Employers often must make hard decisions during times of economic uncertainty or business struggles. One of the most difficult decisions is determining whether holding onto talent or downsizing is more financially feasible. While some companies may turn to layoffs to protect their bottom line, others may turn to labor hoarding. But what is labor hoarding? Simply put, labor hoarding is the business practice of retaining more employees than your operation needs.
In this guide, we’ll explore the labor hoarding definition more closely, examining why companies might decide to retain more employees than it needs, whether labor hoarding is sustainable for your business, and if it makes sense. Keep reading below to learn more about the practice of labor hoarding.
So, what is labor hoarding? A simple labor hoarding definition is when a business retains more employees than it needs to carry out its operations. Rather than downsizing or conducting layoffs during periods of reduced demand or economic downturns, employers keep a surplus of employees on their payroll.
Businesses of any size can partake in labor hoarding, and during and after the COVID-19 pandemic, many employers refrained from laying off staff despite the economic conditions to keep their workforce strong for when conditions improved. But does this practice always make sense? In the next section, we’ll look into why companies engage in retaining excess employees and the potential benefits of this practice.
As stated, there are several reasons why companies are labor hoarding. Some of the top reasons include:
- Economic uncertainty: One of the top reasons is economic uncertainty, where companies are unsure about the future demand for their products or services. Rather than conducting mass layoffs when the economy dips, employers decide to labor hoard to reduce the risk of being understaffed when demand unexpectedly rises. This was evident during the COVID-19 pandemic when employers weren’t sure how long restrictions and government lockdowns would be in place.
- Cyclical industries: Some industries experience seasonal or cyclical fluctuations in demand, where they retain employees and keep skilled workers on hand even during slow periods, allowing them to increase production when demand increases again.
- Maintaining employee morale and loyalty: When challenging times arise, layoffs and firing staff can negatively impact employee morale and loyalty. To prevent this, companies retain employees to show staff their employers are compassionate, fostering a sense of security during economic downturns.
- Avoiding onboarding costs: Recruiting and onboarding new hires can be expensive and time-consuming. To avoid these expenses, companies may turn to labor hoarding to retain existing employees and avoid the costs of recruiting, onboarding and training new staff when the economy improves.
- Preserving human capital: Businesses can preserve the time and resources invested in training their workforce, which can help them maintain a competitive advantage in their industry in the long term.
- Strategic planning: Another reason is for companies to position themselves for growth and expansion when conditions improve. This makes it easy for businesses with long-term visions to jump on opportunities quickly.
- Remaining compliant: In some jurisdictions, labor laws make it difficult to lay off employees without facing significant legal repercussions. Employers can remain compliant and respect the social responsibility of being a respected employer in their community by retaining employees.
At first glance, labor hoarding may seem like it can cost more than employers can afford. However, several strategies can make labor hoarding possible and financially reasonable. Below are some of the ways organizations can hoard labor:
- Reduced working hours: Rather than laying off employees, companies may reduce their working hours by transitioning full-time workers to part-time employees. This can help companies maintain their workforce while lowering labor costs.
- Hiring freezes: During times of economic uncertainty, employers may implement hiring freezes where they refrain from hiring new employees even when vacancies arise.
- Furloughs: Instead of laying employees off, some companies may implement furloughs where employees are placed on a temporary furlough where they are still employed but do not work or receive pay. Furloughed employees are often eligible for unemployment benefits when furloughed.
- Reduced benefits and perks: To protect their bottom line while retaining employees during economic downturns, employers may decide to reduce benefits or cut perks, such as cutting gym memberships, wellness programs and company lunches.
- Remote work: Rather than paying a lease for an office, employers may switch employees to a remote work environment where they can telecommute from home.
- Cutting executive salaries: Some employers may decide to cut their salaries or the executives’ salaries to avoid firing their staff to show a commitment to their employees and the business.
- Early retirement or voluntary separation: Another strategy to make labor hoarding possible is offering early retirement packages or voluntary separation programs to encourage employees nearing retirement age or those willing to voluntarily leave to do so without conducting layoffs.
- Training: During slow periods, employers may invest in employees through training, professional development or internal projects to improve their skills while keeping them engaged until the market recovers.
There are a few key factors to take into account to determine whether labor hoarding is suitable for your business, such as:
- Business conditions: To start, get a deeper understanding of the current and projected economic conditions, such as industry trends and demand for your products and services. If a temporary downturn is expected, this practice might make sense.
- Financial health: Conduct a thorough financial analysis of your organization by considering cash flow, profitability and available resources. Retaining excess employees can cause financial strain if it increases labor costs without corresponding revenue generation.
- Labor costs: Look closely at your labor costs, including salaries, benefits and related expenses, and compare these costs to the benefits of this practice, such as avoiding hiring expenses or training costs.
These are some of the many factors to consider when determining whether labor hoarding is suitable for your business. Other factors include workforce skills, labor law compliance and the long-term impact of labor hoarding.
So, does labor hoarding make sense? The answer to this question and the circumstances involved vary on a case-by-case basis. For some, it can be an effective strategy, such as for companies looking to preserve a skilled workforce, maintain high employee morale and loyalty, save on hiring and training costs, maintain a strong reputation and quickly respond to an influx in demand.
On the other hand, labor hoarding doesn’t always make sense. For example, labor hoarding can result in increased labor costs, reduce flexibility, lower efficiency and have an impact on growth. It’s essential to weigh the benefits and risks of labor hoarding and to consider alternative workforce management strategies to ensure the company’s overall efficiency and longevity.
At Experian Employer Services, you can streamline your HR processes to focus on your talent to create a positive employee experience. From I-9 administration to pay statement services and verification fulfillment, we offer services that can help you increase accuracy, compliance and employee satisfaction.