Company Layoffs? These are the Employee Rights that Must Be Fulfilled

Apart from employees, layoffs are also a difficult decision that companies often have to make. This is because the policy can affect workers from several groups, hundreds, or even thousands as a percentage of employees. But sometimes, the process of laying off a number of employees is part of a business strategy or operational adjustment. For example, when companies have to cut costs, due to decreased demand for products or services, seasonal closures, or economic downturn factors. Even so, companies cannot just do layoffs. There are provisions and rights that companies must fulfill for employees affected by layoffs. This must be known and followed, so as not to affect the company’s image or even get into legal trouble. So, what exactly is a layoff? How are the provisions and what are the differences with Termination of Employment (PHK)? Check out the full explanation in the following article.

What is a Layoff?

Layoff is a form of employee termination due to the instability of the company. That is, it is not related to work performance or employee misconduct. But in some cases, companies even layoff when they are growing rapidly because they foresee economic uncertainty, and hence they overcome difficult times to increase company profits. In this situation, employees are sometimes on the brink of uncertainty, unsure whether they will be permanently fired or rehired by the company. If the company’s condition has stabilized, it is not impossible that layoff employees can return to work for the company. Other terms commonly used for layoffs are downsizing, rightsizing, or smartsizing, which means the following:

• Downsizing: Making a company smaller by eliminating some staff positions.

• Rightsizing: Restructuring the company. The company adjusts its business by reducing the workforce, reorganizing management, cutting costs, and changing job descriptions.

• Smartsizing: The middle ground between downsizing and rightsizing, to still maximize profits and minimize expenses from change.

What Causes Companies to Layoff?

Layoffs are the result of company management decisions. Below are some of the reasons why companies do it:

Budget Efficiency

The reason why companies make layoffs is budget reduction. Usually, this situation is a result of failure to achieve targets, debt repayment, or as has been happening lately, lack of capital support from investors. Therefore, one of the business approaches to save budget is to lay off people and reallocate revenue.

Company Closed

Apart from budget efficiency, the second cause of layoffs is the company going out of business. This condition is caused by continuous losses and poor business management. In some cases, companies may lay off staff that are considered ‘non-essential’ and leave only core employees to continue running the business.

Optimizing the Role of Staffing

Overstaffing and changes in certain managerial responsibilities can also cause layoffs. This is done by companies to improve the effectiveness of their business operations. On the other hand, companies do this optimization to improve the performance of various departments, such as marketing and products. In other words, the company cuts the number of employees in one division and increases the number of employees in another division.

Company Relocation

In certain cases, upper management or key stakeholders may decide to relocate the business to another region or city. This option is taken because the company needs a new location (area) that is conducive to the industry and better equipped to support operational activities. Therefore, employees who are considered less potential or unable to relocate to the new location will be dismissed.

Merger or Acquisition

Simply put, a merger is when two different companies decide to merge into one new entity. This usually happens for a variety of reasons and can result in a change in business strategy, including the emergence of new leadership which impacts a number of administrative decisions. Meanwhile, an acquisition is the process of taking over a company by another company. The effect is the same as a merger, which is a shift in business policy, resulting in the dismissal of personnel with the same position in the company that is taken over.

Significant Project Cancellation

A company can usually go on a hiring spree to meet the needs of a large project. But if the project is canceled, the company is forced to lay off staff. Although most organizations have transferred these employees to other positions, personnel who are deemed inexperienced or incompetent are likely to be let go.

So, what’s the difference between layoff and termination?

Termination of Employment (PHK) is the termination of an employment relationship due to certain things that result in the end of rights and obligations between workers and employers. Companies usually lay off employees for various reasons, generally related to unsatisfactory work performance. Companies can also determine layoffs for other reasons, for example, employees violate rules, employees do not meet company standards, employees damage company property, and employees violate the contents of the contract. So, although layoff and layoff both mean job loss, the main difference between the two lies in the reason. Layoffs are caused by company conditions, while layoffs or dismissals are caused by the behavior or actions taken by employees. Reporting from Indeed, layoff or dismissal has a negative connotation, so there is only a small chance that those who are fired will be recruited again in the future. The difference between the two also lies in the compensation that employees get, because those who are fired are not entitled to any severance pay. Meanwhile, when employees are laid off, they are entitled to severance pay and other benefits offered by the company. For more details, see the differences between layoffs and layoffs in the following table:

Benefits of Layoffs for Companies

Layoffs are not always related to bankruptcy or losses, but companies may lay off employees because they want to reduce the workforce to deal with issues or accelerate the achievement of targets. The following are some of the benefits for companies that layoff:

Labor Cost Savings

One of the main advantages of layoffs is reducing labor costs. By reducing the number of employees, companies can save money on salaries, benefits, and other benefits.

Improved Operational Efficiency

By reducing the number of employees, companies can improve operational efficiency as the same work can be done with fewer people. This can lead to more efficient processes and reduced wastage of resources.

Adjustment to Market Changes

When companies face declining sales or changes in the business environment, layoffs can be used as a strategy to adjust the size of the company to changing market demands. This allows the company to remain competitive and avoid greater financial losses.

Focus on High-Quality Employees

By making layoffs, companies can retain employees who are considered the most valuable and high-performing. This can increase the productivity and commitment of the remaining employees.

Increased Profit and Share Value

Cost reduction through layoffs can increase the company’s profits, which can affect stock value and investor confidence. This can provide a short-term financial boost to the company.

Rights of Employees Affected by Layoffs

Although there are several advantages in making layoffs, keep in mind that companies are also required to fulfill the rights of employees affected by this policy. Referring to Article 15 of Government Regulation (PP) No. 35 of 2021, the rights received during layoffs are severance pay, long service pay, and compensation, namely:

Severance Pay

The right of employees who are laid off is severance pay. Severance pay is money that the company gives when the employee’s term of office is over. Apart from resigning and running out of service, employees affected by layoffs are also entitled to receive a certain amount of money based on the provisions in article 156 of the Labor Law. The calculation of severance pay given is as follows:

Long Service Award Money

The next right of a laid-off employee is long service pay. Generally, companies give this money to senior employees who have worked for many years. The goal is to appreciate the employee’s contribution and loyalty. The Labor Law also regulates the provisions as follows:

Reimbursement of Rights

Other rights of permanent employees include reimbursement of untaken and unpaid leave and transportation costs for workers/laborers and their families to the place where the worker/laborer was first hired.

KH Contact

That is the explanation of layoffs, starting from the definition, causes, benefits for companies, to the rights that must be fulfilled for employees affected by layoffs. So, for KH Pals who may be the owner of a company that employs employees, of course you must understand the provisions of this layoff, yes!

READ ALSO: Important things you should understand about layoffs

If you are still confused, you can contact Contract Law. We can help you to make employment-related letters including termination of employment such as layoffs, in accordance with applicable regulations. The making of employment termination letters at Kontrak Hukum can be done 100% online in just 48 hours! For ordering information, please visit the KH Services – Termination Letter page. If you still have questions about other company needs, you can also consult with us at Ask KH and send a direct message (DM) to Instagram @kontrakhukum.