Layoffs Create Pitfalls for Finance Executives Looking to Cut Costs

Companies, especially those that enjoyed strong revenue growth and increased the size of their workforce during the COVID-19 pandemic are gearing up Because they face high inflation and rising interest rates. They are increasingly looking to layoffs as a way to preserve capital, along with other measures, such as hiring freezes.

Consultants who have worked with companies during staff reductions said that finance chiefs play a key role in planning and setting companies’ financial goals. Hardik Sheth, a partner at Boston Consulting Group, said CFOs are part of the initial discussions about whether job cuts are needed. Mr Sheth said they help management understand the range of options available to boost performance, including adjusting the business model or product offering.

In addition, CFOs are setting financial goals that layoffs are to work with human-resources departments to help assess where to make cuts, says Susan Gunn, a partner at the management consulting firm Bain & Company. he said. They also determine the severance amount, she added. Ms Gunn said well-handled layoffs take two or three months in the US and require a sound strategy as well as empathy and transparency.

However, under pressure to move quickly, some companies risk giving employees undue notice, said David Santacroce, a law professor at the University of Michigan Law School. The federal Worker Adjustment and Retraining Notification Act, or WARN Act, requires that companies with 100 or more employees give at least 60 days notice before layoffs if they affect at least 500 full-time employees at a single location. or the number of employees at a site reduced by at least one-third.

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States such as New York and California have adopted the following thresholds for notice. Twitter Inc. some of the employees who have recently been cut almost half of its workforce, are now pushing back against the dismissal. In a federal lawsuit this month, plaintiffs alleged that the company violated the WARN Act and California’s equivalent by not giving sufficient notice of mass layoffs. San Francisco-based Twitter said in a legal filing last week that it has met its legal obligations by giving employees 60 days’ notice of their termination with pay and benefits. Twitter did not immediately respond to a request for comment.

“If the economic outlook changes dramatically and very rapidly, cuts will have to come more quickly and less thoughtfully,” said Andy Challenger, senior vice president at Challenger, Gray & Christmas. “That’s when it can get bad.”

Mr. Santacroce, from the University of Michigan Law School, said layoffs will likely increase as the economy weakens. “So are the number of lawsuits alleging employers [WARN] Violation of the Act. There seems little reason to believe that this will change.

But layoffs may not help companies in the long run.

Companies that lay off employees generally don’t outperform their counterparts that haven’t cut employees, said Wayne Cascio, a professor emeritus at the University of Colorado Denver Business School. Mr. Casio, along with two finance professors, looked at the effects of layoffs at more than 4,000 public companies over a 37-year period ending in 2016.

Mr. Casio pointed to a study published last year that showed companies that downsized as a “quick fix” or as an easy option to restore profitability did not outperform their competitors, which were in a worsening situation. He was patient in the midst of economic conditions. Labor costs are often a large part of companies’ operating budgets, according to Mr. Casio, and are therefore an easy target as executives seek to preserve cash. “The danger is that when the economy turns, are you going to hire the same people you laid off?” They said. “Quick fixes never work.”

—Kristin Broughton contributed to this article.

write to jennifer williams-alvarez at jennifer.williams-alvarez@wsj.com