One of a company’s most significant expenses is payroll. Hiring freezes are painful, but something has to give when cash flow is down. And for some businesses, hiring gets the ax until the cash starts flowing again.
Here's what you need to know about the dos and don'ts during a hiring freeze:
- Keep in mind that staffing shortages under any circumstance, in this instance, hiring freezes, often create a heavier workload for current employees.
- Ensure your legal counsel reviews your employee communication memo to make sure it complies with federal, state, and local laws.
- Apply freezes as equally as possible across departments to avoid inter-departmental resentment.
Cash flow is critical for any business, big or small, across all industries. At the same time, one of a company’s most significant expenses is payroll. Hiring freezes are painful, but something has to give when cash flow is down. And for some businesses, hiring gets the ax until the cash starts flowing again.
To slow the drain on cash flow, employers often turn to a temporary hiring freeze for financial relief. This means no new hires, except for essential roles, in some cases, and a stay on filling nonessential vacancies for the short term.
Art Shaikh, founder & CEO at CircleIt, told Workest of his experience with hiring freezes. “In my 20+ years in the tech industry, hiring freezes are usually planned to conserve financial resources during predicted times of economic turmoil,” said Shaikh. “[Businesses] may see lagging profits or other indicators that they will need to keep headcount where it is. Headcount is one of the few expenses businesses can 100% control.”
A hiring freeze may bring companies temporary relief. Still, if mishandled, it can set back an organization’s future hiring needs well past the freeze and deflate morale by stretching employees’ workloads to make up for staffing shortages.
But before reviewing the dos and don’ts of handling a hiring freeze, let’s first understand the conditions that often trigger a freeze and its adverse effects on the workplace. This information can help your company get back on track when the freeze ends.
What triggers a hiring freeze?
Companies may have different reasons for putting a hiring freeze in place, but the end goal is always to cut expenses to stay solvent.
Companies may want to give the idea of a freeze serious consideration because of the negative effect it often has on employees and the workplace.
Organizations use hiring freezes to:
- Curb overspending. Recruiting, hiring, and payroll are big-budget items. A temporary cutback on these expenses can help companies avoid overspending to stay within their budgets.
- Maintain liquidity. Companies facing a shortage in liquid assets may ease up on recruiting, hiring, and paying salaries so they can allocate a portion of these costs to improving their liquidity.
- Survive an economic downturn. Market instability and inflation that can lead to a recession or depression may pressure employers to cut back expenses, including recruiting and hiring costs.
- Avoid layoffs. Companies facing financial shortfalls or severe economic losses may choose to freeze hiring or fill only essential positions rather than lay off current workers.
- Survive global disasters or emergencies. Wars, natural disasters, pandemics like COVID-19, and other life-threatening outbreaks impact business operations, including the ability to stay solvent. A hiring freeze may offer financial relief to offset losses from a global upheaval.
While any of these circumstances can trigger a hiring freeze, companies may want to give the idea of a freeze serious consideration because of the negative effect it often has on employees and the workplace in general.
What’s the impact on employees?
Staffing shortages under any circumstance often create a heavier workload for current employees. Hiring freezes can have the same result.
According to the Corporate Finance Institute (CFI), the work assignments that would have gone to new hires often end up on the workloads of current employees during a hiring freeze.
CFI reports the work overload on existing employees threatens to:
- Deflate morale
- Slow down productivity for the long term
- Eventually, cause employees to leave
Besides having heavier workloads and working longer hours during a hiring freeze, employees may feel uneasy about the sudden change in their work life with little or no advance warning. For example, adopting a hiring freeze just days after sponsoring the company’s annual picnic may feel like a betrayal for employees.
Given the negative impact of hiring freezes on employees, should a temporary reprieve from filling positions be employers’ first choice in controlling costs? Is there a downside to a hiring freeze for a business?
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What’s the downside to hiring freezes for businesses?
The negative side of instituting a hiring freeze makes the case for employers to give this cost-saving option serious consideration.
Employment experts offer the following thoughts:
- A hiring freeze can make a business look like it’s failing in the eyes of its employees and competitors.
- Managers eager to resume recruiting after a freeze is lifted may make rash hiring decisions instead of carefully reviewing candidates.
- Businesses undergoing a hiring freeze may miss out on talented job seekers, who may go to their competitors for opportunities.
- Businesses stand to lose revenue when revenue-producing positions, including those that support them, aren’t filled.
- Product-development teams may suffer from being understaffed, costing a business product-delivery delays and revenue losses.
Also, hiring freezes can:
- Keep flourishing business units within organizations from continuing to grow.
- Hurt a company’s brand, along with its customer service.
- Stop a business’s operations by inciting a massive exodus among disgruntled, overworked, and top-performing employees.
- Keep businesses saddled with underperformers who usually would be discharged but feel they can’t let the poor performers go during a staffing shortage.
- Prevent businesses from investing in new technologies for fear of overspending.
- Lower the stock prices of publicly held companies.
Once a business knows the downside of a hiring freeze but decides it’s the right thing to do, the company must understand that there’s a right and wrong way to handle it.
Does a hiring freeze have dos and don’t’s?
Employment experts, including HR professionals, agree that mishandling a hiring freeze is harmful and that there are dos and don’ts for handling it the right way.
Steps for getting started in the correct direction
The first step is preparing an internal memo for staff. The message should be dated and include a simple greeting addressed to each employee individually. The rest of the notice should include the following information:
- An announcement of the hiring freeze that explains what it is.
- The reasons for the freeze including an honest, transparent explanation of the business’s financial situation.
- How the freeze will be handled.
- How long the freeze is expected to last.
- An appreciation of the staff’s dedication.
- A simple closing signed by a top executive at the company.
Being honest and transparent in the letter is key. In fact, CareerMinds, a global outplacement and career management firm, recommends that businesses consult an attorney about the announcement before distributing it. This allows you to ensure it complies with federal, state, and local laws.
Being honest and transparent is key.
Here’s what else employment experts recommend:
- Keep employees engaged by keeping them in the loop about what’s happening or changing in the organization.
- Asking for employee input on work-related matters, supporting their efforts and performance, and encouraging them to stay motivated and productive.
- Be honest, upfront, and clear with candidates that got caught up in the hiring process before the freeze began. Let them know that the process continues and that a selection will eventually happen. And keep the communication going.
- Make a public announcement after employees are notified. And make sure it’s truthful and transparent.
Shaikh recommends that the focus of an announcement be internal to keep the business’s teams informed throughout the freeze.
A few steps to avoid
- Don’t stop hiring essential talent during the freeze since the positions they fill are critical to your business’s continuity.
- Don’t stop the hiring process; just the hiring of nonessential staff. Recruiters should keep sourcing, attracting, and evaluating candidates in preparation for lifting the freeze.
Shaikh also suggests that businesses apply freezes as equally as possible across departments to avoid inter-departmental resentment and to avoid giving a deadline for the freeze. “It can look bad for the business if it needs to alter it.”
What happens after the freeze?
Handling the hiring freeze the right way can help businesses get back to normal when the freeze ends.
Bill Catlette, managing partner at Contented Cow Partners, speaker, coach, and author, said that recruiting, like selling; it’s an ongoing process. “Even during a hiring freeze, you continue the search for people who will be good candidates for the organization’s core positions,” he said. “You maintain relationships with them; may even extend a contingent offer. You just don’t complete the cycle until you have a duly authorized requisition in hand.”