How HR can help companies think through the true costs of layoffs

Recent earnings reports have brought into focus the financial costs companies are incurring from laying off workers.

Alphabet, Google’s parent company, recently reported it spent $2 billion on severance and other related charges during the quarter ending in March, tied to layoffs affecting around 12,000 workers. Susan Li, CFO for Meta, said in an April 26 earnings call that the company expects to spend $3 billion–$5 billion this year on a restructuring that includes about 21,000 job cuts so far. And Amazon, which has laid off about 18,000 workers since the fall, reported it spent half a billion dollars on severance last quarter.

Executives typically argue layoffs will benefit their firms’ bottom lines in the long run. Rideshare company Lyft, for example, is spending tens of millions of dollars on a restructuring, but has estimated it will deliver $330 million in annual savings for the company once it’s completed.

Research has shown, though, that the costs of layoffs don’t always outweigh the benefits. Management experts say HR is uniquely attuned to the costs—both direct and indirect—of letting workers go. In communicating with other executives about these costs, they say, HR departments may help them better understand what’s lost when employees leave.

What research says about restructuring returns. Wayne Cascio, a professor emeritus of management at the University of Colorado Denver, said firms incur both immediate and downstream costs when they lay off workers.

Direct costs can arise from paying out severance, accrued vacation or sick leave, as well as continuing health benefits for affected employees. Firms who bring in outside counsel to help implement layoffs have to account for legal fees as well. The indirect costs are harder to measure, he said, but can include decreased morale and productivity among remaining employees, recruitment and employment costs for new hires, and higher unemployment taxes.

Cutting jobs doesn’t necessarily boost companies’ financial performance in the years after, said Cascio. He looked at 37 years’ worth of stock return data for companies in the S&P 500 to analyze how they performed in the years after laying off workers. The research, which was published in the Academy of Management journal in 2021, found firms that simply cut workers without implementing other changes, such as selling off assets, didn’t see better returns in the long run.

“Companies that just let go of people without changing anything else never outperform their competitors in the same industry,” Cascio told HR Brew. “If you’re just trying to cut people as a way of cutting costs, it doesn’t pay off,” he added.

HR’s role after a layoff. Given HR’s insight into the direct and indirect costs of downsizing, Cascio sees an opportunity “for HR people to have greater impact and influence” by communicating with senior executives about these costs.

“That stimulates the senior people to think about, are there alternatives?” Cascio said. “Are there other ways of cutting costs that don’t involve letting go of people we worked hard to recruit in the first place?”

In the weeks after layoffs, HR is likely to see firsthand how these decisions affect remaining talent, said Tiffany Keesey, co-founder and principal consultant at Conscious Culture Co., which provides fractional people operations services to companies. Employees who remain might experience an element of “survivor’s guilt,” Keesey said, and lose trust in leadership.

What’s more, “it can be really overwhelming for the people who stay because they’re often having to do more than a full-time job without a lot of compensation,” she added. “So, that can lead to burnout. That can lead to, over the long term, people deciding to leave as well.”

HR leaders can advocate for companies to invest in professional development for the employees who remain, Keesey said, even as they’re undergoing a restructuring. This can help ensure those employees see a future for themselves at the firm, she told HR Brew.

On some teams, there also may also be room for HR to ask that executives consider avenues beyond layoffs, as Cascio suggested.

“A lot of it comes down to how much leadership values the role of HR,” Keesey said. “Do they see HR as more of the traditional compliance…or do they see them as a strategic business partner and thought partner?”