How to lay off employees: a guide for small agency owners

If you are reading this, you probably already suspect the answer. This article is for the owner of a small agency, somewhere between five and fifty people, who has to lay off employees and has to do it personally. I have done it. It was the worst week of my working life, and it was worse for the people on the other side of the table.

Nothing here will make it feel acceptable. What follows is how to make sure it is necessary, how to do it lawfully, and how to treat people decently while you do it.

Before you act on anything below, speak to an employment lawyer in your jurisdiction. An hour of advice costs far less than a mistake, and several parts of this process have legal rules that vary by state and country.

Make sure it is necessary

A layoff is permanent for the people affected. Check the arithmetic before you decide.

Take a twelve-person agency that has lost its largest client.

Three and a half months until the agency cannot make payroll for anyone. Now test that number honestly.

Count only signed work. A proposal the client loves is worth nothing until the contract is back. If you have $20,000 a month of signed work starting next month, include it. If you have $60,000 of work you feel good about, it does not count.

Cut everything else first. Your own pay. Unused software. The office, if the lease allows. Contractors and outsourced work that the team could absorb. A hiring freeze. Ask whether a client with overdue invoices can be collected. If these close the gap, you do not need a layoff.

Consider the temporary options. Reduced hours or reduced pay across the team can cover a gap that you can see the end of. Both need legal advice, since changing pay or hours has rules of its own, and both are only fair if the gap is truly temporary. Used to postpone a decision, a pay cut costs everyone money and then ends in a layoff anyway.

If the gap remains, look at what the layoff does. Suppose two roles are eliminated, each with a salary of $96,000 and a loaded cost of $10,000 a month.

Now look at the same action taken two months later.

Waiting two months turns ten months of runway into three. It also shrinks what you can afford to pay the people leaving, and it raises the chance of a second round. This is the hardest fact about layoffs: delay feels kind and it hurts everyone, including the people you were trying to protect.

One check on the saving. If the people leaving were billing hours, their departure removes revenue as well as cost. Subtract any revenue that goes with them before you trust the new monthly figure. The article on bench management shows how to see where unbilled time is sitting.

Cut once

Decide the full size of the reduction and do it in one day. If the arithmetic says two roles, and you eliminate one hoping the second will not be needed, you will most likely be back in the same room in eight weeks. The team will then spend every following month waiting for the third round. The good people, who have options, will leave on their own schedule.

Cut slightly deeper than the minimum the numbers demand, so that you can say truthfully to the remaining team that you do not expect to do this again.

Deciding who

Start from the business you will be running afterward. List the work that is signed and the work you expect to sell. Then list the roles that work requires. The roles that are not on the second list are the ones being eliminated. The selection is of positions, based on what the company needs. How much you like someone has no place in it.

Write the criteria down before you put names against them: the skills future work requires, each role’s connection to current revenue, and documented performance if performance is part of the decision. Then apply them consistently.

Two cautions, both for your lawyer.

Check the pattern. Look at who is on the list as a group. If the people selected are disproportionately older, or of one sex or race, or include someone who recently took medical or parental leave or raised a complaint, you may have a legal problem even if every individual choice was made in good faith. Counsel will want to review the list and the criteria before anyone is told.

Seniority and salary. Selecting purely on cost tends to select the oldest and longest-serving people. Selecting purely on recency ignores what the business needs. Neither is safe as a sole criterion.

Keep the planning group as small as possible. In an agency this size, that is usually you, a business partner if you have one, and your lawyer. The period between deciding and telling should be days.

The legal basics to check with counsel

This section is a list of questions to bring to an employment lawyer. The lawyer’s answers are what you act on, since the rules differ by state and by country.

Notice requirements. In the US, a federal law requires employers with 100 or more employees to give 60 days’ written notice of mass layoffs and site closings that meet certain thresholds. Most small agencies fall below the federal threshold. Several states have their own versions with lower thresholds or broader coverage, so ask about your state specifically.

Final pay. States set their own deadlines for the final paycheck. In some, it is due on the last day of work. States also differ on whether accrued, unused vacation must be paid out. Missing a final pay deadline can carry penalties, so have the checks or transfers ready before the meeting.

