How To

May 30, 2022

What startups should keep in mind when considering layoffs — a legal professional's view

Startups should make sure to communicate and exhaust all other options before they make the difficult decision to lay off staff

Eleanor Warnock

3 min read

Credit: Annie Spratt, Unsplash

In the last week several well-funded European startups, including Klarna and Gorillas, have announced employee layoffs amid economic uncertainty. With the outlook still uncertain, Sifted spoke to Alison Weatherhead, employment partner at Dentons and also part of its global venture technology group, about what investors and startup executives should keep in mind if they're considering cutting headcount. 

Companies should demonstrate that they have exhausted all the alternatives

One of the things that people will expect a business to do before they reduce headcount is to remove agency workers or other consultants — any part of the workforce that is not directly employed. Employment law usually expects all measures to be reviewed before there is a headcount reduction among employees.  

Employers should also consider action short of dismissal. For example:

  • Can hours of work be reduced?
  • Are there any other working arrangements that people could try out?
  • Can they retrain individuals so they do not have to lose resource?

Employers should remember how hard it can be to hire great people. Losing them and then having to rehire them costs a lot of money, and you might need people to come back in six months. Can you have them stay and do something else in the meantime? 

Employers should remember how hard it can be to hire great people

Reducing headcount can also be a bad news story and the general confidence of the workforce can be very badly affected. Trying to win the hearts and minds of employees can be hard enough, and even harder where profits appear to be given priority over people.

Consult with employees before making a decision to do layoffs

In many cases, the hard decision to implement redundancies cannot be avoided. As a minimum, in many countries across Europe and in the UK an employer must consult with employees before it makes the decision to make people redundant. Consultation must be at the stage where there is a proposal to dismiss and when the employees who are "at risk" will still have a chance to influence the outcome of any consultation.  

Sometimes businesses are in too much of a hurry, but it's very important not to make a final decision before you have consulted staff. Of course, this is key because you need to comply with the law but also want to be seen as doing the right thing by employees. Your reputation in the marketplace will be damaged if you are seen to be very cut-throat with people. 

Be careful of industry bargaining agreements

Another thing to be careful of is running foul of any industry bargaining agreements. In a number of countries, such as Spain, there are nationally agreed collective bargaining rules, rather than agreements, that are agreed between an employer and a union. These can apply to some industries where there are startups, like fintech.

So it is important for startups to double-check if there are any mandatory social policy rules in the jurisdiction they are operating in. 

Communication, communication, communication

The way companies communicate their reasons for laying off employees is going to be really important for how they are seen in the market now and in the future. Companies that are not thinking about the impact of how the market perceives them are being short-sighted. It is easy to get on the wrong side of public opinion, especially with a really tech-savvy workforce. It makes a difference if you can keep people on your side.  

For more Sifted reporting on how companies are getting through the downturn and how you can help your own company, sign up to our Startup Life newsletter. 

Eleanor Warnock

Eleanor Warnock is Sifted’s deputy editor and cohost of Startup Europe — The Sifted Podcast. Find her on X and LinkedIn