In the business world, “restructuring” is a term that often circulates in the corridors of large, publicly listed companies experiencing downward share prices. While it carries a technical veneer, at its heart, restructuring is a polite term for mass terminations. So, what drives companies to adopt this course of action, and what does it mean for the corporation and its employees? Let’s dive in.
Why Do Companies Restructure?
Typically, a company embarks on restructuring in response to demands from shareholders to reduce expenses during weak growth or financial strain. One of the swiftest routes to cut expenses is reducing the workforce. A company might announce a “restructuring plan” that can affect a substantial portion of its workforce, sometimes up to 20%, to preserve the financial health of the organization.
This move can be timed with earnings reports to signal to shareholders that proactive steps are being taken to bolster the company’s profitability. Paradoxically, even as the company braces for a rough patch with mass layoffs, its stock price might experience an uptick as investors react to the potential for reduced operational costs and increased efficiency.
The Immediate Financial Impact of Restructuring
When a company announces a restructuring, it’s not all about instant savings. There’s an immediate financial burden due to severance packages owed to employees. This can result in a noticeable dip in net income for at least one-quarter post-restructuring. Severance costs can be significant, sometimes equating to two years’ worth of an employee’s salary, for every single employee affected by the mass-firing, depending on the terms of their contract and local employment laws.
The Aftermath Within the Company
Post-restructuring, a company is expected to operate more efficiently with reduced expenses. However, suppose the restructuring isn’t strategized correctly. In that case, the company may find itself in a bind, needing to recruit new talent to fill in the critical gaps left by the “restructured” employees, which can happen just a few years later, dragging down the share price once again.
What Restructuring Means for an Employee
For employees, being ‘restructured’ is a sobering reality — they’ve lost their job. While companies may use the term restructuring, it doesn’t soften the blow of termination. Legally, being restructured is a termination without cause and doesn’t change the entitlements or severance an employee is owed. Large-scale terminations can actually trigger additional severance obligations under employment standards, depending on the jurisdiction. However, employment standards are just a minimum for severance. Many employers, especially large ones who aren’t on the verge on bankruptcy, usually far exceed their minimum obligations for severance. However, that is not to say that employees are likely owed more. In that sense, I encourage all employees affected by a restructuring to call a lawyer, even if the severance package offer appears very generous. There is no risk- many employment lawyers offer a free consultation. Alternatively, spending a few hundreds dollars on a paid legal consultation is never a bad thing when you are dealing with an offer worth tens of thousands of dollars or more. Not to mention, many, many large employers reimburse employees for legal advice for severance package reviews.
The Final Takeaway
Restructuring may be shrouded in corporate jargon, but its implications are clear and significant.
Restructuring is a corporate strategy to improve a company’s balance sheet by reducing payroll expenses. Though it may lead to short-term financial strain due to severance package payouts, the intended long-term outcome is a leaner operational model with less financial liability regarding worker compensation.
For those caught in the crosshairs of restructuring, it’s crucial to remember that this is indeed a termination without cause, and their rights to severance remain intact. It’s prudent, if not necessary, for affected employees to seek legal advice before accepting any severance package. Legal consultation can ensure that the severance offered is fair and equitable, and more often than not, employees may discover they are entitled to more than initially presented.
Jeff is a lawyer in Toronto who works for a technology startup. Jeff is a frequent lecturer on employment law and is the author of an employment law textbook and various trade journal articles. Jeff is interested in Canadian business, technology and law, and this blog is his platform to share his views and tips in those areas.