Do You Need to Downsize? Handling a Difficult Situation with Employees

Of all the difficult situations a company might face, having to downsize can be one of the most tricky to deal with.

Everyone is affected. Managers don’t take the task lightly and feel awful having to deliver bad news, while for employees, it can flip their world upside down. Fear and stress can lead to an uncomfortable environment and overall, it’s a situation most wish they could avoid.

That said, there are so many circumstances where downsizing is the answer to keeping the business going. It’s never going to be pleasant, but how you approach it can make a difference. 

Here are some of our thoughts on managing this difficult situation with your employees:

Download our downsizing criteria points here

Define the goals for your business 

If you’re at the point of downsizing, it’s usually because you’ve looked at other means of improving the business revenue situation and can’t make it work. Sometimes, that’s due to temporary factors such as a recession or a tough economic period, while other times, it might be that your entire business model needs to be revisited to make sense under changed market conditions.

Whatever the circumstances for your downsizing decision, a good place to start is to have clear goals for your business. For example, if this is a temporary situation, are you hoping to be able to hire the same employees back? If so, you might be looking at furloughing rather than laying people off. Even if laying people off is the only option, you’d want to make a plan for how you will stay in touch with those people.

It’s also important to give some thought to goals around how you want your business to come out of the downsizing. It’s fair to say that downsizing can be a minefield for the overall reputation of a business. If it’s not handled well with employees, there can be a lot of ill-feeling, as well as poor publicity outside your business. Think about things like how you will reassure and maintain strong relationships with remaining employees, customers, creditors and other stakeholders.

Be transparent with your team

Have you ever worked in a business where the rumor mill runs rampant? Sometimes people get a sniff of an idea that something might be happening and that’s all it takes for the stories to spread. This can lead to consequences such as poor morale or lowered productivity. It’s also just plain unpleasant! No one likes feeling that there’s an axe over their head…

One thing employers can do to improve the situation is to be transparent. This means sharing information as soon as you have it and doing so with sensitivity. It’s also okay to let team members know when you don’t have all the answers yet. It’s better to admit this than to have people thinking you’re not being straight with them.

Being in the habit of disseminating the information that you do have to everyone at once can help to quash the rumor mill. If you get wind of bad information that is circulating, address it directly. Let everyone know when something is not true, or when it’s not known yet.

It also tends to be better to have the conversations with affected team members as soon as possible. It’s very stressful to deal with uncertainty, so being upfront as soon as you are able is important.

Transparency through downsizing helps to maintain the trust of your team Share on X

Show compassion

Never lose sight of the fact that laying people off has a huge impact on their lives. This could be a very stressful and emotional event for them and you don’t know how that might stack up with other things they have going on. Sometimes being laid off is the latest in a catalogue of stressful situations, so always approach with compassion.

Keep in mind that people are often fearful that they won’t be able to manage the very basics of their lives. Losing their job leaves them wondering how they’ll keep their family fed, or a roof over their heads. These sorts of fundamental fears can lead to a visceral reaction, so be prepared that you may get a response that includes tears or anger, and approach with empathy. 

Have criteria to decide who goes

What’s the first thing you think of when faced with choosing who stays and who goes? From a purely bottom-line perspective, many businesses first look at who’s contributing the most to additional revenue. Those are often the first people to be kept on, but there are many other criteria to consider. 

Your criteria might be completely objective, or it might include a mix of objective and subjective points. The point is that having criteria is important because you’re aiming to meet your company goals and ensure you have the right mix of people to do that. Some typical categories of criteria include:

  • Employee status-based. For example, laying off contract workers or part-time roles first.
  • Employee seniority-based. Some companies take a “last in, first out” sort of approach.
  • Skills-based criteria. This is a key exercise to go through before downsizing: what skills are important to retain?
  • Merit-based criteria. This might include things like results from performance reviews or overall measures of productivity. It may also look at factors like innovation, leadership or teamwork.
  • A combination of many criteria.

It’s important to plan your criteria and look at the broader picture outside of your bottom line. For example: what if you have someone who doesn’t directly contribute to your revenue but is very productive in terms of keeping vital services running for your business? Or, what about people who are innovators, ideas people, or challengers of the status quo? You might have someone who is relatively new compared with other team members, but maybe their background experience means they bring a lot of new ideas that could help the business through a difficult time.

Another criteria might be if the person is a key part of the team in terms of “rallying the troops” and encouraging positive team engagement. If someone like that were to be laid off, you need to consider what the morale effects might be on the remaining team members. Will they quit? Lowered morale is a huge retention risk.

Look for ways to keep up morale

It’s a difficult task to come out of downsizing with morale unscathed. Chances are, you will have some work to do and this is a good thing to consider with your planning. 

Job security and morale are inextricably linked. Among surveys of what factors go into job satisfaction for most employees, job security ranks near the top. In a downsizing situation, even those who remain are often worried about their job security! 

Psychological theory helps to explain this. One of the most well-known, Maslow’s Hierarchy of Needs highlights how we need our basic needs met first – things like food, warmth and security. Progress up the hierarchy toward self-actualization depends on those needs being met. A “threat” such as downsizing can create a deficit, where people become focused on those most basic needs.


Of course, through all of this, remind your employees that they are valued! Downsizing can leave people feeling like another small cog in a big machine. Tell them how much they are appreciated and find ways to show them. For example, maybe you don’t have a lot of budget for staff lunches or events, but you might be able to surprise people with a paid half-day off that falls within your regular budget for salaries or wages. 

Another thing to do is encourage a caring, positive atmosphere. If your work conditions allow it, maybe you can put initiatives in place such as a mentoring program, team fitness or volunteering in the community. You might also make some adjustments to create comfortable spaces for your team. Showing you care doesn’t have to cost a lot of money – you can come up with small surprises that your team will appreciate. For example, maybe you schedule a walking meeting and pick up coffee for everyone along the way. It’s often the sum of the small things that add up to a better atmosphere.

As we talked about earlier, maintaining transparency and openness to discussion through this period are key for improving morale. Honest discussions prevent rumors from spreading and help employees to know what their role is in any changes. Encourage a two-way dialogue where people can ask their questions.

Free download: Downsizing criteria for businesses

Final thoughts

Downsizing is a difficult time for any business and we empathize with anyone that is going through this! While it’s difficult to come through without some level of heartache, there are things you can do to handle the situation as sensitively as possible with employees.

Having a plan to manage downsizing, including the goals of the company coming out of it is a great place to start. Anticipating what you will need along with the needs of employees allows you to be prepared to deal with the situation effectively.

Transparency is one of your best strategies for managing any rumors and for helping to maintain morale. Trust is a big part of overall satisfaction and morale – look to create an environment where employees feel that they are kept informed. This can also help them to take a pragmatic approach, rather than any sort of “us versus them” mentality.

With these strategies in place, we hope you can manage downsizing as smoothly as possible.
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