Wednesday, March 8, 2017

Is it ethical to lay off employees in need?

Jorge Pine is a restauranteur who attributes success to three elements:  great food, great operations, and enough capital to support them.  However, after opening up a new restaurant, "Taco Love," he noticed a problem with operations.  The profit margin (net income divided by revenue) was only 5%, well below the 20% required to cover the cost of capital.

After looking at the books, Jorge noticed that labor costs were unusually high.  He spoke to his manager and discovered that she was reluctant to send workers home when demand was low, as on rainy days.  "They need the money," the manager explained, pointing out several workers who supported young families, or sent money back to struggling parents in Mexico.

Jorge sat his manager down and said, "look, if you do not hold costs down, this restaurant won't earn a profit, and my investors will not fund our next one."  Jorge had plans to open three more "boxes" under the same brand name.

Jorge continued, "Think about the families of the workers that I am not going to be able to hire, and what is going to happen to them if you don't earn a profit." The manager responded positively to Jorge's talk, and now Taco Love is so successful, that Jorge plans to expand to other cities.

The moral of this story is still one of incentive alignment--successful businesses will find ways to give workers enough information to make good decisions and the incentive to do so--but incentives include more than just money.  Great managers learn what motivates employees, and use that knowledge to get them to do the right thing.

This story also illustrates: (i) the zero-sum fallacy (when the restaurant makes more, the proverbial pie gets bigger), (ii) the consequentialist morality of earning profit, and (iii) the hidden cost fallacy--the manager should have considered the hidden cost of her decision, on the workers who were not going to be hired.


  1. I can see both sides in this post. I see Jorge's side because he wants the business to succeed. Especially in small businesses like this, it is hard when you are doing as much as you can but the profits are still not there therefore you are not making as much money as the money you need to keep the business running and pay the employees. Being able to cut costs whenever possible is a huge deal for companies like this. I worked at a small frozen yogurt store, yes it was a chain frozen yogurt store but it was still the owners first store. It was slow during the day so we were able to send a worker home. Yes, it sucked for that worker but if only one person could handle the store, there was no need for 2 or even 3. This was for the best interest of the company and that is what employees should realize. They are working to make this company successful, if they do not like the low hours then they can find a job somewhere else that will be able to give more hours.

    I also see the managers side though. These people have families to provide for and if you cut their hours down, it is taking away food from their family or the cost of a bill or any necessity to live. That is hard. But the manager also has to realize they are running a business and the success of the business should come first.

    1. I do agree with you and i think ultimately employees can even ask their managers for a flexible schedule where they work another job. Personally, I have dealt with situations like this but I was able to talk with my managers where I made up the lost hours during a busy season. However, I did understand the importance of keeping the business running and agreed to be adjustable and flexible during slow periods.

  2. Replies
    1. The problem is the same. Workers are hired to be productive, to add value. If a worker at a not-for-profit enterprise doesn't produce enough value to pay his own wage, then a donor has to give the difference. That's no different from the difference having to be made up by those who contribute capital to the for-profit business. If they don't make a return equal to what they can get elsewhere, they are effectively donating that capital.

      The basic economic insight that most people miss is that a worker's wage cannot permanently be either more or less than the value the worker adds to the product. If that wage is too low, other companies can and will offer a higher wage; if it is too high, the business will not ultimately survive. Whether the company is run for profit or not, the trade-off is the same.

    2. The non-profit organizations have more gray area to examine than do for-profits regarding the value of wages and employees. Specifically in healthcare or in an NPO in which humans are primary resources. Let's say an agency that serves the office of child and family services is running in the red due to inflated wages. That agency may not be able to fire at will because even though the performance of the employee may be underwhelming the employee themselves hold value in the fact that they are relied on to provide direct care services. In this respect - many NPOs would tolerate unjustified wages in order to continue serving their respective community. To indifferently fire entry level direct care workers would cause unsafe living conditions and oversight for vulnerable and at risk populations. In this regard, the opportunity cost of firing under performing employees would be more costly than to keep them.

      The NPO is different in that it's board of directors usually consists of prominent and affluent local citizens who as stakeholders will often utilize a utilitarian approach (it is human services after all); which more times than not will cater to enduring under performing staff vs firing staff in a sector that already has close to 50% turnover/vacancy rates.

