Cutting Staff Doesn’t Immediately Equate To Cost Savings

February 2, 2015       Mark Hrywna      

Layoffs typically come about when nonprofit managers aim to cut costs and expenses. Sometimes they’re called reorganizations, as leaders try to re-imagine their structures and organizational charts.

Whatever the reason, it doesn’t mean an immediate cost savings. Typically there are costs associated with cutting back staff, taking into account unemployment insurance claims, unused vacation time or severance agreements and retirement plans.

The average unemployment claims cost nationally is $5,174 (as of February 2012), if an employer is covering the cost directly and not paying into the state unemployment tax pool. “That’s how much states are going to be paying out. It fluctuates with how many claims they’re having,” said Megan Maulhardt, senior marketing manager for Unemployment Services Trust (UST) near Santa Barbara, Calif.

Qualified 501(c)3 organizations are not liable for federal unemployment taxes but in many cases must pay state unemployment taxes. Federal law allows nonprofits the option to pay for the claims of their employees dollar for dollar, instead of paying state unemployment tax.

A large layoff is likely to mean a spike in an organization’s unemployment taxes the following year, taking into account the increased number of claims.

Employers in California face some of the highest unemployment tax rates in the nation, at 6.2 percent. States generally range from 0.5 percent to 6 percent, with many falling in the middle, around 3 to 3.5 percent, Maulhardt said, adding that they’re relative to wages in each state.

Unemployment benefits vary by state but most offer 26 weeks of benefits. In Georgia, the most that someone can collect in benefits is $6,600, compared with Connecticut, where someone can collect more than $17,000. Connecticut is likely to continue to have among the highest unemployment tax rates in the nation, she said, because it’s still in debt to the federal government for high unemployment claims during the recession.

Unique to California is a requirement that employers are not permitted a “use it or lose it policy” when it comes to employees’ vacation days, according to Calvin House, a partner with Gutierrez, Preciado & House who advises the Center for Nonprofit Management (CNM) in Los Angeles, Calif. Employees accrue vacation time on a regular basis throughout the year and accrued vacation time must be paid out on the day of termination.

If an employee accrued two weeks a year and did not take vacation time but was with an organization for 10 years, that could amount to a fair bit of money, he said. Employers who are aware of the regulation normally cap vacation accrual, sometimes at three or four weeks, House said, until an employee uses some of it. The state’s policy is aimed to give people a chance to take their vacation time. “Anyone that has thought through the implications of the vacation rule in California has a cap,” he said.

Severance is up to an employer’s discretion. It can be based on service, determined on a case-by-case basis, or how valuable an employee is, House said, but there’s no government requirement. The norm among nonprofits probably is not to offer severance, he said, but if it is offered, typically it’s a week for every year of service.

There’s no standard for severance; every organization does it differently. “It’s not like corporate America when they do it. Those are generous. Every organization and culture is different,” said Jennifer Dunlap of Development Resources, Inc., (DRI), in Arlington, Va. “They have to do what makes business sense. You always want to do the most you can for people without hurting the organization. That has to be part of that business planning,” she said. Most organizations determine what severance is, usually anywhere from one to six months. Most states require that unemployment is provided in a layoff situation. It’s just a matter of how many weeks.”

Another rationale for severance is to eliminate the possibility of problems, House said. A charity can offer severance pay in return for an employee giving up their right to bring a lawsuit against the organization. “It’s a tricky thing to judge because the first thing an employee thinks is there must be some kind of problem,” House said.

The Center for Nonprofit Management (CNM) in Los Angeles, Calif., works with about 4,000 organizations each year. “Some of what we’ve seen, not really in 2014 at least, was not about severance packages but much more about slow growth,” said President and CEO Regina Birdsell. “It wasn’t so much about laying off and reducing, paying people to leave versus how to strategically think about staffing back up,” she said.

Sometimes it’s difficult for boards to have that conversation, about what executives are entitled to, because they get to know their senior executives and understand what it would mean to lose those jobs, Birdsell said.

“It takes real leadership in those cases, especially for leaders who have been there awhile and gotten to know each other,” she said. “These things are harder for some board members to understand, that they just have to make tough choices as a governing body…what’s best for the organization.”

Cutting back to grow can be good but sometimes it’s reactionary, said Dunlap. Organizations hopefully have enough in reserve to manage through external threats, such as a stock market crash that would affect endowments and foundations, she said. “It’s a much harder thing for a nonprofit to do versus what should be the regular course of business. Every month they should be analyzing cash flow, what’s in the pipeline, managing expenses to revenue,” she said. Very often the first reaction is to cut the fundraising shop. Unless they’re underperforming, Dunlap said cutting them is going to reduce revenue even more, beginning a vicious cycle.

“You have to look at the real bottom line of the costs of the layoffs. Cost savings, you don’t necessarily see that for months and months to come. They need to really look at it as a strategic business plan. If we make these changes now, what will the impact be in two, three, or five years, and look at what that costs,” Dunlap said.

There also are costs involved with layoffs that aren’t quite calculated on the bottom line.

“The piece that’s intangible is the quality suffers,” Dunlap said. There might be immediate cost-cutting but it might have ripple effects in the future, she said, such as opportunity costs for things an organization won’t do anymore, or won’t try to do. There’s also the public perception of the organization, which sometimes doesn’t realize the impact it might have on its donors or brand, she said.

Remaining staff can be affected, whether a sort of “survivor’s guilt” or simply more stress as a result of the same amount of work to be done by fewer people until the new business practices are in place. Other things can happen, such as questioning an employer’s commitment to employees. “That weighs on folks’ minds. ‘Will it happen again?’ ‘Will I be next?’ That adds a level (of stress), a new dynamic in place,” Dunlap said.

One way that management might address that is to engage different parts of the organization in such business solutions, so it does not look like an edict that came from on high. “Explain what future of the organization is,” Dunlap said. “Making sure that people get it, why it had to be done, the vision as to where it’s going, you want them to be part of the team,” she said. Share business plans with remaining employees, get them excited and on board, and you will get a different result.”

The layoff frenzy has slowed in Southern California since the start of the recession around 2009, according to Birdsell.

“What we’re seeing is cautious optimism about bringing people back. What we heard from executives, there was a lot of rightsizing over the last few years,” Birdsell said, starting after the Bernard Madoff Ponzi scandal and continuing into another phase that cut deeper. In surveys by CNM, about 27 percent of organizations recently said they were considering layoffs while 73 percent were expecting to growth. NPT