Vistra Insights

Employee terminations: Due diligence for multinational employers

After a period of robust growth, companies typically face an environment of economic slowdown and rising interest rates. In that situation, they naturally look to cut costs, often through staff reductions. While this is a common area to turn for savings, the process of reducing staff is often painful and comes with underlying risks. To minimize those risks, multinational employers must understand the consequences of employee layoffs and terminations, including the need to comply with applicable laws in all countries of operation.

Many companies hired exuberantly over the past few years. High-tech companies, including Meta, Amazon, Twitter and Microsoft have already had significant layoffs — 150,000 in 2022 according to one estimate. Global banks are announcing similar layoffs.

Multinational employers in particular must plan carefully for any layoff or reduction in global workforce. Failure to account for the specific employment regulations of a jurisdiction in which employees will be terminated can lead to delays, protracted lawsuits and significant expenses.

US-based employers used to the concept of “at will” employment often underestimate the difficulties they can face in other countries. In the US, few laws (aside from the Worker Adjustment and Retraining Notification [WARN] Act and certain anti-discrimination laws) regulate how layoffs must be carried out. A US employer does not even need to state a specific reason for a layoff.

By contrast, most countries strongly regulate involuntary terminations. Termination requirements are often long and involved; many stakeholders must be negotiated with, and public pressure can be intense.

Aside from compliance issues, there are many commercial downsides to a layoff of any size, from damage to employee morale to difficulty hiring new staff when circumstances change. Employers will benefit from thinking through these consequences well before trying to solve a short-term budget shortfall by reducing staff.

Understand all applicable country-specific requirements

Virtually all countries have unique requirements governing employee terminations. The US is widely recognized as a country with laws and regulations that tend to favour the employer over the employee, but even it has strict limits. The major restriction on layoffs in the US is WARN, which covers companies with 100 or more employees and requires early warning for both layoffs and plant closings affecting a certain number of workers.

In addition to federal WARN requirements, seven US states have varying requirements, some of which are stricter than WARN requirements, which also must be taken into account.

The real difficulties for global companies come when considering requirements across multiple countries.

Many employees globally have legally required local employment contracts, almost always drafted in the local language. Employers must be careful to comply with termination-specific clauses contained within these contracts.

Some countries, including the Netherlands, Japan, South Korea and China, require that employers negotiate with the government before laying off employees.

Strong collective bargaining agreements (CBAs) are also common and represent another compliance challenge. In the EU, employers must consult with even non-unionized employees about the features of the layoff. Employees have a lot of power in these consultations, which can take weeks to conclude and require thorough documentation.

Many countries impose various severance pay requirements. They can also require specific analysis of employee age, marital status and dependents before making layoff decisions.

In general, any company with offices abroad will need country-specific layoff plans as well as well-considered domestic layoff plans. Managing the process requires significant effort.

Consider the long-term costs of layoffs

Once the need for a layoff is established, the process must be carefully planned and executed. An organisation should plan the entire offboarding process for laid-off employees before implementing any of it. It should start communications early and continue to provide as much information as possible while maintaining a consistent message to various stakeholders. An organisation should stage the notifications and continue to provide information to all employees from the beginning through the period after the layoffs. It should also train managers to provide this information directly, so the information doesn’t all come through emails or large meetings.

We often find that remaining employees are neglected in layoff communications. They will be anxious as well, one reason it’s preferable to do a single large layoff rather than a succession of smaller ones, which can demoralize employees and lead to diminished productivity and unwanted departures.

Layoffs also create IT security risks. Employees can have access to sensitive or proprietary files, so an employer must manage file access before termination and monitor the files after termination. Loss of data to a competitor can significantly damage a business, and if an employee creates a data breach, the employer might face significant GDPR or other penalties.

Poorly planned layoffs can have an impact on other hard to quantify costs such as the unemployment insurance premiums an employer has to pay, reputational damage (particularly through social media), and long-term litigation costs that reduce or even eliminate the intended cost savings of the layoff.

After a layoff in response to a poor financial situation, companies often face problems and costs when the situation improves and it’s time to expand and hire new staff. A company may find it needs to hire people very much like those it previously laid off, only it now faces onboarding costs, long periods of retraining and the need to rebuild the working relationships between employees that are any business’ key resource.

Think about alternatives to layoffs

Multinational companies should always keep in mind that they’re in business for the long haul. A variety of furloughs, reduced work schedules, promotion and pay freezes, pay reductions, and other less severe actions can cut costs while preserving corporate culture, experience and connections for a rapid ramp-up when circumstances improve.

When a layoff is genuinely necessary, an employer should develop procedures that account for the regulations of the various jurisdictions in which it operates, communicate effectively and often, support affected employees with outplacement services (such as job search training, resume reviews, interview preparations and coaching) and treat both laid-off and retained employees with the utmost respect.

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