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Freshfields Risk & Compliance

| 3 minutes read

To downsize or not to downsize: What are the alternatives?

The US-China trade war and an easing in China’s economic growth, compounded by political unrest in Hong Kong and elsewhere across the region, have given rise to general fears about the health of the global economy. With these economic storm clouds brewing, an increasing number of companies are considering their contingency plans in case of a global recession.

But what does all this mean for the workforce? Does it simply mean redundancies? The good news is that it doesn’t have to.

We set out below some potential alternatives to downsizing that might allow companies to retain their experienced, quality staff and avoid the expense of redundancies (in the short term) and future recruitment and training costs (in the long term).

1. Unpaid leave and/or a reduction in working time

One approach that some employers are already taking is inviting employees to take periods of unpaid leave, for example Hong Kong Airlines, and in the UK, BMW.

In the past, we have also seen employers respond to a reduction in their resource requirements by implementing a strategy whereby employee working time is reduced, with corresponding reductions in employee salary or wages.

If done correctly, these practices can achieve significant cost savings without affecting the overall size of the workforce. There is, however, a difficult line for an employer to walk between, on the one hand, ‘requesting’ that employees take unpaid leave or reduce their hours and, on the other, ‘requiring’ them to do so.

There are a number of risks with this approach (for example, potential breach of contract and constructive dismissal claims and the possible triggering of employer obligations to inform and consult, where there is a recognised employee representative body) which means that any period of unpaid leave generally must be voluntary. This can in turn lead to outcomes that may not be ideal for the employer, for example where not enough employees agree to the proposal or where those that do agree are not in the desired areas of the business. However, the examples show that, with appropriate sensitivity and careful employee communications, these risks can be managed. 

2. Relocation

Where only certain areas of an employer’s business are experiencing a downturn, it may be that there is a need for additional employees in a different location or business unit. Another possible alternative to downsizing is therefore relocation of staff.

Of course, there may be real practical obstacles to adopting this solution successfully (eg employees may be unwilling or unable to commute further or relocate to a different company site), as well as similar risks to those of unpaid leave. Improvements in technology and an increased focus by employers on remote and agile working may, however, make it possible to mitigate the impact of such a relocation in certain sectors, provided employers are willing to embrace these new working models.

One powerful example of successfully relocating employees (albeit temporarily) is the approach taken by Mandarin Oriental following a catastrophic fire at its London Hyde Park hotel. Instead of laying off approximately 750 employees while the hotel was forced to close for reconstruction, Mandarin Oriental used this period as an opportunity to second employees to work oversees at its other hotels and/or to allow its staff to volunteer with charities across London. This helped to avoid the cost of both redundancies and a future mass recruitment exercise. It also helped some employees to gain valuable new skills and interesting experiences.

3. Retraining

Closely related to ‘relocation’ is ‘retraining’. Where the profile of an employer’s business has changed or there is an opportunity to grow into a new sector or product, it may be prudent for an employer to invest in the re-skilling of its workforce to equip them for different roles. This allows a business to be agile and nimble in the face of economic uncertainties. This focus on ‘retraining’ is also firmly on employers’ agendas in the face of the impact that AI and technology is having on the workplace.

4. Cost cutting

Finally, as well as the alternatives to downsizing set out above, an employer can look at other ways to cut costs. This can be done in conjunction with some of the other initiatives discussed and can be implemented in a number of ways, including:

  • a pay freeze;
  • a headcount freeze, where vacancies are only replaced internally;
  • reducing or removing employee benefits (in a perhaps surprising example that bucks the trend of employers expecting employees to be available 24/7, KPMG recently asked certain UK members of staff to hand back their work mobile phones as part of a cost-cutting exercise); and
  • reducing salary or wages for all staff

Such proposals should be considered carefully by employers before they are implemented and some measures, such as a reduction in salary, will require consent. Employers should be asking themselves: are any benefits contractual, so that their removal or amendment would amount to a breach of contract? How will such changes be received by the workforce? Will achieving a marginal saving by e.g. ‘downgrading’ the office coffee and biscuits have a disproportionate negative effect on employee morale and retention?

As with any change, there are pros and cons to each approach and the measures discussed will always require careful consideration. Whichever route is chosen, it is critical for employers to think through the human element of any change carefully before they proceed with implementation.