  3. This example shows a tricky decision where either side of the decision was not necessarily the most favorable. When a company like ‘Taco Love’ must decide on whether they shut down their business or fire/cut hours to retain the profit margin. Sometimes there could have been other ways, but when looking at what’s mostly eating at the business, the labor costs were very high. Any other cuts to be made to save the staff would have probably been too insignificant to improve business. The post brought up a good point that granted they may have to let go people now, but once the business picks up, they can create new jobs for people. If ‘Taco Love’ continued with just operating their business as normal, knowingly that there are issues, what happens is that the restaurant will close and everyone will be out of a job permanently. The text highlights, “demand and supply shocks change price in one industry, region, or profession, assets move in and out of industries, regions, and professions, until a new equilibrium is reached,” (p.117). The text furthermore explains that competition is forced to allocate resources to where they are most highly valued. In this topic, the resource that is talked about is the workers. The workers are assets, but they are also considered mobile assets (p.116). Depending on profit levels, assets will move in and out of industries until a long-run equilibrium is reached. This topic speaks on profits, ethics, and the denial of what labor costs actually reflects on the business profitability. Once making a harsh cut, the business can expand (hopefully). The point is to cut where needed and eventually gain back what you lost.

  4. With any small business operations, it can be difficult to make such a decision. On one side of the spectrum, keeping the business open is a priority and due to volatile market changes and demands anything can happen that could potentially hinder the business operations. I don’t think it is ethically wrong to send someone home due to slow period especially if the employer did their due diligence to communicate this possibility prior to hiring the individual. I think for an hourly employee, employers must ensure they enable them to make up the hours during a busy season versus a salary employee. An hourly employee can be guaranteed hours which ultimately can affect their financials if hours are reduced. On an ethical stance, I do believe it is important for employers to establish and enforce strong communication surrounding the employee’s expectations, pay policy and guidelines. By establishing an open communication with the employees, I firmly believe they will understand the situation for any given time they are sent home for slow operations at work.
    Finding ways to cut cost or implementing cost savings initiatives is not necessary a bad thing. It is good for the company’s longevity and also provides somewhat of job security for an employee despite the reduced hours. I also believe that if an employer sends an employee home consistently without pay, their maybe more pressing issues present aside from it being a slow period for the business. While it can be tremendously annoying to travel a long distance to work and be sent home due to lack of work, an employee can make up the hours during a busy season. I do think that the employee should be creative in implementing key initiatives that can assist with protecting an employee from going home early. Such initiatives can include adjusting work schedules where employees can work more hours on a busy day and get three days off (I.e. 4days/ 10hours with 3 days off). Employees can also have rotational shifts where they assess the busy time for their business and determine its staffing needs. While I don’t think it’s wrong to send someone home for slow periods, I do think it’s ethical for a business to do their best to ensure employees can make up the lost hours when opportunities present itself.
    Every business has a cycle of demands. This is evident within the transportation and hospitality industry. Many airlines during slow periods may instill cost reduction programs that includes having employees taking off voluntary without pay, or granting Voluntary Time Off during their work schedules and rearranging work schedules to meet areas of full demands. Other industries may cross train their employees to do multiple functions so that a company can achieve its duties it could not achieve during a busy season. Until there is stricter regulatory laws enacted for sending employees home due to slow periods for the business, small businesses will continue to do what is best for their operations and success of the business.

  5. In this situation a company has to have the ability to terminate people or reduce their hours to allow the company to survive. If the company does not survive then everyone will lose their jobs and it will be a bad outcome for all. Although, there are many ethical options to reduce staff and increase the organizations profit margin.

    First, if you choose to reduce your overall staff give employees that were laid off first pick at new jobs when new locations are built. Second option, would be to reduce everyone’s hours so that you meet your payroll guidelines but do not lay people off. Both of these option would be ethical choices for the survival of the company.

    Regard to the manager running the store, even though he understands the companies issues and seems motivated to reducing the staff because of the obligations to the company and future employees, it would be a good idea to give the manager an incentive as well. This could be a bonus when payroll standards, created by the company, are met by the manger or profit sharing for the manager. That way he understands and is directly impacted by his decisions that affect his stores performance.

  6. I think it is interesting that instead of explaining to his manager that not earning a profit could cause the restaurant she manages to close (another potential outcome from spending too much on labor), Jorge instead focused on future growth and additional restaurants opening. This decision must have been based on Jorge knowing what would motivate that specific individual. Many people are less altruistic, and would not have been swayed by the idea that it is better for the majority that one person goes home than that the business not make sufficient profit such that they all lose their jobs. On the other hand, someone who worries about her employees needing money would definitely see the wisdom of growing the business to not only allow those workers to get more hours, but to also hire additional workers who may need a position.
    I initially had a difficult time applying the zero-sum fallacy to this scenario, so read a little more about it. The concept is simple; the idea that the amount of available money is fixed, and that therefore, if the pie (in this case, the restaurant chain) gets bigger the money is spread more thinly, versus the true state, where growing the pie grows the available money.
    This was very helpful to read, as it illustrated quite well that keeping a worker who is not adding value equal or greater than their pay is not a long term efficient use of resources. I understand the concerns raised regarding employees needing pay, and the ramifications of employees not earning sufficient pay and moving elsewhere. In that case, the employee is not receiving sufficient value for their work, and moves themselves (the asset) to a higher -value use (aka gets a new, better paying position, likely somewhere else).
    I’ve run into similar situations at work, most recently in my department. I have a long-time employee who needs more money to retire. I would like her to retire, so that I could hire someone else who would produce more for less money. Additionally, she does not add value greater than or equal to her pay, and indeed balks at being more responsible or taking on additional duties. To me, she is an employee who should not be in our facility any longer. However, because we are a unionized environment, and she completes her tasks within the minimum parameters, I’m unable to move her to either a higher-value use or to remove her from her current position. It’s quite frustrating when the voluntary nature of the transaction is made involuntary by outside agencies.

