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Extra3/7/2009 12:01 AM ET

Small companies work to prevent layoffs

When there are only a few dozen employees -- or fewer -- layoffs can hit harder. So small businesses are using various methods and incentives to try to avoid them.

By The Wall Street Journal

At a time when the news is filled with large companies announcing major layoffs, some small businesses are determined to buck the trend.

For some companies, it's a matter of pride: They've never had a layoff and they don't want to start now.

But it's also a matter of necessity. For one thing, unlike big companies, small businesses rely on each individual employee much more to keep their companies running. In addition, many small companies use their history of never firing people as an essential tool to attract and retain workers.

This recession, however, is testing the no-layoff policy.

"Many companies previously known for avoiding layoffs during past downturns are forced to make extreme sacrifices to resist pink slips now," says Mel Fugate, assistant professor of management and organizations at the Cox School of Business at Southern Methodist University in Dallas.

Fugate adds that "how these concessions are identified and executed can make a significant difference in how well a company emerges when economic conditions improve." He says that, in general, "it is important for management -- and particularly executives and owners -- to share in the pain and the gain."

Management should be the first or at least among the first to sacrifice and make concessions, he says. Conversely, when the economy improves, management should reward those employees who were forced to make concessions. "Doing so will preserve employee commitment and performance not only in the new good times but also in future downturns."

Here's a closer look at some ways companies have tried to avoid layoffs:

Mandatory days off

"We've never laid anyone off in our company's history," says Matthew Zurn, general manager of Zurn Plumbing Service, a family-owned business in Chamblee, Ga., that has been in operation since 1985. And Zurn would like to keep it that way.But sales in the last four months of 2008 were down 24%, to an average of $124,000 in sales per month from a $163,500-per-month average a year earlier. So the plumbing company, which has 15 full-time workers, has had to take extreme steps.

Field employees must take a mandatory day off each week without pay, with hours down to 30 or 32 per week from 40 hours. They can opt to use vacation time to get paid for that day off. Office workers and management must take a day off every other week. Since mid-September, Zurn has saved close to $7,000 a month in labor expense with this strategy.

Meanwhile, Zurn's parents, the company's owners, have taken a 25% to 30% pay cut. The business also isn't purchasing as much inventory.

"Our business is our people," Zurn says. "Trying to keep them in the company is our top priority. When the economy bounces back, we're going to need everybody."

Turning to employees

Even small companies making a profit during this recession are preparing for the worst.

Take Samovar Tea Lounge of San Francisco. While sales are up, the company is short on cash these days, because of loans and spending related to a store opening. So Jesse Jacobs, the company's founder and owner, took some pre-emptive measures in October. He reduced payroll -- the company's largest expense, 7%, or $100,000 -- by tightening workers' schedules.

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Samovar no longer allows its 60 employees to clock in early, not even five minutes ahead of time, and encourages them to clock out early. People who clock out on time and don't go into overtime get a reward: a free massage valued at about $100 to $200. Jacobs says such rewards are much less costly than having to consistently pay overtime.

"I need to proactively address the economic climate," Jacobs says, "and I didn't want to lay off anyone."

In addition, the company welcomes input from employees about other ways to cut costs. Jacobs says he told his workers: "Help me come up with creative solutions. I'm trying to keep your jobs. . . . This is a team process."

A dishwasher suggested purchasing stainless-steel drinking glasses because they don't break. The move saves the company $3,000 a year because it no longer has to replace broken glasses.

In all, Jacobs says, Samovar's efforts should result in about $200,000 in savings this year. He projects $3 million in sales for 2009, up 36% from $2.2 million last year. "Business has increased, costs have decreased and morale has gotten stronger and more positive," he says.

Continued: Doing good, doing well

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