openings and Labor Turnover Survey (JOLTS) from the Bureau of Labor Statistics is a count of “separations” from employment for all causes, including layoffs, resignations, firings, transfers, retirements, and deaths. From all of these numbers, it reaches a number for job openings.
For September 2023, for example, the Bureau announced that job openings nationwide totaled 9.6 million, virtually the same as the previous month. There was also little change in the numbers that make up that total, which include all job separations, voluntary and involuntary.
Special Considerations
The workers who lose their jobs bear the brunt of layoffs, but mass job losses also hurt the workers who remain, their communities, the broader economy, and even the employer.
Moreover, they may not offer the financial boost that companies are hoping for when they embark on mass layoffs. Stanford Graduate School of Business Professor Jeffrey Pfeffer argues that the recent rounds of layoffs among Big Tech companies were unnecessary and, for that matter, did the companies no good at all. He dismisses the entire phenomenon as “copycat behavior” among tech companies.
The downsides include high levels of stress for both laid-off employees and those left behind, and a deterioration of the customer experience. Not least, layoffs can cost the company more than they save in the long run.
What Should You Do When You Get Laid Off?
The first step after a layoff is to carefully review your contract of employment and any severance package your former employer is offering. This may include severance payments, continuation of benefits, and healthcare insurance.
Employers may attach conditions to severance agreements, such as requiring that you not claim unemployment insurance.
It may be a good idea to negotiate your severance agreement and have an attorney review any paperwork before you sign.
What Happens to Your Health Insurance When You Get Laid Off?
In most cases, your employer will stop paying for health insurance at the end of the month if you are laid off. You can then continue your coverage through the federal COBRA program for a term of 18 to 36 months. You will get the same insurance you had as an employee at the rate that the company has negotiated for its employee coverage.
COBRA coverage is significantly more expensive than employer-provided health insurance. You may be better off getting coverage through one of the plans offered under the Affordable Care Act. During the time you’re unemployed, you should qualify for a substantial subsidy for the coverage and may pay little or nothing for it.
How Long After Being Laid Off Can I File for Unemployment?
According to the U.S. Department of Labor, you should file for unemployment insurance benefits as soon as possible if you become unemployed. To be eligible for unemployment insurance, you must be laid off or fired through no fault of your own and meet certain wage and work requirements, such as the length of time you held your previous job. Some states have additional requirements.
What Happens to My 401(k) After a Layoff?
Depending on the size of your 401(k), you may be able to leave it with your former employer.
It may be better to transfer the balance, either to a new employer or into an Individual Retirement Account (IRA).
It is essential to transfer the balance through a direct transfer between financial institutions rather than allowing the administrator of your former employer’s 401(k) plan to cut you a check. Otherwise, you could owe income taxes on the entire balance.
Who Gets Laid Off During a Merger?
Following a merger or acquisition, many companies eliminate redundancies in their combined workforce. This typically affects the C-suite as well as any area where the new company has two departments performing similar functions. Human resource and payroll departments are frequent targets.
Since it’s hard to predict which workers will be laid off, mergers are inevitably a source of anxiety for all employees.
The Bottom Line
Layoffs are a painful fact of life in a market economy exposed to intense competition and a constant search for higher profits.
Layoffs can be damaging psychologically as well as financially to the affected workers, those who are left behind, their families, communities, colleagues, and other businesses.
Any employee who is vulnerable to a layoff should be aware that there are government programs that can fill the gap between jobs and supply some income and uninterrupted health coverage.
Related Terms: firing, furlough, downsizing, early retirement, unemployment benefits.
References
- Society for Human Resource Management (SHRM). “What Is the Difference Between a Furlough, a Layoff and a Reduction in Force?”
- U.S. Department of Labor. “COBRA Continuation Coverage”.
- U.S. Department of Labor. “I Have Been Furloughed”.
- U.S. Bureau of Labor Statistics. “The Employment Situation - April 2020”, Pages 1-2.
- U.S. Department of the Treasury. “Paycheck Protection Program”.
- Bureau of Labor Statistics. “Job Openings and Labor Turnover Summary”.
- Stanford. “Why are there so many tech layoffs, and why should we be worried? Stanford scholar explains”.
- U.S. Centers for Medicare & Medicaid Services. “People with Coverage Through a Job”.
- U.S. Department of Labor. “COBRA Continuation Coverage”.
- U.S. Department of Labor. “How Do I File For Unemployment Insurance?”
- Internal Revenue Service. “Topic No. 413 Rollovers from Retirement Plans”.
- Internal Revenue Service. “401(k) Resource Guide - Plan Participants - General Distribution Rules”.