  7. In this scenario, the manager was only taking into consideration one portion of the impact her decision was making. She was considering the benefits to the employees but not the costs to Taco Love. "When making decisions, you should consider all cost and benefits that vary with the consequence of a decision but only costs and benefits that vary with the consequence of the decision. These are the relevant costs and benefits of a decision (pg. 32)." The manager had failed to recognize that the decision she was making by not sending employees home during slow periods of time was impacting the overall profit of the company which in turn was hindering the company’s ability to grow. The hindered growth was preventing the creation of new career opportunities and positive socio-economic impacts for a larger group than just those employed at the Taco Love location described. Jorge had to intervene to not only manage the issue of reduced profit margins, but to also enlighten the manager as to how the varying decisions she was involved in had far greater impacts and reaches than she saw on the first level. The manager seemed to have missed a relevant benefits scenario in her attempt to make positive decisions for the existing staff. What the manager in this case failed to most effective was, as stated in the text “remember to consider the consequences of the decision from your company’s point of view (pg 35).”

  8. First off, the employees were not laid off, they were sent home when work was slow, big difference! Labor costs are typically one of the highest costs in an organization, and naturally one of the first places management looks to save and/or cut costs. The manager at “Taco Love” assumed she was making an ethical decision by keeping workers on the clock even though they were net needed, but that manager did not consider all the costs when making her decision. “Consider all costs and benefits that vary with the consequences of a decision and only costs and benefits that vary with the consequences of a decision. These are relevant costs and relevant benefits of a decision.” (Froeb, McCann, Shor, & Ward, 2016)
    Having personally worked in a restaurant for years, it was standard practice to send employees home on slow nights. At my old employer, the only staff that wanted to work on slow nights were the hourly salary, to them it didn’t matter if there was work to do or sit around, they got paid no matter what. Servers, busboys, and bartenders on the other hand made money off tips, and on slow nights people volunteered to leave, knowing that they would make almost no money compared to a good night. This is a perfect example of opportunity cost, “if the benefits of the first alternative are larger than its cost-the profit of the second alternative-then choose the first.” (Froeb, McCann, Shor, & Ward, 2016) Employees would rather spend time with family, do homework, run errands, or pick up shifts at a busier restaurant than stand around. The opportunity cost of giving up time for low wages was not worth it. Employees also bargained with each other, they knew that for every employee who went home, that meant any customers coming in would be theirs and they would get their business, so they would trade off, “you went home last time, so I’ll go home this time”, it kept it fair and allowed for at least a few to make money. Sometimes my old boss would even throw in an incentive to leave, promising to exchange it for another day/time when we knew it was going to busy, that at least incentivized employees to leave and come back when there was work to be done, and money to be made. This is an example of the rational actor paradigm to predict behavior, simply put, it says that people act rationally, optimally, and self-interestedly.” (Froeb, McCann, Shor, & Ward, 2016)

    The manager did not consider all the costs of her decision, Jorge had to remind her that without profit, there would be no expansion, and that future employees were put at stake of not being hired. One could argue that by focusing on an expansion strategy, Jorge was motivated by greed, and not the morale of his human capital. But he could have presented another scenario and said that without revenue, there would be no jobs at all, regardless of expansion. Using this message, sending employees away is more ethical, if short terms costs are not reduced, the organization itself could shut down, then no one would be working. Sometimes the needs of the many outweigh the needs of the few. For example, last year my current employer suddenly laid a handful of employees off, the department was shocked and angry, but when management sat us down to talk about how labor costs could not support the reduced production forecast, and that the layoffs were necessary to keep the company afloat, emotions subsided. Suddenly it went from anger over layoffs to a sense of relief that those who were kept employed had been spared and that the financial stability of the company was safe for the next two years. This was not the first time we have seen this happen since the recession, and management reminded us that this is only done in the direst or situations, and has only been necessary on rare occasions over the long life of the company.