Dismissals or Severance Packages - Strategic Choice in Downsizing and Restructuring

The choice between layoffs and severance packages during downsizing requires a thorough assessment of the company's specific situation and strategic objectives. While the Working Environment Act establishes layoffs as the standard procedure, severance packages may, under certain circumstances, represent a more appropriate alternative. This article highlights key considerations to be evaluated when opting for a downsizing strategy.

Basis for Strategic Assessment

Companies may benefit from considering both layoffs and severance packages since some severance packages can be relatively modest yet prevent legal disputes and eliminate priority rights where waived. This can be advantageous when the company later intends to hire new staff, as it can seek entirely new employees with desired competencies without ties to former employees.

Planning Phase

Firstly, the company must establish an overview of its staffing needs through systematic mapping of tasks that need to be completed, the number of necessary employees, and the required competence. Next, the scope and identity of employees who become redundant are identified.

For companies bound by collective agreements, there is typically a duty to inform union representatives when downsizing plans are being concretized. Similarly, this applies to companies that regularly employ 50 or more employees, regulated by chapter 8 of the Working Environment Act.

When the plans are concretized, it becomes a natural time to consider the method of execution - layoffs or severance packages. These can be discussed with union representatives, although the base case is downsizing through layoffs according to the Working Environment Act's rules.

Key Considerations

Documentation and Procedural Requirements

The Working Environment Act imposes extensive requirements for documenting the need for downsizing and justifying the selection of redundant employees. Furthermore, it requires an assessment of alternative suitable positions for potentially redundant staff and balancing the company's needs against the drawbacks the layoff imposes on the individual employee, cf. the Working Environment Act § 15-7.

Requirements for information and discussions with affected employees and union representatives are usually stricter for companies bound by collective agreements. Although these requirements are normally not insurmountable or unreasonable, situations may arise where they prove difficult or resource-intensive to meet, especially for companies with limited administrative resources. Under such circumstances, severance packages may represent an alternative.

Time Aspect

The time aspect often constitutes a significant consideration. The requirements of the Working Environment Act and collective agreements for information and discussions take time, and employees may have a notice period of up to six months cf. the Working Environment Act § 15-3. Employees may also contest the fairness of the layoff and demand to remain in the position until the dispute is resolved in court - a process that can take a year or more.

Downsizing through severance packages can therefore be executed more quickly than by layoffs.

Cost Considerations

Costs in the short and long term must be carefully assessed. Severance packages are often more expensive than layoffs because the company pays out funds without receiving labor in return. Funds spent on severance packages reduce resources available for remaining employees, investments in new jobs, or other purposes.

Therefore, severance packages are not without problems, either from a business or economic perspective. Simultaneously, layoffs can incur costs related to disputes and lawsuits. Nonetheless, the cost argument is one of the main objections to severance packages.

Labor Market and Retraining Opportunities

The labor market and opportunities for redundant employees to find other work significantly influence the choice. If redundant employees can easily find new employment, they are more likely to accept layoffs. In a challenging labor market, or where redundant employees face employment challenges, a practical approach may be to engage NAV for an overview of measures and assistance for the redundant.

Case management and involvement of NAV and potential recruitment firms can influence this aspect.

Relationship with Remaining Employees

The relationship with employees who remain is significant. If layoffs and the method of implementation meet understanding from employees, layoffs should not harm the relationship with the employees. Documentation of the need for downsizing and the process leading to selecting redundancy becomes important.

Voluntariness and Agreement Nature

Layoffs are based on orders from the employer to the employee, while severance packages are based on a voluntary agreement between the parties. Allowing an employee to voluntarily participate in downsizing can be significant in many situations, although the feeling of voluntariness varies depending on the circumstances.

Reputation and Social Responsibility

Reputation in the local community and society can be significant, especially for larger well-known companies. These may rely on a good relationship with the municipality in which they are located and are attentive to media coverage.

The downsizing method can affect relationships with the surroundings. In some situations, this argues for severance packages where larger downsizings create a negative reputation and uncertainty about the company's continued operation and future recruitment.

Industry Practice and Precedence

Industry practices or company practices may be significant. In certain industries and companies, severance packages are frequently used, creating an expectation of their continued use. Opting for severance packages may set expectations for future use, and companies that utilize severance packages often face later demands for downsizing at a minimum previous level.

The risk of precedence therefore constitutes a consideration in this evaluation.

Priority Rights and Recruitment Bindings

In cases of downsizing and layoffs, those who must leave have priority rights for one year to positions in the company from the date of departure, cf. the Working Environment Act § 14-2. This may create unfortunate constraints on the company's recruitment policy by having to consider former employees instead of individuals viewed as more suitable for the future, such as those with new skills the company needs.

The company can set qualification requirements for former employees for new positions cf. the Working Environment Act § 14-2 (1), but it bears the burden of proof that they do not meet these requirements, which can be conflict-inducing.

As a general rule, all offers of severance packages require the recipient to waive the right to contest the termination of the employment and priority rights for new employment according to the Working Environment Act § 14-2, unless the severance agreement states otherwise.

Overall Assessment and Recommendations

The company must conduct a comprehensive assessment of which factors are most crucial in the particular situation. The weighting will vary between companies and situations within the same company.

Based on cost considerations, severance packages are often less feasible for companies planning to cease operations, run at a deficit, have insufficient profits, or limited equity. Severance packages may be a relevant alternative for companies with strong earnings and equity.

Practical Approach

In challenging situations, especially concerning older employees with long service, it may be practical to show flexibility regarding both severance packages and alternative positions, even without legal obligation. The rationale being that legal disputes consume time and money and may have adverse effects on the work environment.

If the company has no use for the workers' labor during the notice period, it may be appropriate to offer the notice period as a severance package to everyone as an alternative to layoffs. This gives employees the opportunity for immediate departure with salary during the notice period, waiver of priority rights, but also the possibility to take other employment immediately, thus potentially allowing for double income in a period.

A thorough evaluation of all factors is recommended, and the company may benefit from consulting a lawyer before implementing measures.