Startup Life/Analysis/ How do startups decide who to lay off? With news of staff cuts continuing to roll in, Sifted looked at how companies typically conduct layoffs By Miriam Partington in Berlin 10 February 2023 Credit: Desola Lanre-Ologun from Unsplash Credit: Desola Lanre-Ologun from Unsplash \Startup Life Which SaaS products are getting cut? By Tim Smith 22 February 2023 Startup Life/Analysis/ How do startups decide who to lay off? With news of staff cuts continuing to roll in, Sifted looked at how companies typically conduct layoffs By Miriam Partington in Berlin 10 February 2023 When an operations manager at a large European tech company was recently asked by his manager to cut 140 employees, he wasn’t given any clear instruction from the top on how to do so. He was left to figure it out for himself. It was May 2022, and news of other European tech companies cutting staff in their hundreds was rolling in. That month, buy now, pay later giant Klarna was among the first to slash its headcount, as its valuation sank. A day later, speedy grocery startup Gorillas axed 320 people at its Berlin headquarters and pulled out of several markets, as it tried to steer the business toward profitability. Layoffs can be messy and emotionally distressing for those having to make the cuts. The operations manager developed a simple metric to help him decide who would stay or go at his company, given that he didn’t have much data or knowledge of the employees in other teams to make his decision. If he rated the person a three, that meant they were a “rockstar”, in his words. If they were a two, the employee was performing well, but was not essential to business operations. And if they were a one, they were underperforming and would likely be ousted. Cutting staff due to performance can be legally dubious if you don’t have a data-driven criteria in place, but the manager — who wanted to remain anonymous — says this was the only way he could decide who to lay off. “There’s just no easy way to make these decisions,” he says. With more layoffs expected in 2023, Sifted asked talent specialists, companies and an employment lawyer how layoffs should be handled in a best-case scenario. The layoff process Usually, companies conducting layoffs have a “cost-saving target” in mind, says Learco Finck, cofounder and CEO at the Big Search, a talent firm that builds specialist teams and hires executives for tech companies, which conducted layoffs itself last year. Companies figure out how much they would need to cut costs to extend their runway by a certain number of months, and then use that figure to decide the number of staff they need to lay off. In the best-case scenario, companies typically remove agency workers and contractors first, and then move on to full-time employees. They analyse which departments and people are most essential to business function, and decide what the “minimum viable organisation” would look like for the business to continue running while hitting that cost-saving target, says Finck. Typically the functions that are most affected, in consecutive order, are: Support roles (recruitment, operations, HR and finance) Individuals from sales and commercial who are underperforming (low return on investment) Product and engineering staff who are working on product lines aside from the company’s core product Only then does the company look to cut staff from the core product team. The final stage would be underperforming individuals from HR, finance and legal, says Finck. The CEO, CFO and chief people officer “drive decision-making” on layoffs, with the internal communications team and legal team closely involved, adds Finck. Department heads are often consulted by the leadership team too, to find out which roles in their teams are critical and which can be shaved off. Sometimes it’s possible for staff to be moved elsewhere. The operations manager says he was able to move two people who had a finance background from the operations team into the finance team, for example. Finck adds that, in an ideal scenario, companies should cut “harder than they need to” to avoid doing multiple rounds of layoffs. He advises companies to also account for the fact that once they’ve done layoffs, there will also be a number of people who likely leave of their own accord. The legalities What European employers are obliged to do when cutting employees en masse differs from country to country, but there are a few key principles that are relevant across the board. Pre-layoff consultations When companies are planning layoffs, they are legally required to consult with employees first before making a final decision, says Roger James, partner in the Cross-Border Practice Group at labour and employment law firm Ogletree Deakins. That means informing employees they are at risk of redundancy, and giving them a formal letter explaining the company’s proposed restructuring and how it will affect them. Employers should then invite employees at risk of redundancy to a formal consultation meeting, where the employee can propose alternatives to being made redundant: such as taking on additional responsibilities, going down to part-time or working as a consultant. “Redundancies should be a last resort, and companies should demonstrate they have eliminated all alternatives“ “The employer doesn’t have to agree to anything proposed by the employee. But they need to consider suggestions before deciding whether to confirm the redundancy,” says James. “Redundancies should be a last resort, and companies should demonstrate they have eliminated all alternatives.” Additional rules apply if over 20 redundancies are proposed. Employers then have to inform the relevant public authority, typically 30 days before making the first termination. (This is done in the UK by filling out and submitting an HR1 form as a notification of impending layoffs.) Notice period Typically, companies doing mass layoffs have to show that certain roles or teams are no longer needed. Employees are entitled to notice pay and, if they have served for two years in the company, also redundancy pay. Once terminations are confirmed, an employee’s notice period starts, which can be anywhere from one week to three months (or more if the contract requires it) in the UK. Redundancy pay is given in addition to notice pay and is calculated based on several factors including age and length of service. Employees are also paid for any accrued holiday. Each European country have their own rules but generally most provide for some form of redundancy pay in addition to notice entitlement. Some employers wanting to bump off employees quickly will offer generous settlement agreements once redundancies are proposed, and “try and get the agreements signed quickly, so they don’t have to go through all the consultations”, says James. “Sometimes, in reality, employers will want to get rid of people who they can’t fairly get rid of” “And sometimes, in reality, employers will want to get rid of people who they can’t fairly get rid of — for example, maybe their performance is better than others — so they will offer [employees] higher payment [to leave],” he adds. Transparency and communication There’s no easy way to tell employees they’ve been made redundant, but being totally transparent with employees is essential if you want to conduct layoffs humanely, and protect your reputation as an employer. Finck says it’s important to explain to employees what the company’s financial position is and use factual evidence to explain why layoffs are happening. In a company-wide email at Paddle, a platform for software companies to sell their products that laid off 8% of its staff last month, the company explained how the change in the markets is forcing them to trim down on costs, and consequently headcount. It laid out what would happen to laid off employees — following the email from the CEO, employees would receive another email outlining next steps, which would be followed by a 1:1 chat with a member of staff to discuss their departure — and explained what they could expect in terms of severance pay, their healthcare plans and stock options. Finck says it’s important for leadership teams to ensure department heads are trained to communicate with employees about layoff decisions, severance packages and any concerns employees may have going forward. He recommends having an open FAQ for employees to ask questions and get feedback, “instead of saying, ‘here’s the cut off point and now you’re on your own’”. Layoffs aren’t easy or clean-cut, and it’s often down to the manager initiating staff cuts to be kind and empathetic, says the operations manager. He and the “SWOT team” he enlisted to help him conduct the layoffs had face-to-face meetings with the 140 people they laid off, to make the process as “personal” as possible, rather than simply sending each individual an email. “A lot of companies don’t do that,” he says. “Obviously, the more people you have the harder it is to have one on one conversations, but it’s also easier for companies not to do that, because then [they] don’t have to look somebody in the face.” Miriam Partington is Sifted’s DACH correspondent. 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