When a company experiences, or foresees, a decrease in revenue, it is often faced with the reality that it must cut costs, which, in turn, often leads to a layoff of employees. Before a company decides to layoff an employee, the supervisor should check the employee's employment contract, if applicable, as well as the laws of the jurisdiction where the company is located to make sure both are followed to avoid future litigation. Laws differ from one jurisdiction to another regarding what a company must legally do when it decides to layoff an employee. In addition, the employee's employment contract, or company policy, may entitle the employee to severance pay or continued benefits that must be considered prior to the decision to layoff an employee.
Some jurisdictions legally protect workers more than others. In the United States, employment is usually considered to be "at will" unless the parties entered into a written employment contract. In an "at will" situation, a supervisor may layoff an employee for any reason without a need to justify the layoff. As a rule, an "at will" employee is also not entitled to severance pay when he or she is the subject of a layoff. A laid off employee may, however, be entitled to receive unemployment insurance benefits when he or she has been laid off.
For employees who are under an employment contract, or are part of a union which has a general contract with the employer, the employer must consider any rules in the contract before making a decision to layoff an employee. For example, many union contracts require the employer to make layoff decisions based solely on seniority. While an individual employment contract may not dictate who must be laid off first, it may entitle the employee to a number of costly benefits upon a layoff which the employer needs to consider.
Once the decision has been made to layoff an employee, the employer must notify him or her. This is often referred to as "getting a pink slip." Along with the official notification that he or she is being laid off, an employee may be entitled to receive counseling regarding the benefits to which he or she will receive, as well as any employment services that the company offers for laid off workers. While small companies may simply hand a worker a "pink slip," larger companies often offer retraining services, counseling, or other programs to help employees adjust to the layoff.