The difference between layoffs and buyouts

To weather the economic downturn, many employers are turning to layoffs or buyouts to reduce the cost of their payroll. Both moves help employers reduce head counts and cut wage and benefit costs. But, experts say, the moves are very different tools and employers use them for different reasons. But for workers, the difference between a layoff or a voluntary buyout may be dramatic. Here’s a look at the issues involving buyouts and layoffs:

The difference between layoffs and buyouts

Suzanne O’Keefe, an associate professor of economics at California State University in Sacramento, said layoffs happen when employers must cut payrolls fast. Workers selected for layoffs have no say in the matter but may return later if they have recall rights under a contract.

Buyouts are different.

“They are typically packages of financial incentives offered to workers to leave jobs voluntarily,” O’Keefe said. “But when they leave, it’s permanent.”

According to a study by Right Management, a Philadelphia-based human resources firm, the average U.S. employer’s voluntary buyout deal includes lump sum payments equal to between 1.23 to 2.76 weeks salary for each year of the employee’s service, plus medical insurance for a period.

Why companies first offer buyouts to employees

O’Keefe said buyouts are a goodwill gesture that employers adopt when they must reduce staff but maintain the morale of remaining workers and stature in the community.

“Buyouts are typically offered to veteran workers near or approaching retirement,” O’Keefe said.

Buyouts are risky, though, offering “formidable challenges” to senior executives, Harvard University Business School professor Stuart Gilson said in a 2001 book.

The executives must pick who gets downsized: factory workers vs. administrative, for example, and must keep remaining workers motivated.

What about unemployment benefits?

Accepting a financial package to leave a job is considered a voluntary quit that makes a person ineligible for unemployment insurance benefits, said Michele Sutton-Riggs, of the Employment Development Department’s unemployment insurance program.

However, employers use the term “severance” loosely, and some offer unemployment insurance supplements.

Because eligibility for unemployment insurance is decided case by case, people should apply and let state officials decide, she said.

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