How Do Companies Decide Who to Lay Off? A Guide for HR Teams

Layoffs are never easy, but sometimes they’re necessary for a company’s survival. Employees may perceive those decisions as unfair or random, but organizations typically follow a structured approach to determine who’s impacted – and HR teams play a critical role in this process. While balancing business needs with human impact is one of the toughest jobs for HR professionals, doing it right will ensure layoffs are conducted fairly and strategically.

So, how do companies decide who to lay off? The process involves many factors, from financial pressures to strategic priorities and legal considerations. This article will explore the key factors HR teams should consider when making those difficult choices and list some best practices for a smoother process.

When a company faces the difficult decision of conducting a layoff, it must determine who will be let go based on strategic and fair criteria. There’s no one-size-fits-all approach: each business must weigh different methods to align with its goals, values, and legal considerations. Some companies prioritize tenure, while others focus on performance, skills, or a combination of factors. Below are five common approaches used to make these tough decisions.

This method follows a “last in, first out” approach, where the most recently hired employees are the first to be let go. It’s a simple and objective way to make decisions, reducing the risk of age discrimination claims and ensuring long-term employees retain their positions.

However, this approach can be problematic when newer hires bring specialized skills or leadership experience critical to the company’s success. It may also unintentionally overlook performance and productivity, keeping employees based solely on tenure rather than contributions.

This method prioritizes full-time employees over contractors, part-time staff, or temporary workers. Since companies have fewer legal obligations toward contingent workers, this approach helps to mitigate legal risks and can be easier to justify publicly.

The downside is that contract workers often play essential roles, sometimes even outpacing full-time employees in productivity. Companies relying heavily on outsourced teams may find this approach ineffective, as it could disrupt operations more than expected.

Performance-based layoffs focus on retaining top performers and letting go of employees with lower productivity or weaker contributions. This method ensures that the company retains its strongest assets and minimizes the impact of layoffs on overall efficiency.

However, for this to work fairly a company needs a reliable, well-documented performance evaluation system. If performance reviews are inconsistent or subjective, merit-based layoffs can lead to legal risks and employee dissatisfaction. Additionally, organizations must consider performance differences across departments to avoid weakening high-impact teams.

This approach prioritizes employees with the most valuable skills for the company’s future. It requires leadership to assess which skills are crucial for maintaining operations and driving growth, ensuring that essential expertise remains within the organization.

The challenge with this method is that it can inadvertently lead to age discrimination, as older employees may be perceived as having outdated skills. Companies must also acknowledge any gaps in professional development that might have contributed to skill disparities among long-term staff.

This comprehensive method uses a weighted ranking system that evaluates employees based on factors such as skills, tenure, performance, and job function. By assigning different levels of importance to each criterion, companies can make more balanced and strategic layoff decisions.

While this approach is highly effective, it requires careful planning, data analysis, and transparency. Companies often need HR analysts to develop fair scoring models to ensure that decisions align with business objectives and minimize bias.

Each of these methods has its advantages and challenges. The best approach will depend on the company’s priorities, workforce structure, and long-term strategy.

As hard as they might be, layoff processes can become more fair, transparent, and legally sound when HR teams jump in. The key is to strategically approach layoffs while considering business needs and employee well-being. Here are four best practices to follow:  

Before making any layoff decisions, HR should work with leadership to define clear, consistent selection criteria. Whether based on performance, skills, tenure, or multiple factors, the criteria should align with company goals and be applied fairly across all departments. Being transparent reduces legal risks and helps employees to understand the rationale behind the layoffs.

HR should ensure that all performance evaluations, selection criteria, and layoff decisions are documented. This includes maintaining records of employee reviews, communications with affected employees, and layoff selection justifications. A well-documented process indicates fairness and compliance with labour laws while protecting the company from legal challenges.  

Before finalizing layoff decisions, HR should collaborate with legal and data analysis teams to review selection models and criteria. This step ensures no protected groups are disproportionately affected, reducing legal liability and promoting fairness. A thorough review can help to catch potential risks before they become legal or reputational issues.  

How the company communicates the layoff can impact morale and employer reputation. HR should provide clear, direct explanations for the layoffs while showing compassion for affected employees. Offering outplacement support, severance packages, and career transition resources can help ease the transition and maintain goodwill among remaining employees.

Layoffs are one of the most challenging decisions a company can make, but having a structured, fair approach can make the process more manageable for everyone. By using clear selection criteria, documenting every step, conducting legal reviews, and communicating with empathy, HR teams can help to protect both the company and its employees. The goal isn’t just to reduce headcount, it’s to ensure the organization moves forward sustainably and responsibly.

If your company is facing layoffs, you don’t have to navigate the process alone. Careerminds specializes in modern outplacement services that prioritize employee support through a digital-first, results-driven approach. Contact our experts today to learn how we can help your organization to manage workforce transitions with confidence and care.

Rafael Spuldar

Rafael is a content writer, editor, and strategist with over 20 years of experience working with digital media, marketing agencies, and Tech companies. He started his career as a journalist: his past jobs included some of the world's most renowned media organizations, such as the BBC and Thomson Reuters. After shifting into content marketing, he specialized in B2B content, mainly in the Tech and SaaS industries. In this field, Rafael could leverage his previously acquired skills (as an interviewer, fact-checker, and copy editor) to create compelling, valuable, and performing content pieces for various companies. Rafael is into cinema, music, literature, food, wine, and sports (mainly soccer, tennis, and NBA).