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Handling Employee Layoffs as a Small Business Owner

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Handling Employee Layoffs as a Small Business Owner

By Caron_Beesley, Contributor
Published: August 18, 2010 Updated: November 20, 2011

Note: The ARRA (Recovery Act) initiatives and/or programs referenced in this article will expire on September 30, 2010. Any statements about qualifying time periods, or extensions of these dates, as they pertain to the availability of ARRA programs are over-ridden by the expiration of the Act on September 30, 2010.




We often think of layoffs as a cost-cutting strategy reserved for larger corporations and employers who lack the day-to-day operational flexibility of smaller businesses.

Much of this perception stems from the fact that many small business owners are able to employ a variety of strategies - discussed in my blog post here - to help them stay profitable and retain employees during difficult economic times.

But when all available options for keeping your workforce intact have been exhausted, downsizing can quickly become a hard fact of life for many small business owners.

Layoffs, as with hiring employees, are governed by labor laws and regulations that protect both the employer and the employee. The government - through the Business.gov Web site - has compiled lots of useful information and tools to help small business owners (and their employees) understand their rights and responsibilities during this difficult time.

Below is an overview of the applicable laws and associated resources that can help you cover all your legal and regulatory bases when conducting layoffs.

Layoff Advance Notice Law

There are certain laws that protect workers facing layoffs by requiring employers to provide advance notice of plant closings or layoffs. The law applies to companies of certain sizes only; her;s what you need to know:


  • If you employ 100 or more employees - The Worker Adjustment and Retraining Notification Act (WARN) requires you to provide at least 60 calendar days advance written notice of a closing or layoff that affects 50 or more employees at a single site.
  • If you employ less than 100 employees - Many states have enacted similar laws of their own while some have added provisions to the WARN Act that apply to smaller businesses with less than 100 employees. Check your individual state laws here.


Read more about the provisions of the WARN Act and how, as an employer, you can understand the requirements of the act.

Severance Pay

While there is no legal requirement in the Fair Labor Standards Act to provide severance pay, it is offered at the discretion of the employer and usually based on the length of employment. If you have an employer-employee contract, you should check whether any specifications for severance pay are outlined. And of course, if you value your employe-s contribution and want to keep your good name - do the right thing on this one.

When and how you provide the final pay check is also something to consider. The federal government does-t legislate on this, but your state might.

Check out these resources from Business.gov to find out more about federal and state law about severance pay and final pay checks.

Continuation of Health Coverage: The Law and the Recovery Act

Companies who had 20 or more employees on more than 50 percent of its typical business days in the previous calendar year are subject to COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985). COBRA provides continuation of health coverage at group rates for former employees, retirees, spouses, former spouses and dependent children.

The government has put together some very useful guides and FAQs to help business owners understand the ramifications of COBRA. You can read all these on the Business.gov site here.

Changes to COBRA in the Recovery Act

Employers should also be aware, that the newly passed American Recovery and Reinvestment Act provides employees laid off since Sept 1, 2008 through the end of 2009, with as much as a nine-month subsidy to help them retain employer health benefits. How does this work? Eligible individuals pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the coverage provider through a tax credit.

The Department of Labor has posted specific information for employers on its Web site about COBRA Continuation Coverage Assistance under the ARRA.

A Layoff Need't Mean the End of Your Employer-Employee Relationship

One step in the layoff process that employers often ignore is having a longer term view - i.e. recognizing that when your business bounces back you will once again need skilled talent.

More and more small businesses are doing this by making arrangements with former employees, such as hiring them as independent contractors. Taking these measures can ease the strain of a layoff, go some way towards retaining the skills you trust, and hopefully make it easier for loyal former-employees to re-enter the fold when the economy picks up. Read more about Hiring Independent Contractors.

Additional Resources

Message Edited by caronb on 04-14-2009 08:07 AM

About the Author:

Caron Beesley


Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley


Agreed. A lot of people forget that during down cycles in the economy a layoff isn't permanent. Also, it never helps to burn bridges, as they say. Omer A.MMORPG Game List ,RPG Music and Game Wallpaper Site OwnerVG Alliance LLC (New Jersey)Message Edited by NicoleD on 09-30-2009 11:29 AM

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