Navigating Financial Challenges: Practical HR Guidance for SME CEOs

The company liquidation rate in the 12 months to June 24 was 55.8 per 10,000.  This was higher than pre-pandemic levels.  Most SMEs face the highest risk of failure within their first 5 years.

When a SME or company of any size is forced to lay off staff due to financial constraints, it can be a challenging and emotional process for both the employer and the employees.

However, by approaching the situation with compassion, transparency, and planning, employers can help ensure the best possible outcome for their dedicated staff. If the Company leaders are aware that there is no possible way in which to rectify the situation, they should not build false hope.  When the problem first comes to light, employees hold on to hope that their jobs will be safe.  Whilst it is easier for employers to spread optimism, even the most loyal employees can become upset and disgruntled when they realise that they are being given false hope.

If companies find themselves in this position, here are some key steps to take:

1. Be Transparent and honest (Impact over Intent)

• Communicate early: Once the decision is made, inform your staff as soon as possible. Honest, timely communication helps build trust and prevents misinformation from spreading.
• Explain the situation clearly and truthfully: Share the reasons behind the layoffs, including any financial challenges.  Explain clearly what steps were taken to avoid the financial crisis. While this can be difficult, providing context always helps employees understand the situation is not personal, but a business necessity.
• Keep lines of communication open: Be available to answer questions and offer one-to-one meetings to help employees process the news. This also allows you to offer personalised support where possible.

2. Follow Legal Obligations

• Ensure Compliance with Employment Law: Be aware of the legal obligations when making redundancies, including notice periods, redundancy pay (where applicable), and fair selection criteria. Failure to comply can lead to disputes and further financial strain.
• Consult your employees: UK law requires businesses to consult with employees before redundancies, particularly if more than 20 people are being let go within a 90-day period. Even for smaller numbers, consult employees on the process and look for alternative solutions if possible.

3. Offer support and resources

• Provide redundancy pay: If employees qualify for statutory redundancy pay, make sure they receive it, along with any outstanding wages, accrued holiday pay, or bonuses they may be entitled to.
• If the company is in a position where it cannot pay redundancy payments apply to the Redundancy Payments Service (RPS) for financial assistance.  If your application is approved, the RPS will make the payments directly to your employees.  You will be financially responsible for the payments, and you will need to repay them as soon as possible otherwise the RPS may take enforcement action.
•  Outplacement services: Where possible, help such as CV workshops, interview coaching, or connections to recruitment services. This can help employees transition to new roles more easily.
• Flexible references: Offer to provide strong, personalised references and be flexible about allowing time off for interviews during the notice period.

4. Consider alternatives before layoffs

• Part-time or a reduction in hours: Explore options like reducing working hours or offering part-time roles instead of full layoffs. Some employees might prefer this over losing their job entirely.
• Temporary layoffs: If the financial difficulties are temporary, where employees return once the business recovers.
• Voluntary redundancies: In some cases, offering voluntary redundancies might be an option, allowing staff who are willing to leave to do so, reducing the impact on those who need the job most.

5. Show empathy and appreciation

• Acknowledge the employees’ contributions: Take the time to thank your employees for their hard work and dedication. A small gesture of appreciation can go a long way during difficult times.
• Maintain a positive atmosphere: Handle the process with sensitivity, respect, and empathy. Maintaining positive relationships with departing employees can leave a lasting impression and preserve your reputation.

6. Provide financial advice

• Signpost support: Guide staff towards financial advice services, benefits they may be entitled to, or job-seeker resources that can help them manage the transition.
• Employee Assistance Programmes (EAPs): If your business offers an EAP, encourage employees to access free counselling or financial planning services, especially if they are struggling emotionally or financially.

7. Support remaining employees

• Communicate plans for moving forward: Layoffs can create anxiety among remaining staff, so be clear about the company’s future and reassure them where possible. Open communication is key to maintaining morale.
• Manage workloads: Ensure that remaining employees are not overburdened by additional responsibilities following the layoffs and be mindful of their wellbeing during this transition.

8. Plan

• Re-evaluate business strategy: Use this opportunity to reassess your business model, streamline operations, and explore new revenue streams. This can help you avoid similar situations in the future.
• Engage in contingency planning: Consider building a financial buffer to prepare for future economic uncertainties. Strong planning can help safeguard both your business and staff in challenging times.

While layoffs are often unavoidable during tough financial periods, handling the process with integrity, transparency, empathy, and a strong sense of responsibility will not only help your staff but also protect the long-term reputation and resilience of your business.

If companies cannot meet any of their financial obligations and continue to trade while knowing that the company is insolvent, the company directors could face serious consequences.  This is known as wrongful trading and is covered by Section 214 of the Insolvency Act 1986.  Signs that you may be insolvent include:

·        Difficulty paying invoices

. Unable to pay staff wages

·        Breaching overdraft limited

·        Increasing amounts owed to HMRC

·        Inability to pay pension contributions

If you think your company is insolvent, seek immediate professional advice.

We at Discovery HR Solutions can assist from an HR perspective during these uncertainties.  Please reach out if you need support.