Benefits continuation. Under federal law, employers with 20 or more employees that offer group health coverage generally must offer departing employees the option to continue that coverage at their own expense for a period. Many states have similar rules for smaller employers. Your benefits provider or broker will know the notices required. Find out the exact date coverage ends, because it will be one of the first things people ask.

Severance and releases. Severance is generally not required by federal law, though a contract, an offer letter, or your own written policy can create an obligation. If you offer severance in exchange for a release of legal claims, the release has to be drafted properly. For employees aged 40 and over, federal law sets specific requirements for a valid release of age discrimination claims, including minimum periods to consider and revoke the agreement, with longer periods when a group is affected.

Contracts and visas. Check each person’s employment agreement for notice terms. If anyone is on a work visa sponsored by the company, their right to stay in the country may depend on the job. Tell your lawyer early and give that person as much time as you can.

Outside the US. In the UK, redundancy is a regulated process. An employer is expected to consult with each affected employee before the decision is final, use fair selection criteria, and consider alternative roles. Employees with two or more years of service are generally entitled to statutory redundancy pay, and collective consultation rules apply at 20 or more redundancies. EU countries each have their own rules, often with longer notice periods, required consultation, and sometimes a role for employee representatives. In these jurisdictions you generally cannot decide and announce on the same day, and the sequence described below has to be adapted. Take local advice before you say anything to anyone.

The conversation

Do it yourself. In person if you share an office, by video if you do not. Never by email, by message, or through someone else. Meet each person individually. Have a second person present if your lawyer advises it, and tell the employee why they are there.

Choose the timing for the employee’s benefit. Early in the day and early in the week gives them time to call a lawyer, a benefits provider, or a recruiter during business hours. Avoid the day before a holiday or someone’s known personal event if you can.

The first two sentences

The person will know something is wrong within seconds. Do not make them wait. Skip the small talk, the state of the market, and how hard this is.

I have bad news. Your position is being eliminated, and your last day is today.

Then stop for a moment. Let them hear it.

What comes next

Give the reason in a sentence or two, truthfully.

We lost our largest client and the company cannot support its current size. This is a financial decision. It is final, and it has been made for two roles.

If the decision had nothing to do with their performance, say so plainly: “This is no reflection of your work.” Say it only if it is true.

Then cover the practical terms, briefly, and hand them over in writing, because people do not retain details after hearing news like this:

• The last day of employment and whether they are expected to work until then
• Final pay and when it arrives
• Severance: the amount, the conditions, and how long they have to consider any agreement
• Health coverage: the end date and how continuation works
• Equipment, accounts, and how they collect personal belongings and files
• What you will say in a reference, and that you will give one
• Who to contact with questions, with a direct phone number

Then listen. Some people ask sharp questions. Some say nothing. Some are angry, and they are entitled to be. Answer what you can. If you do not know an answer, say that you will find out and reply by a specific day, then do it.

The meeting should take ten to fifteen minutes. A longer meeting tends to become a negotiation or an attempt to make yourself feel better.

What never to say

• “This is hard for me too.” It may be. You still have a job. Your feelings are for someone else to hear, later.
• “I know how you feel.” You do not.
• “You’ll land on your feet” or “this could be a good thing.” You cannot know, and it asks them to comfort you.
• “We’re a family.” If you ever said it, this is the day it is shown to be untrue. Do not repeat it.
• “If it were up to me.” It was up to you. Own the decision.
• “We might be able to bring you back.” Unless you have a specific, real plan, this is a false hope that delays their search.
• Anything about another employee. Who else is affected, who was considered, who is staying.
• Reasons that shift. If you say it is financial today and mention performance next week, you have created distrust and possibly a legal problem. Give one true reason and keep to it.

Do not argue the decision, and do not apologize in a way that suggests it might be reversed. You can say “I’m sorry this is happening” once, and mean it.

Severance

Pay what the business can truly afford, and work that out before the meeting. In the worked example above, one month’s pay for each person cost $16,000 and left the agency with over ten months of runway. Two months would have cost $32,000 and left about eight. That is a real choice, and I would lean toward the more generous one where the runway allows.

