Publications

Alternatives to Layoffs (1996)

Corporate restructuring in the private sector has continued for years with no end in sight. Now, America's public sector is in the midst of a similar trend. Hardly a week goes by without layoffs being proposed in states and municipalities as governments grapple with financial and political pressures to streamline" or "downsize." These pressures will not go away in the near future; in fact, pending federal budget initiatives will likely mean an acceleration of the trend. AFSCME affiliates must be well prepared to fight against employment reductions that threaten the quality of public services and the livelihood of our members.

Layoffs may result from the elimination of jobs or from contracting out. In either case, the strategy is likely a response to a fiscal problem. Evidence indicates, though, that layoffs will not save as much money as anticipated, at least in the short-run, and that alternative means of achieving savings may be more effective.

The High Cost of Layoffs

Layoffs may deliver far less than they promise as far as short-term cost savings are concerned. As the U.S. Department of Labor found in a recent study of restructuring, "although layoffs are intended to reduce costs, some costs may in fact increase" (USDOL, "Restructuring," 1995, p.3). These include "direct costs" associated with layoffs, such as severance pay, accrued vacation and sick pay, supplemental unemployment benefits, outplacement, pension and benefit payoffs, and administrative expenses. When these costs are accounted for, the up-front savings from layoffs diminish substantially.

Layoffs also involve "indirect" costs, more difficult to calculate than the direct costs but just as substantial. These include heightened insecurity and reduced productivity, increases in the unemployment tax rate, training and retraining, potential charges of discrimination, and the cost of social services for displaced workers. Furthermore, the Department of Labor reports that "involuntary layoffs are traumatic; they exact a devastating toll on workers and communities. Lives are shattered, people become bitter and angry, and the added emotional and financial pressure can create family problems. 'Survivors,' workers who remain on the job, can be left without loyalty and motivation" ("Restructuring," p.2).

Studies of numerous companies that have downsized echo these concerns. While "many can slash their payroll, few can do it without unleashing downsizing's unintended consequences: low worker morale, too few employees scrambling to do too much work, lawsuits and, ultimately, disappointing financial results" (U.S. News and World Report, 5/4/92, p.51). Christian Science Monitor reports that "downsizings that involve hasty layoffs usually haul down growth and productivity, management experts hold. Such staff cuts also disrupt work and hurt the morale, loyalty, and productivity of remaining employees" (2/6/95, p.45).

A Better Way?

Approaches to avoiding layoffs range from pre-emptive efforts to redesign work processes, to finding other ways to reduce payroll costs. What follows are examples that illustrate a range of creative solutions to the problem of maintaining employment security.

1. Redesigning Work Processes

Many public employers are realizing that involving employees and their unions in redesigning work processes can not only cut costs, minimizing (though not necessarily eliminating) the need for layoffs, but also improve the quality of services.
A joint initiative implemented by Gov. George Voinovich and the Ohio Civil Service Employees Association (OCSEA)/ AFSCME Local 11, which represents almost 40,000 Ohio state employees, is called Quality Service through Partnership. Since the quality partnership began, Ohio state employees have implemented changes in the workplace that have streamlined processes and increased productivity. Governing magazine (September 1994) cites Ohio as a leading example of quality improvement in state government.

2. Limiting the Use of Outside Contractors and Consultants

"Contracting in" can save a jurisdiction money and provide employment for those slated for layoffs. Contracts can be phased out as they come up for renewal.
In 1992, Gov. Bruce King of Arizona ordered all state agencies to impose an immediate freeze on discretionary spending including professional services, among other items.

3. Transferring/Retraining Employees

Moving workers from jobs slated for downsizing to other positions can mitigate the need for layoffs as well as tap the experience and expertise of the existing workforce.
The 1993-95 master agreement between AFSCME Council 6 and the state of Minnesota contained provisions for employees to receive alternative job opportunities and retraining to avoid layoffs, as well as an enhanced separation package.
The 1992-95 agreement between Multnomah County, Oregon and AFSCME Local 88 contains a special provision to save employees from layoffs. In lieu of layoff, an employee could receive a three-month trial service period to demonstrate his or her ability to fulfill the requirements of a new job classification.

4. Freezing Hiring

Holding available positions vacant and/or prohibiting the creation of new positions is a way to decrease costs. Policies can range from no new hires under any circumstances to employee replacement only for essential services. Many jurisdictions have instituted hiring freezes in times of fiscal stress.

5. Flattening the Government's Organizational Structure

Many employers in the private sector have realized that it is in the middle management ranks that cuts can be made, and have found that empowered front-line workers need less supervision.
This suggestion was among the "Top 21" cost-saving ideas developed by Iowa's Governor's Committee on Government Spending Reform. Projected savings were $7.5 million each year in 1993 and 1994. The Executive Branch Review Task Force of the Governor's Committee wrote: "...it is essential for state government in Iowa to adopt management methods that have proven their effectiveness in improving quality and productivity."
Indianapolis, Indiana Mayor Stephen Goldsmith plans to cut $4.5 million out of the 1996 municipal operating budget by eliminating 150 positions. About 80 of those positions have already been eliminated through attrition or vacancies left unfilled. Goldsmith maintains the move will increase efficiency by reducing the number of mid-level managers. He has already eliminated some mid-management positions in the city.

