A new Bloomberg report published last week sheds light on the often-overlooked financial consequences of workforce reductions. While companies may view layoffs as a quick fix to cut costs, the reality is far more complex and potentially more expensive than many realize.

The report begins with the example of Meta Platforms Inc., which laid off 11,000 employees in November 2022. The tech giant paid out an average of $88,000 per person in severance, totaling $975 million. Meta claimed this cost was “not material” as it was offset by savings in payroll and other employee benefits. However, this simplistic view fails to account for the numerous hidden costs associated with layoffs.

One of the most significant hidden costs is the impact on productivity among remaining employees. According to exclusive data analyzed by Bloomberg, workers who survive a layoff often experience a decrease in output for several months following the event. This decline in productivity is attributed to increased anxiety and low morale among the remaining workforce.

ActivTrak, a company that monitors worker activity, provided Bloomberg with data from seven anonymous clients that conducted layoffs between January 2022 and April 2024. The findings were striking: after a layoff, productive time per person fell by nearly an hour a day on average, totaling about 18 hours per month. For a company with 100 employees, this could translate to more than $50,000 a month in lost productivity – a substantial sum, especially for smaller businesses.

Another often-overlooked cost is the increase in voluntary departures following a layoff. A study of 200 companies by management professors Charlie Trevor and Anthony Nyberg found that a 10% workforce reduction led to a nearly 50% increase in the voluntary turnover rate. This exodus can be even larger than the initial layoff itself, creating additional costs related to understaffing and the need to recruit and train replacements.

To put this into perspective, consider a company with 10,000 employees. Under normal circumstances, such a company might lose about 1,900 people annually to voluntary turnover. However, after a 10% layoff, that number could jump to 2,831 – an additional 931 departures directly attributable to the downsizing. With an average cost of $81,250 to replace each of these employees (based on 1.25 times the average professional salary), the total cost of these additional departures could reach a staggering $75.6 million.

The financial implications of layoffs extend beyond productivity losses and increased turnover. Companies also face higher unemployment insurance tax rates in the year following a layoff. While the exact increase varies by state and situation, it can be substantial. For example, a Texas-based company that laid off 5% of its workforce could expect to pay an additional $93 per remaining employee in unemployment insurance taxes the following year. For a 10,000-person firm, this amounts to nearly $1 million in additional taxes.

Legal fees represent another significant hidden cost of layoffs. Companies often hire external statisticians, at a cost of at least $5,000, to analyze the demographics of those slated for dismissal to ensure compliance with anti-discrimination laws. If the initial analysis reveals potential legal issues, the process may need to be repeated multiple times, each iteration incurring additional costs.

Additionally, companies frequently engage lawyers – at rates of $500 or more per hour – to navigate the complex legal landscape surrounding layoffs. These legal experts help determine if the layoff triggers requirements such as WARN notices, audit personnel records, and stand ready to defend against potential lawsuits.

The Bloomberg report highlights that even when companies attempt to be careful in their approach to layoffs, the risk of litigation, including class-action suits, remains. This ongoing legal exposure represents yet another potential cost that may not be immediately apparent when a company decides to reduce its workforce.

In light of these findings, it becomes clear that the true cost of layoffs often far exceeds the initial estimates made by companies. While the immediate savings in payroll and benefits may seem attractive, the long-term financial implications – including decreased productivity, increased turnover, higher unemployment insurance taxes, and potential legal fees – can significantly erode or even outweigh these short-term gains.

As companies consider workforce reductions as a cost-cutting measure, it’s crucial that they take a more comprehensive view of the potential financial impact. The Bloomberg report serves as a stark reminder that layoffs are not a simple solution to financial challenges, but rather a complex decision with far-reaching consequences that extend well beyond the immediate bottom line.

While layoffs may sometimes be necessary, companies would do well to explore alternative cost-cutting measures before resorting to workforce reductions. The hidden costs revealed in this report suggest that in many cases, the financial burden of layoffs may be far greater than anticipated, potentially undermining the very cost savings they were intended to achieve.