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Business Slowdowns, Downsizing, and Cost Reductions

Difficult economic times and unforeseen circumstances can negatively affect a business and require layoffs or other cost-reduction measures. Or, a fire can destroy a place of business. In either case, business owners face complicated business and legal decisions that they must make carefully.

Business Interruptions

When a natural or man-made disaster hits a business, the effects can be catastrophic. Facilities can be destroyed and equipment can be ruined, making conducting business impossible.

Yet, your business may have legal obligations to deliver goods and may have an important interest in continuing operations so that the company can remain viable, even if you lack the funds to replace what you lost. For these reasons, businesses need to purchase business interruption insurance.

Business interruption insurance can provide much-needed funds to replace what the business needs to continue operating. Business interruption insurance is expensive, so it is important to purchase an accurate amount of insurance coverage that you need to meet your business’s legal obligations in the event of a catastrophe.


Economic or business conditions can force businesses to face the painful reality to downsize or lay off workers to reduce costs and remain open. Few business owners decide to lay off workers lightly.

Businesses may consider alternatives to layoffs such as reduced workweeks, salary reductions, and early retirement incentives, for example. Yet, sometimes layoffs are inevitable. In those instances, you must give careful consideration to the legalities of layoffs to avoid future litigation.

The majority of American workers are at-will employees. That means that they may leave their job, or you may terminate them at any time. However, your right to terminate employment is not unlimited. You may not terminate an employee for discriminatory reasons, for example.

To prevent lawsuits based on discrimination, it is important for employers who are conducting layoffs to:

  • Have clear reasons for downsizing
  • Identify who made the layoff decision
  • Have accurate and complete written documentation of performance reviews
  • Have accurate and complete written documentation of other factors related to the layoff, such as the timeline of when employees were hired
  • Follow all applicable state laws and union contract provisions related to terminations

It is important to avoid even the appearance of discrimination. Accordingly, many businesses use the “last to hire, first to fire” rule when laying off workers. Other businesses rely both on longevity and performance reviews. To navigate the legal minefield of downsizing, you should keep careful documentation and make careful decisions.

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