6. Reducing the Workforce through Attrition

An average attrition rate of 5% could result in an annual 3 to 5% reduction in employee costs if employees are not replaced.
Prince George's County, Maryland Executive Wayne Curry reduced the county government by 1,000 positions through attrition, as well as early retirement and the elimination of some vacant positions, to address a $131 million gap in the county's 1995 $1.48 billion budget.
Maine Gov. Angus King won the state legislature's approval for a Productivity Realization Task Force, which is supposed to find $45 million in savings for fiscal 1995 and 1996 mainly through attrition.
In 1995, the city of Baltimore, Maryland, eliminated 75 positions in the Fire Department, partly through attrition. "If retirements and attrition had not played such a large role in reducing the number of city workers, massive layoffs would have been needed," said the mayor's spokesperson.

7. Offering Early Retirement/Severance Inducements

Extra pension credits may be offered, or the penalty for retiring early may be lessened or eliminated. Inducements for employees to quit voluntarily are another option.
In an effort to avoid layoffs many states have implemented early retirement programs at various times. These states include California, Delaware, Florida, Minnesota, North Carolina, New York, Ohio, Tennessee, Pennsylvania, New Jersey, Virginia, Connecticut, and Wisconsin.
To address a serious budget gap, New York City reduced the number of city employees by 17,000 through attrition and severance buyouts. Most of the money needed to cover the shortfall will come through lower payroll costs due to attrition, combined with a reduction in other costs associated with keeping employees on the payroll.

8. "Payroll Lag"

By extending the payroll cycle or deferring compensation over a specific period of time, a jurisdiction can capture savings. In either case, employees recover compensation owed according to the terms of an agreement. "Payroll lags" were negotiated in New York state during the early 1980's recessionary period.
CSEA/AFSCME and New York state agreed that during the course of ten payroll periods, which are normally two weeks, each payroll period would be extended by one day. Employees worked 11 days each payroll period but were paid for ten, and 25 paychecks were received in the year rather than 26. The lagged paycheck is typically recovered when the employee separates from state service, paid at the rate then in effect.

9. Creating a Deferred Compensation Plan (Section 457)

Instead of laying off employees to decrease expenditures, a jurisdiction can increase the amount of cash available for creditors by setting up a deferred compensation plan, such as a "457 plan." A 457 plan allows employees to defer income (and interest attributable to the income) as authorized by Section 457 of the IRS code. Deferred income and interest income remain the property of the employer, subject to the employer's general creditors. A caveat: in cases where bankruptcy is looming (as in Orange County, California), this method of generating savings might be too risky to consider.
Under Section 457 plans, employees may claim their deferred compensation when they separate from employment. Such plans are available only to state and local government and tax exempt organizations. A 457 plan addresses revenue needs, while maintaining service levels.
Many state and local governments now offer 457 plans; states include California, Wisconsin, and Michigan.

10. Restricting Overtime

Overtime represents as much as 10% of payroll in some jurisdictions. Decreasing this cost may relieve fiscal pressure enough to avoid layoffs.
In 1992, San Diego eliminated overtime, suspended hiring and reduced travel to help close a $25 million budget gap that year. These measures were expected to save the city $7.8 million.
In 1992, Cincinnati eliminated overtime for some city employees. The city also expected to lower overtime costs by more than $2 million that year.

11. Paring Down Non-Labor Expenditures

Numerous governments have pared down areas other than payroll to save money. Such measures include:
  • Postponing equipment purchases or delaying capital outlay expenditures.
  • Prohibiting out-of-state travel except in the most crucial cases.
  • Restricting vehicle use.

12. Concessions: A Last Resort

In truly desperate situations, it may be necessary to make serious concessions in order to prevent job elimination. Such drastic measures include reduced hours of work, pay freezes, modifications to benefit plans, and unpaid furloughs. These measures have been implemented in several jurisdictions and while unpleasant, have prevented or minimized layoffs.

Effective Contract Language

In spite of the array of effective alternatives, many AFSCME locals may still face layoffs in the bargaining unit. The following contract provisions can give the union some flexibility:

  • Notification—Prior to any layoff action, the employer should give advance notice to the union. Ninety days is preferable, with 30 days a minimum.
  • Counter-proposal—The union should be able to discuss the situation with the employer prior to the layoff notification, and should have the opportunity to offer alternative means of achieving budget savings.
  • Seniority—Layoffs should proceed in inverse order of seniority with all temporary, provisional and seasonal employees laid off first. The last laid off should be the first recalled, with no new hires until all laid-off employees have been recalled. Performance evaluations should not be a factor in layoffs.
  • Grievances—The union should explicitly reserve the right to grieve layoffs under provisions of the contract.
    The alternatives discussed in this article—ranging from redesign and contracting in, to transfer and retraining, to separation packages—can also be covered in collective bargaining agreements.

The Department of Research and Collective Bargaining Services has sample contract language available on layoff and recall procedures, including those described above.

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