MBT | McKay, Burton & Thurman, P.C. | Attorneys At Law

The main risks of downsizing while restructuring a business

On Behalf of | Jan 18, 2024 | Business Law

Restructuring a business is a common undertaking in the wake of times of financial hardship. Businesses may restructure or reorganize internally or may do so in conjunction with a Chapter 11 bankruptcy filing. Business bankruptcy gives an organization an opportunity to halt collection activity, rework financial obligations and establish a more sustainable budget.

Oftentimes, stabilizing a company’s budget requires making some significant changes to how it operates. For example, it may be necessary to close certain departments or shut down secondary facilities. Businesses reducing their operations often need to streamline their workforce as well. Layoffs and mass terminations are often part of the restructuring process.

There are numerous challenges inherent in staff reductions, including the two major concerns below that could cause operational and financial challenges for a company.

Losing key staff members

Workers can usually tell that downsizing is about to happen before the company announces layoffs and terminations. Many employees may try to get ahead of the company’s decision by seeking out new employment elsewhere.

Businesses may lose dozens of highly-qualified workers in a very short amount of time when preparing for downsizing or widespread staff reductions in addition to those they decide to terminate. Often, high performers are among those who try to leave early when there are signs of issues within a company. The business may also reduce staff to a level where the company can no longer operate with optimal efficiency. Companies need to consider the potential for loss of talent and worker burnout when making decisions about staff reductions during restructuring.

Facing employee lawsuits

Workers who suddenly lose their jobs can become bitter and may believe that their former employers violated their rights. Employee lawsuits after layoffs are a known operational hazard. They may try to claim that their termination was either discriminatory or retaliatory. Companies planning to reduce staff levels significantly often need to do so with great care to minimize the chances of those workers suing the company later. An employee lawsuit on the heels of other financial struggles could leave a company incapable of bouncing back.

Reducing staffing expenses is often a necessary part of a Chapter 11 bankruptcy or any other restructuring effort, but those operating companies need to understand the risks inherent in the process. Approaching restructuring very cautiously can help companies move on from a time of temporary economic hardship.