Layoffs Are More Expensive for Companies Than You Think (2024)

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When Meta Platforms Inc. laid off 11,000 employees in November 2022, the company paid out $975 million in severance—more than $88,000 a person on average. The impact of those costs “was not material,” Facebook’s parent said in a later regulatory filing, as it was offset by what the company saved in payroll, bonuses and other employee benefits.

But the accounting for layoffs isn’t that simple. A workplace culling carries costs that go beyond severance. New, exclusive data shows that the output of employees who remain at a company after a layoff generally falls, at least for a few months, as they grapple with anxiety and low morale. More employees quit, resulting in additional costs to hire and train replacements. Unemployment insurance tax rates rise. Lawyers and statisticians are often hired before and after the cuts to try to prevent and possibly defend against discrimination lawsuits.

Bloomberg News analyzed hundreds of SEC filings to capture the direct costs of a layoff, then consulted economists, academics, executives and workplace-data analysts to estimate some of the indirect costs. The latter costs are difficult to nail down, says Wayne Cascio, a distinguished professor of management emeritus at the University of Colorado-Denver Business School. But they help to explain why his research has found companies that use cost-cutting measures such as temporary worker furloughs to avoid layoffs perform better up to two years later than those that cut staff as soon as they get into financial trouble.

Not every worker who gets cut gets a payout. Just one-quarter of US firms said all of their employees were eligible for severance in the event of a layoff, according to a survey by Dutch recruitment firm Randstad NV. Globally, it’s 42%.

Those who do receive severance typically get a certain number of weeks’ pay for each year of service, often along with continued health-care benefits and accrued vacation time. As a result, payouts can vary widely from worker to worker.

At US-listed companies with these payments, the most common average severance package was worth about $40,000 per employee, according to an exclusive Bloomberg News analysis of recent layoffs among companies in the Russell 3,000 index. That figure would represent the company’s total severance costs divided by the number of workers laid off as reported in an 8-K SEC filing, an account of events significant to shareholders.

More companies started offering severance packages during the pandemic, in line with broader efforts to address workers’ well-being. But that trend has reversed as the threat from Covid-19 has receded. David Fischer, 53, an e-commerce marketing executive in Portland, Oregon, was laid off without severance in May. Adding insult to injury, he received word of his dismissal in the company’s parking lot.

“It still haunts me,” Fischer says.

After a layoff, the stressed-out employees who remain at a company are typically less productive. Research has shown that workers’ focus on quality declines, leading to higher rates of product defects, subpar work and accidents. Innovation can also take a hit.

ActivTrak, whose software is used by thousands of employers to monitor workers’ activity, measured the change in productivity for seven anonymous clients that conducted layoffs from January 2022 through April 2024 and shared that analysis exclusively with Bloomberg News.

After those layoffs, the amount of productive time per person fell by nearly an hour a day on average, for a total of about 18 hours per month. ActivTrak defines productive time as hours spent using work-related apps and sites. It measures this via mouse and keyboard movements, and can integrate with employees’ calendars to assess time spent in offline meetings. (The software doesn’t track what people type or access their cameras, and productivity goals are set by employers.)

Using an average salary of $60,000, or $28.85 an hour, ActivTrak calculates the monthly productivity loss at $519 for each remaining employee. For a company with 100 employees, that would mean more than $50,000 a month in lost productivity, which could be a significant sum for a company of that size. At the companies ActivTrak analyzed, the drop in productivity mostly followed similar patterns, no matter whether 14% or 47% of the company was let go. Of the three companies for which six months of data was available, all returned to pre-layoff productivity levels within that period.

Anyone who’s been through a layoff knows that it can breed an atmosphere of mistrust and fear. Remaining employees are sometimes expected to shoulder the duties of those who were jettisoned without any increase in pay, which can create resentment. Often they update their résumés and start looking elsewhere for work. Morale drops in more than two-thirds of firms within the first year of a layoff, according to the American Management Association.

A layoff can trigger a subsequent exodus that in some cases is larger than the layoff itself, according to an analysis of the impact of a downsizing on voluntary turnover. The study, of 200 companies, was conducted by management professors Charlie Trevor of the Wisconsin School of Business and Anthony Nyberg of the University of South Carolina’s Darla Moore School of Business. While a layoff promises substantial savings in labor costs, the authors said, that promise is undermined “by the considerable costs associated with unanticipated increases in voluntary turnover.” Those include the costs of being hobbled by understaffing and the expense of recruiting and training replacements for the departed.

How big are the costs? Let’s take a 10,000-employee company. Firms of at least that size employed nearly a third of all US workers in 2021, according to the most recent figures available from the Census Bureau.

Company X normally would lose about 1,900 people a year, given that the average voluntary turnover rate at US private companies in recent years is about 19%, according to workplace consultant Mercer. But after it axes 10% of its workforce, quits would increase by 49%, based on the findings of Trevor and Nyberg, to 2,831 people—an additional 931 people attributable to the downsizing.

Replacing those employees is expensive, and can cost about 1.25 times their salary, according to estimates from human resources executives. With the average professional salary in the US at $65,000, according to the Bureau of Labor Statistics, each of those incremental departures will cost $81,250 to replace. Multiply that figure by the 931 additional quitters, and you get $75.6 million.

“We have a mixed hodgepodge of laws in each state,” says Robert Pavosevich, a former lead actuary in the Department of Labor’s Office of Unemployment Insurance. “It’s a very difficult calculation.”

To help, Pavosevich created a calculator to determine the added impact of a single layoff on an employer’s unemployment insurance tax rate in the next year. A company based in Texas—which has a more straightforward process than, say, New York or California—that laid off 5% of its workforce would pay an additional $93 per employee in the next year, Pavosevich found. At a 10,000-person firm, that’s nearly $1 million.

Finally, there are the costs to reduce the chances that a layoff leads to a lawsuit. Companies pay at least $5,000 for external statisticians to analyze the demographics—race, gender, age—of those they intend to dismiss and compare it with the makeup of the company overall.

Mike DuMond is a labor economist and a managing director at Berkeley Research Group, which does such work for clients. “If the correlation between being female and being laid off is too strong to be random, it’s statistically significant, and that’s important because it can be used by courts to create an inference of discrimination,” he says.

If the preliminary layoff report shows a disparate impact on a group that’s legally protected from employment discrimination, “you have to go back to the client, and the client tries to find other people to pick (for dismissal) to fix their problem,” says Matthew Disbrow, a labor and employment partner at law firm Honingman. “And then you run the models again.”

Some firms get the all-clear with just one run-through. But others can require more than a dozen iterations before their list passes muster, says DuMond.

A company may also want to hire lawyers—at $500 an hour, or more—to determine if the layoff is large enough to trigger so-called WARN notices in advance of a mass layoff, which must be sent to employees, their union representatives and local officials, as required by law. Employers might also ask outside lawyers to audit their personnel records, to assess whether layoffs might provoke discrimination lawsuits related to those matters.

However careful a company means to be, once the pink slips go out, there’s always the risk they will provoke litigation, including a class-action suit. “You’re there on retainer to help them if something pops up,” Disbrow says. When it comes to a layoff, a lot can pop up, and it all carries a cost.