pay cuts furloughs lay offs in covid19

Managing pay cuts, furloughs and lay off in the face of COVID19

Edward Neequaye

Current business news is rife with lay offs, furloughs, pay cuts and businesses going into administration. This is a result of the ongoing pandemic caused by the novel COVID19, which has been very disruptive to businesses across the world. The startup world has also seen its fair share of this ‘bad’ news. Popular brands with some presence in Ghana such as Uber, Airbnb, Andela, IROKO, have all either laid some workers off, initiated pay cuts or furloughs.

For small businesses, the effects are even graver as they usually have limited resources and are operating with a shorter cash runway. A recent survey showed that:

  • 42% of startups globally have 3 months or fewer of runway
  • 58% of startups have had to terminate full time employees.

So, you will bear with me that lay-offs, pay cuts and furloughs are not extreme in this current challenging economic and health situation we find ourselves. But the question is, “how do you carry out any of these activities in an ethical and legal manner as a small business owner?”. You will not want to be known as a business owner who neglects or ignores staff when things go south.

In this article, I will focus on the three main initiatives – lay-offs, pay cuts and furloughs – we have seen other businesses engage in and how you can also do same without neglecting the welfare of your employees.

Pay cuts:

I will start with pay cuts as that seems to be the first option for most businesses. This normally involves employees accepting a reduction of their normal salaries. When it happens, top-level management of the company typically accepts a higher percentage cut to show their commitment to the pay cuts.

This is one of the first measures most businesses took when the effects of the pandemic started to set in; besides freezing recruitment. A list of over 10 CEOs and companies that have implemented pay cuts can be found here.

To implement pay cut, it is important to be very transparent about your business numbers and use that as a basis for discussing with your employees the essence of the pay cut. Also, as the founder/CEO, show more commitment towards the pay cut initiative by taking a higher cut than the whole team.

Some companies such as Gravity Payments have also used pay cut as a way of avoiding lay-offs, thus, ensuring every team member stays on board and get a cut off their normal pay. Other companies are also offsetting pay-cuts with equity options/share-based agreements as a compensation.

Lastly, pay cuts are supposed to be temporary, so employees can return to normal salaries when things improve. Thus, employees need to be constantly updated on the business’ financial performances.

Furlough (Unpaid Leave):

In cases where your business will not be able to keep up with payment of staff during this pandemic, you can place those staff on furlough. Furlough means temporary leave of absence from work and it is normally used during difficult economic conditions as we are in currently. It is an unpaid leave, meaning you do not make any payments to staff.  However, staff are still kept on payroll and get to enjoy other company benefits such as health insurance, as this is not redundancy or lay off.

Furlough is also normally used where there’s a lockdown and therefore the company cannot operate at all, meaning there is almost 100% loss of revenue. This is why we have seen many football clubs and bars/restaurant place their staff on furlough.

Also, some companies have implemented pay cuts together with furlough. This means that key staff remain in active service but get reduced salaries whiles other staff go on furlough. For instance, Nigerian video-on-demand (VoD) company IROKO has furloughed 28% of its staff whiles 16% got pay cuts.

Layoffs:

This is the most difficult option of all the three, though that is what we are seeing more and more in the news these days. For example, Andela has laid off 135 staff, which is roughly 10% of their total staff strength. Airbnb laid off 25%, Renmoney reduced its staff by 50% and many other companies have done same. Because it is the most difficult option at the moment, looking at the fact that the economies of the world are already tight, it is important that founders/CEO make arrangements/provisions that will help the laid off staff survive till they get new jobs. One business that has been praised for how they managed their layoffs is Airbnb. I will share some of the arrangements they implemented below:

  • Severance pay: Article 17 of Ghana’s Labour Act requires that you pay the staff a full month’s salary in instances where the layoff is done without one month’s notice. Besides the legal requirement, business owners must consider the hardship caused by the pandemic and give laid-off staff some funds that can sustain them for the time being. It can be a month’s salary or even more.
  • Health insurance benefits: Some companies allow laid off staff to continue with health insurance coverages, mostly up to December this year. This has become important due to the fact that we are in a health pandemic at the moment. This shows how important the company cares about the health of laid off staff and their families.
  • Job search support: Last but not the least, you can also put up an initiative of helping affected staff get jobs by recommending them to other businesses, organizing a job fair etc. Companies with the wherewithal allow their staff to own company laptops they were using.

These are just the common options out there that businesses are using to handle their employees currently. The important thing is that whichever option you go with, you handle it ethically and within legal means.

If you have already taken any of the above measures, you can share with us in the comment section. We would also like to learn from you.

2 Comments

  1. COVID19 Relief Fund for Ghana SMEs - Built Accounting
    May 15, 2020

    […] COVID19 Relief Fund for SMEs is part of broader measures by the government of Ghana to manage the social and economic recovery of the country, especially through SMEs who account for over 80% of the country’s workforce and are the hardest hit. […]

  2. How to apply for the COVID19 Relief Fund for SMEs - Builders Blog
    May 17, 2020

    […] COVID19 Relief Fund for SMEs is part of broader measures by the government of Ghana to manage the social and economic recovery of the country, especially through SMEs who account for over 80% of the country’s workforce and are the hardest hit. […]

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