Employee layoff criteria – deciding who to retain and who to let go

One of the most difficult decisions during a retrenchment process is identifying which staff to let go and which to retain. Balancing the needs of the business with regulatory compliance, fairness, and human relationships is a fine line to walk. Setting specific layoff criteria takes the bias and emotion out of the process, ensuring transparency and putting the business in the strongest possible position for the future. 

But how does HR choose who to lay off and who to retain? When redundancies are on the horizon, the HR team needs to be clear on how to lay off employees legally. Whichever layoff criteria an HR team uses, the overarching driver should be regulatory compliance. A company cannot just lay off employees at any time or for any reason. The Fair Work Ombudsman requires a “genuine redundancy,” meaning: 

• The employee’s job does not need to be done by anyone.
• The employer followed the consultation requirements in the relevant award or enterprise agreement.
• The employee could not have been offered another job within the business (or an associated entity).

If these criteria are not met, then the redundancy is “not genuine” and the employee can apply for unfair dismissal. Unfair dismissal applies when an employee is terminated in a “harsh, unjust or unreasonable manner”. 

Unlawful termination occurs when an employee is dismissed because of a protected attribute or temporary absence due to illness, injury, parental leave, or voluntary emergency management activity. It can also occur due to trade union membership, seeking office, acting in the capacity of an employee representative, filing a complaint, or participating in legal proceedings against the employer. 

These can include:

• Automation – the job does not need to be done by anyone because it has been automated to the extent that machines, computers, or robotics have replaced the need for human activity.
• Merger, acquisition, or takeover – the job does not need to be done by anyone because the change has resulted in a duplication of roles. 
• Insolvency or closure – the job does not need to be done by anyone because the business ceases to trade.
• Capacity changes – the job does not need to be done by anyone because production is slowing or stopping in that specific area of the business. 

When there is no genuine reason for redundancy, the company may decide to look at alternatives. These could include: 

• Non-renewal of contracts – natural attrition by not renewing the contracts of temporary or agency staff.
• Reduced hours – overtime freezes or cuts to standard working hours to reduce costs. 
• Recruitment freezes – not replacing staff lost through natural attrition, such as retirement or maternity.
• Redeployment – redeploying staff from areas of the business where they’re no longer needed to areas where they are.
• Voluntary separations – generous incentives offered to staff, attractive to those planning to retire or leave for another role.
• Temporary salary reductions – a drastic measure to retain staff when the company is under severe financial pressure. 

Businesses with fewer than 15 employees do not need to make severance payments. However, they must still ensure that redundancies are carried out for a genuine reason, and make sure their selection criteria are fair and non-discriminatory. 

Different organisations use different employee layoff criteria – there’s no one size fits all answer here. Common selection criteria include: 

• Merit-based selection.
• Seniority-based selection.
• Skills-based selection. 
• Status-based selection.
• Multi-criteria selection. 

Deciding on the right layoff strategy for a business needs consideration of the pros and cons of each approach, so let’s dive in to find out more about each. 

This method uses employee performance data to decide who to retain and who to lay off. The best-performing employees are kept on, with low-performing employees made redundant. 

Pros: Selection based on merit helps to weed out underperforming employees, so that the business retains top talent and is in a strong position to move forward. 

Cons: This method needs the business to have a strong and regular performance management system in place. Additionally, manager biases and personality clashes could lead to liability. Layoffs may not be spread equally across all teams, particularly if one team has a record of historical underperformance, nor does it take into account the wider business impact of teams as a whole.

 

This is also known as the “last-in, first-out” method. The most recent hires are made redundant, retaining those with longer tenure. 

Pros: Seniority-based selection retains institutional knowledge and can protect against age discrimination claims, as older workers are likely to have longer tenure. 

Cons: New external knowledge that could benefit the business may be lost, as new recruits bring new perspectives. While seniority-based selection can protect against age discrimination, it may not protect against other minority group claims. 

This method retains employees with the skills that are most important to the company now and in the future. 

Pros: Skills-based selection can put the business in a strong position to succeed going forward. 

Cons: The leadership team needs a solid understanding of the skills that will be necessary for the future success of the business. This method can also lead to age discrimination, as younger workers are less likely to have developed professional skills than older workers – or, conversely – older workers may not have the digital and technical skills the younger ones do. 

This method gives security to permanent employees, while contingent workers, such as contractors and temps, are laid off. 

