Hiring in the Wake of a Layoff: What Employers Need To Know

The tech layoffs that gained momentum in 2022 are called loud layoffs for a reason: they grabbed a lot of public attention, but did not represent what was happening across the labor market as a whole.

Data from a recent Visier Insights Report called Behind the Hype: Data-Backed Insights About Layoffs backs this up. In Q4 of 2022, the involuntary turnover rate (layoff rate) spiked within the tech sector as other industries remained relatively stable. 

In early 2023, however, the involuntary turnover rate increased within manufacturing as well as within the retail, warehousing, transportation, and wholesale (RWTW) sector. This increase was larger than previous seasonal increases these sectors experienced between 2021 and 2022. 

Clearly, layoffs have not been confined to one sector, but the 2022 tech spike was driven by an unusual driver. As Sandra Sucher, a Harvard Business School professor, explained in this HBR podcast, the tech layoffs were a correction to the pandemic-induced hiring frenzy. 

“Usually, there’s a mismatch between what’s going on in the economy and the size of [the] workforce. But the level of hiring that went on preceding this was huge," she said. “This is taking a bet on the future, being somewhat wrong about that and now having a number of people paying the price for your bad decision-making.”

Amidst uncertainty, employers are recruiting contract workers

The pain of more layoffs are front and center, and many tech leaders are cautious about overhiring. At the same time, work still needs to get done, and many firms are still growing in key parts of the business. It’s also unclear what demand will be like as economists continually adjust their recession predictions. 

So what’s a path through all this uncertainty? For many employers, it’s contract workers.

As Lionel Felix, CEO of Felix Media Solutions told USA Today, his company is making strategic use of hiring contractors alongside full-time workers so they can have the talent supply when big projects crop up. It also helps his company navigate an unpredictable market due to factors such as the war in Ukraine, volatile oil prices, and chip shortages. 

“Enough ripples of worry and we see a contraction, then a whiplash of pent-up spending. It’s been a roller coaster and we see no end to this erratic behavior,” Felix said.

Staffing executives are also reporting that many tech companies are hiring contract workers to do the work of full-time employees. Laid-off Amazon and Microsoft employees are even being approached by recruiters to work as contractors for the same companies that had previously let them go. 

While Amazon maintains that it doesn’t eliminate full-time positions so that they can be replaced by contract work, survey data reveals that this is the exact approach many companies are taking.

According to a January 2023 survey conducted by ResumeBuilder of 1,000 business leaders, four in 10 companies are hiring contractors to replace laid off employees. 80 percent of companies that had recently conducted layoffs reported that contract workers were now performing duties previously assigned to laid-off employees.

On one level, the approach makes sense: replacing permanent roles with contract positions allows companies to adjust their workforce size quickly based on changing business conditions. But hiring contractors against the backdrop of layoffs presents some major disadvantages.

Scaling down and staffing out: three major risks

While replacing full-time workers with contract labor can help organizations stay nimble in the face of uncertainty, it can harm the business in the longer term. Prudent business leaders balance any short term gains of using this approach against the potential risks it brings. Here are three significant drawbacks to consider:

1. Legal liabilities

Letting go of staff and subsequently engaging contingent workers to take their roles can raise legal concerns. If individuals are classified as contractors when they actually function as employees, organizations may be exposing themselves to penalties and legal disputes.

The fines for mislabeling workers can be stiff: In May 2023, the Guardian reported that Nike could be required to pay up to $530 million in penalties for misclassifying workers. Longer term, policy changes could make it more risky to classify workers as contractors.

2. Surprising labor costs

Hiring contractors can be cost-effective because organizations are not responsible for offering long-term job security. However, this does not automatically guarantee that switching to a contract workforce will be more cost-effective.

Depending on the sector, contract labor can actually prove to be more expensive. A reliance on contingent workers contributed to a 258% increase in labor costs at hospitals between 2019 and 2022. It’s important to consider whether the tasks in question require skilled workers who are in demand.

Conventional wisdom holds that contingent workers typically do not receive additional benefits, but this is not always the case. SurveyMonkey, for example, started providing full benefits and paid time off for its contract workers after its full-time workforce raised concerns about issues with fairness.

3. Productivity impacts

For some individuals, contract work might actually be preferable—the hours are more flexible, they aren’t tied to a single employer, and they don’t have to deal with office politics. 

However, within the context of a layoff situation, it can cause engagement issues that ultimately impact profitability. Laying off employees and hiring contractors to fill those roles may disrupt team dynamics and cohesion. 

When companies fire and hire (contractors or permanent staff) at the same time, it can seriously impact morale. According to Sucher, “that means the employees who work for you are kind of whipsawed. On the one hand, they see people leaving who they know, on the other hand, they see new people coming in who don’t know much. That’s not a recipe for building a great corporate culture or building a productive and engaged workforce.”

Redeploying employees as an alternative

Again and again, research indicates that layoffs impact corporate performance and are not worth the immediate cost savings. According to a McLean & Company report, during a recession, redeployment and upskilling should be the priority—not layoffs.

A certain amount of rightsizing might be necessary if the organization simply has more people than it can afford. But layoffs should only be a last resort—and not a de facto strategy for managing market uncertainties. Layoffs also typically lead to turnover contagion, which impacts profitability. 

Instead of cutting jobs with the intention of getting that work done by contractors, organizations can deal with a decrease in demand in one area by moving employees into roles where there is demand. These individuals can move back into their previous role if needed. 

The pandemic taught us that this is possible: 2020 saw the largest and most rapid re-deployment of employees since World War II. Many individuals found themselves switching to completely different roles within days. 

More recently, the Bank of America moved some employees from wealth management into product specialist roles in response to changing market conditions. (While the company came under criticism for not living up to its promise of avoiding layoffs, it arguably averted  more widespread cuts by pursuing alternatives.)

When the true costs of layoffs are taken into account, internal employee movement and retraining options often end up being less expensive. Role flexibility not only allows employers to hold on to the people they might need once the economic situation stabilizes, but also enables organizations to pursue new markets and adapt to rapid technological change. 

Generative AI could bring massive changes to the global economy, for example, and workers will need to perform new types of tasks to ensure their organizations don’t get left behind. 

Embarking on a reskilling effort at scale to ensure learning efforts align with the overall business strategy is more difficult with a team of contingent workers. According to a recent Visier survey, 86% of employees said their employer should take at least some role in reskilling to ensure they aren’t easily replaced by AI tools. 

Staying agile by planning ahead

Trying to forecast how many roles will be needed to meet future demand for products and services is not an easy feat when the economic situation is ambiguous. But it is possible to develop an agile workforce that can stay resilient when disruption strikes without resorting to the elimination of permanent positions. 

Simple workforce planning techniques help leaders see a clear picture of future business demand. This gives managers and support functions the insights they need to consider and implement alternatives, such as internal mobility, reskilling, cross-skilling and redeployment. 

Scenario modeling also enables leaders to consider the most optimal plans for different growth projections. Additionally, AI and predictive analytics can help forecast the roles needed and number and skills available needed to amplify reskilling. 

The outcome? Employers can adapt quickly to changing business conditions and market demands without resorting to a fire-then-hire approach. Planning ahead facilitates agile decision-making and resource allocation, making the organization more responsive to challenges and opportunities.

On the Outsmart blog, we write about workforce-related topics like what makes a good manager, how to reduce employee turnover, and reskilling employees. We also report on trending topics like ESG and EU CSRD requirements and preparing for a recession, and advise on HR best practices like how to create a strategic compensation strategy, metrics every CHRO should track, and connecting people data to business data. But if you really want to know the bread and butter of Visier, read our post about the benefits of people analytics.