Common structures in small firms are a set number of weeks for everyone, or a number of weeks per year of service with a minimum. Whatever you choose, apply the formula consistently to everyone in the group.

Money is one part of it. Other things cost you little and matter a great deal:

• Paying for a month or more of health coverage
• Letting them keep their laptop
• A written reference, offered before they have to ask
• Introductions to other owners who are hiring
• Flexibility on the last day so they can leave on their own terms
• Time to say goodbye to colleagues, if they want it

If your cash position means severance has to be small, say so directly. People can accept a small amount that is explained more easily than a vague one.

Telling the rest of the team

Tell everyone else the same day, within an hour or two of the last individual conversation, in one meeting. People will already know something is happening.

Say these things, in this order:

1. What happened: how many roles were eliminated and that the people affected have been told. Name them unless your lawyer advises otherwise. The team will know within the hour regardless.
2. Why: the same true reason you gave in the individual meetings, with real numbers if you can share them.
3. That the people leaving are being treated properly, in general terms.
4. Whether more cuts are expected. Tell the truth. If you believe this is the only round, say so and say what would have to happen for that to change. If you cannot promise it, do not.
5. What changes now: who covers which work, starting Monday.

Then take questions for as long as they come. You will be asked whether the company is going to survive. Answer with the runway figure. Adults handle real numbers better than reassurance.

Do not describe the day as a fresh start, and do not ask the team for extra commitment in the same meeting. They have just watched colleagues lose their jobs and are deciding whether to trust you. In the following weeks, expect productivity to fall, and expect one or two people to start looking elsewhere. Meet with each remaining person individually within the week.

Telling clients

Call every client whose team is changing, the same day, before they hear from anyone else. A client who learns about it from a departing developer’s social media post will assume you are hiding worse news.

Keep it short and factual:

I’m calling because we’ve made some changes to our team. Sam is leaving the company as part of a reduction, and Friday is the last day. Priya is taking over your project. She’s been briefed, and the handover is happening this week. Nothing changes in your timeline.

Say only what is true. If the timeline does change, say by how much. Do not discuss the departing person’s performance or the detail of your finances. If the client asks whether the agency is stable, give a direct answer: “We’ve sized the team to our current revenue, and we have the capacity to deliver everything we’ve committed to you.”

Check your contracts for any clause requiring notice or consent when named team members change. Then make sure the handover is real. The fastest way to turn a layoff into further lost revenue is a client whose project stalls the week after. If the reduction leaves you short of a particular skill for existing commitments, staff augmentation can cover it without adding a salary.

What you owe the people leaving

You made the decision to hire them, and in most cases you made the decisions that led here: the client concentration, the hire made on hopeful revenue, the cost you did not cut a quarter ago. They are paying for those decisions with their income. That creates obligations that outlast the meeting.

• The truth. One honest reason, told once, and never revised.
• Speed. Final pay on time or early. Paperwork the same day. Calls returned within a day.
• A reference that means something. Written, specific, and given without being chased. Take every reference call.
• Active help. Send their name to owners you know. Reply when they ask you to look at a resume. This costs you an hour and can shorten someone’s search by weeks.
• Dignity in the exit. No escort to the door unless there is a real security reason. Let them say goodbye. Speak well of them afterward, to the team and to clients.
• Privacy. Their severance terms and their reaction in the room stay with you.
• No requests. Do not ask them to feel fine about it, to stay in touch, or to tell you they understand.

Some of them will not speak to you again. That is their right.

Afterward

When the week is over, write down how the agency got here while you still remember it clearly. Most small-agency layoffs trace back to a few causes: one client that was too large a share of revenue, hires made against work that was never signed, and a forecast nobody was keeping. The rest of the Team hub is about those decisions, including when to partner instead of hire, which covers the cases where flexible capacity is the safer choice. If the pressure behind your numbers is clients needing fewer engineering hours than they used to, the AI hub’s piece on software engineer layoffs covers what is driving that.

The work of rebuilding revenue starts immediately, and it starts with getting clients on terms that make the next hire safe to make.