Pros: Status-based selection can protect against legal liabilities, as employer duties towards contingent workers are different to employer duties towards permanent members of staff. It can also be less damaging to the employer brand.

Multiple criteria ranking for layoffs involves creating a list of criteria from those mentioned above and giving them different weights. Each individual is ranked against this weighting system, and those with the lowest total scores are laid off. 

Pros: This is one of the most effective ways of laying off employees, enabling criteria to be tailored precisely to the company’s objectives. 

Cons: It’s considered a difficult selection criteria to implement, as it’s much more complex than the other options. 

1. Set clear criteria

Decide what criteria to use for selection and give specific examples of how rankings will be allocated. For example: 

<1 year tenure: 0 points

1-5 years’ tenure: 1 point

6-10 years’ tenure: 2 points

10+ years’ tenure: 3 points

2. Weight according to value

Decide which behaviours and traits hold most value for the business. For example, long tenures may be very highly valued, so a tenure of 10+ years could be assigned 5 points, while 6-10 years remains at 2 points. 

Key criteria may also be given higher points values than less important criteria. For example, performance may be weighted with more points than tenure. 

3. Review

Review models and criteria with the legal team and senior HR professionals. This reduces legal liability and ensures that no protected groups are negatively impacted. 

This combination model is one of the most common employee layoff criteria, as it is adaptable to the specific needs of the business and incorporates the advantages of the other methods. 

Let’s take each of these criteria in turn and see how they’d play out in the real world.

• Selection based on merit

An HR Manager is asked to reduce the headcount in the finance department by five employees, due to automation. They collate performance data for every employee within that department and order them from worst to best performer. The data includes an overall performance score from annual appraisals, as well as client feedback, attendance data, and error rates. 

The five employees with the lowest scores are let go, leaving a strong, high-performing team, complemented by technology, to take the business into the future. 

• Selection based on seniority

An HR Director in a manufacturing company is asked to save $2 million in human capital costs. They make a list of every employee, including how long they have been with the company. They order their list from the most recent hire to the employee with the longest tenure. Starting at the top, they lay off each employee in turn until they hit $2 million in savings. 

They retain specialist knowledge within the company, but may lose employees with the potential for high impact in a key part of the business.

• Selection based on skills

A large retailer needs to cut headcount in the head office, to reduce role duplication following a merger. The leadership team meets to discuss the skills that will be most in demand within the business in the short to medium term. They rank each skill based on its value to the business. 

Each employee’s skills are then mapped to the list, retaining the employees whose skills most closely match future business requirements. Others are let go as their skills are less in demand. 

• Selection based on employment status

The HR Manager of a charity needs to make short term cost savings quickly. She marks all temporary and contract workers for potential layoffs, keeping the permanent workforce intact. 

However, she risks not hitting her savings goal if there aren’t enough temporary workers, or laying off more workers than necessary, so she combines this with another ranking criteria, and lays off contingent workers in order, according to their ranking. She may then use the same criteria for the permanent workforce if more savings are required.  

• Selection based on multiple weighted criteria

A multinational business is looking for the fairest way to reduce its workforce. The HR team works with the executive committee to develop a method that allocates different weights to different criteria. 

They assign most weight to seniority and merit, with skills and tenure having less importance. They score each employee based on the points allocated to each criteria and let them go in order, starting with the lowest scores, until their goals are met. 

Whichever methodology is used, HR departments should decide upon criteria in collaboration with legal and HR analytics teams to ensure that no group is unfairly targeted. 

To make the process easier, use this layoff selection criteria template from Careerminds:

NAME:
Criteria	Assessment	Score
Merit	Performance rating: 5*4*3*2*1*
Seniority	Tenure<1 year1-5 years6-10 years10+ years
Skills	Skill examplesAI / prompt engineeringData analyticsCybersecurityEnergy efficiencyEmotional intelligence
Status	Contract typePermanentFreelanceTemporaryFixed termSeasonalCasual
Company-specific criteria	Potential for promotionInstitutional knowledgeThreat of competitor poaching
TOTAL:

This form can be tailored to the company’s requirements and filled in for every employee, giving a total that determines their place in the order of layoffs. Those with the lowest scores should be laid off first. 

Deciding who to lay off is a sensitive and difficult decision for any business. There is no right or wrong selection method, as every business has different needs. 
Careerminds are the experts in redundancy. From templates and guides to full outplacement services, we stand with you as your partner during the toughest times in HR.