Health Benefit Costs—Fly in the Ointment of Flexible Alternatives to Layoffs

Since February, 2008 when I first encouraged companies to consider using flexibility—reduced schedules, furloughs, sabbaticals, additional unpaid vacation days, job sharing and contract-based work—as an alternative to layoffs, I’ve gotten the same response from managers, "That’s great, but what about the health benefits I still pay for if I use flexibility?"  It’s the fly in the ointment of an otherwise straightforward business case in favor of using flexible alternatives to reduce labor costs while minimizing job cuts.  So what’s the answer?

In previous posts (here and here), I’ve pointed out that if you look only at the direct costs saved such as salary and benefits, then, yes, layoffs look like the better option (see table below).  This is why a manager thinks that if he or she lets go of someone making $50,000 (salary and benefits), they save $50,000

However, as I outlined last week, the cost/benefit argument shifts dramatically in favor of flexible alternatives when you pull back the lens and add in all of the direct and indirect costs incurred from layoffs (see table below), which can range from 150% to 250% of an employee’s compensation.   In other words, laying someone off who makes $50,000, actually costs $75,000 to $125,000, especially since the research shows that many organizations continue to hire or rehire during and after job cuts. 

Bottom line: By using flexible alternatives to reduce labor costs, you still have the expense of health benefits, but you avoid incurring the costs related to job cuts that a far greater.  For inspiration about how flexibility can minimize layoffs, check out the updated Downsizing Flexibility Champions list, and for "how to" steps to get started go to worklifefit.com/blog.

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4 Comments

  • Judy Martin

    The perceived quick fix of layoffs for a company seems to outweigh crunching the numbers in a more creative way I think, purely to assuage shareholder fear. Investors like public action that gives off the scent of, "we're cutting costs and streamlining our business." Instant gratification in our always on climate.

    Rising health care costs is the red herring that says, "We don't even know how bad it's going to get, how high those health care costs will go anyway. Why take the risk of keeping employees?" So flexibility and furloughs fall the wayside.

    It's hard to convince some companies to get past that fishy conundrum. It takes work, innovation, time, energy and a new way of doing things that might on the outset appear risky. Anything that smells of risk they fear will have them dead in the water.

  • Kathie Lingle

    The cost of continuing health care benefits for each employee kept now has to be weighed against the new (employer) cost of footing 65% of COBRA for each employee let go. This may not equalize the comparative ledger, but it does provide additional incentive to pause, take a realistic assessment of the consequences of all of the assumptions (and numbers) involved on both sides of the decision tree, and make the most informed decision possible.

  • Kathie Lingle

    The cost of continuing health care benefits for each employee kept now has to be weighed against the new (employer) cost of footing 65% of COBRA for each employee let go. This may not equalize the comparative ledger, but it does provide additional incentive to pause, take a realistic assessment of the consequences of all of the assumptions (and numbers) involved on both sides of the decision tree, and make the most informed decision possible.

  • Kathie Lingle

    The cost of continuing health care benefits for each employee kept now has to be weighed against the new (employer) cost of footing 65% of COBRA for each employee let go. This may not equalize the comparative ledger, but it does provide additional incentive to pause, take a realistic assessment of the consequences of all of the assumptions (and numbers) involved on both sides of the decision tree, and make the most informed decision possible.