What Is Downsizing?

Definition & Examples of Downsizing

Group of professionals leaving office after a layoff
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Downsizing is when a company terminates multiple employees at the same time to save money. As opposed to termination for cause, downsizing is typically not due to any conduct on the part of the employee, but rather business conditions as a whole.

What Is Downsizing?

Downsizing is the process of reducing costs by reducing headcount. Jobs may be eliminated voluntarily, by offering employees a buyout, or involuntarily, through a layoff.

There are several reasons a company may downsize:

  • Recession: Poor economic conditions may spur a business to downsize to stay afloat or maintain profitability.
  • Industry decline: If a business's specific industry is facing a crisis due to technological or other difficulties, reducing costs may be a necessity.
  • Merger: Downsizing may also occur during a merger between two companies, or in an acquisition of one company by another. Or, if the merger or acquisition has not yet happened, a company might downsize to appear like a more viable candidate.
  • Streamlining: Downsizing can also occur when a company wants to “streamline” itself through corporate restructuring in order to increase profit and maximize efficiency.
  • Competition: If a rival company has reduced costs by reducing its workforce, a company may feel pressure to do the same to stay competitive.

Regardless of the reason for downsizing, when a company reduces its workforce, it should do so using nondiscriminatory criteria.

  • Alternate names: layoff, reduction in force, rightsizing

How Does Downsizing Work?

During a downsizing, the company will usually notify certain employees that they are being laid off. Usually, these are permanent layoffs; however, sometimes the employees may be rehired after a restructuring period. Layoffs are often followed by other changes, such as branch closings or the consolidation of departments.

There may also be changes in the day-to-day work of the remaining employees after a company downsizes. Because there are fewer employees, many workers will have to take up new responsibilities.

Sometimes the added stress of losing coworkers and being tasked with more responsibilities results in the loss of morale for the remaining staff.

For example, say a car manufacturer decides to downsize based on sales numbers that show it's no longer profitable to produce one of their vehicle models. They decide to end production of that model, which means they need to close the plant, which in turn requires a layoff of all of the production workers at that plant.

WARN Act Notification

The federal government requires companies with 100 or more employees to provide at least 60 days’ notice of plant closings or mass layoffs (defined as 50 or more employees at a given site). The Worker Adjustment and Retraining Notification Act (WARN) covers hourly and salaried workers, as well as managers and supervisors. This gives workers the opportunity to look for and train for new employment as they transition to new jobs.

In the example above, the car manufacturer employs more than 100 people, so they would be required to notify all workers at the plant at least 60 days in advance that they plan to close.

If your situation isn’t covered under the WARN Act because your employer isn’t large enough or the layoff doesn’t involve 50 or more workers, you probably won’t receive much notice.

However, you can keep an eye out for warning signs that your company might downsize:

  • Hiring freezes: If no new hires are allowed, it may be a sign the company is struggling financially.
  • Numerous closed-door meetings: A sudden uptick in private meetings may indicate trouble.
  • Economic woes: The economy at large doesn’t need to be in a downturn for individual employers to feel a pinch. If your company has suffered financial reversals lately, such as a decline in sales, it’s a good idea to have your resume ready just in case.
  • A new corporate structure/new management: Change isn’t always for the worse, but when companies merge or new executives take the helm, there are often staff shakeups.
  • No new work: If you find yourself without much to do at work, you might want to consider starting your job search. Often, managers will stop delegating work to employees who won’t be with the organization for much longer.

If you think your company might downsize soon, prepare for the possibility of a layoff. Update your resume, and be sure to network with contacts at other companies. You might begin a passive job search to keep an eye out for possible jobs. You can also consider saving money now in case of a layoff in the near future.

Finding a New Job

Once you receive a layoff notice, check with your company’s HR department to see what benefits you might receive. You should also file for unemployment benefits as you start your job search. The federal government funds dislocated worker programs that provide job search and training support.

If you are a dislocated worker who has been fired during a company’s downsizing, you should explain this when applying for jobs. Being laid off is very different from being fired because it is due to circumstances beyond your control. Employers should be aware of this distinction when you apply for jobs.

Include a clear statement somewhere in your application process (in your cover letter, application, or during your interview) that explains why you were displaced. For example, you might explain that your position was eliminated when the company outsourced an entire department.

Consider emphasizing the quality of your work while you were employed there. For example, you might mention in an interview your positive performance evaluations, or include in your application a recommendation from your former employer.

Mentioning these things during the job application process will dispel any worries that you were fired due to issues with your performance.

Alternatives to Downsizing

Layoffs are not the only option for reducing costs during periods of crisis. In some cases, employees are not fired, but instead become part-time or temporary workers to trim costs. Other times, employers may offer job sharing for some employees, cut back on employee benefits, or shorten the workweek in order to retain employees.

Key Takeaways

  • Downsizing is a reduction in a company's workforce to save money.
  • The federal WARN Act requires companies with more than 100 employees to provide 60 days' notice of mass layoffs.
  • If your company doesn't fall under WARN Act guidelines, you may not receive much notice if your company downsizes.
  • When looking for a job after a downsizing, let prospective employers know you were laid off, not fired because of your work quality.

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