Preparing for Layoffs
Financial uncertainty has become the norm for many nonprofits.
In 2025, roughly one-third of all American nonprofits reported a loss or disruption in needed federal funding. This has had a chilling effect across the entire sector, and many have had to make difficult decisions to reduce their headcount through layoffs.
Being laid off is more than the loss of a job. For many nonprofit employees, their mission work is deeply personal — and learning that their role has been eliminated is both a personal and professional blow.
When layoffs become necessary, nonprofits should not neglect the human component of layoffs and recognize that an employee who was asked for their loyalty and commitment has now been deprived of their livelihood.
In addition to the human impact on employees, layoffs carry significant legal and compliance risks if they are not carefully planned and carried out.
So how can nonprofit leaders approach layoffs in a way that balances compassion with compliance? The following considerations can help guide that process.
Giving Notice
Before implementing a layoff, nonprofits should assess whether any federal or state laws require that employees be provided advance notice of the layoff.
The predominant federal law on this issue is the Worker Adjustment and Retraining Notification (WARN) Act. The WARN Act, which generally applies to employers of 100 or more, may require 60-day advance written notice to employees, state agencies and local governments in in a situation where there is a large “plant closure” or “mass layoff” — terms defined in the WARN Act. Employees can also be paid in lieu of working during some or all of the notice period.
Some states also have their own legislation that applies to smaller employers or imposes additional obligations regarding notification.
Employees covered by a collective bargaining agreement may also have different requirements for notification, severance benefits, or other provisions related to a layoff.
Even if the layoff is not covered by state or federal WARN acts, nonprofits offering severance agreements or other benefits to employees who are being laid off may have other compliance obligations.
Severance Pay Complications
It’s important that nonprofits be mindful of obligations that may arise if they offer severance or separation agreements in connection with the layoff. These agreements typically offer a payment in exchange for an employee releasing legal claims they might have against their employer.
A severance agreement can offer a “soft landing” for an employee who would otherwise be without an income and provide certainty to the employer that they will not be facing drawn-out legal battles as a result of the layoff.
But these agreements may give rise to complex federal disclosure requirements that nonprofits should not navigate on their own.
Severance programs which involve groups of employees and those which include releases of age-related claims must comply with the Older Workers Benefit Protection Act (OWBPA) which imposes additional requirements.
These can include an employee having an extended period (45 days) in which to consider whether to sign a severance agreement and the right to revoke their signature on such an agreement within seven days of signing.
While these obligations are highly technical, failing to comply and have the result of the severance agreements being unenforceable and can create legal exposure for the nonprofit.
Common Mistakes
One common and costly mistake is to use a layoff as a shortcut to address performance or conduct issues with employees.
A layoff is not a substitute for managing an employee with performance problems. Mislabeling a termination as a layoff can increase the risk of discrimination, retaliation, or other wrongful termination claims, especially if the employee belongs to a protected class or is recently engaged in protected activity, such as making complaints or taking protected leave.
Because of this, selection criteria for layoff must be based on legitimate business reasons which should be documented, if they are performance-based.
Employees who take legal action against their former employer are often motivated by how they feel they were treated at the end of the employment relationship. Transparency and empathy may be your most effective risk mitigation tool when conducting a layoff.
Managing the Exit Process
An exit process should be respectful of the employee.
Deliver the notice in person whenever possible and come to the point quickly. Make sure they know who to contact if they have questions, as many issues especially related to benefits, come up after employment has ended.
Documentation in some states must require notice of the right to file a claim for unemployment benefits, and a COBRA notice if they are covered by employer-provided health insurance.
Let the employee vent but avoid getting into an argument about the decision.
Prepare a communication for the remaining employees that clearly explains any changes in process and responsibilities in light of a smaller workforce.
It’s very common for employees who have been laid off to express that they understand why headcount had to be reduced but found that the notification and exit process lacked empathy for their situation.
Working with a human resources consultant with expertise in this area, an employment attorney, or other compliance professional can help evaluate the nonprofit’s legal obligations and potential risks and ensure compliance with the law.
The manner in which a nonprofit’s leadership handles a layoff reflects the organization’s values under pressure.
Frequently Asked Questions: Layoffs and Furloughs
Nonprofits Insurance Alliance has created a “frequently asked questions document” to help its members navigate a layoff. While not a replacement for legal advice, it provides valuable guidance for executing a layoff effectively.
The financial realities for nonprofits operating in 2026 means that layoffs may be inevitable. Nonprofits will benefit from expert advice, careful planning, and an exit process that aligns compliance and compassion.
1. What is the difference between a layoff and a furlough?
A furlough a temporary reduction in hours or unpaid break in work, but with the expectation that the employee will return to work in the near future. So in a furlough, there is no break in the employee. Employees are often able to access unemployment benefits during a furlough period. In contrast, a layoff is an end to employment.
Nonprofits who have a temporary disruption in funding may choose to implement a short-term furlough if they know they will be able to return employees to work. If there is no end in sight for the resumption of funding, a layoff is the better option.
2. Can we use layoff to get rid of poor performing employees?
A layoff generally occurs when a position is eliminated for business reasons, such as loss of funding, restructuring, or reduced need for services. It should not be based on the employee’s performance or misconduct and should not be used to eliminate “problem employees” from the workplace.
Mislabeling a termination as a layoff can increase legal risk, particularly if the employee is part of a protected class or has recently engaged in protected activity.
3. How should we select employees for a layoff?
Identify the selection criteria rather than targeting specific employees. Selection criteria must be neutral, objective, and consistently applied. Common lawful criteria include:
- Elimination of entire programs or departments
- Required skills or certifications
- Budgetary considerations tied to specific funding sources
Selection decisions should never be based on protected characteristics (such as age, race, disability, or gender) or retaliatory motives.
4. Do nonprofits have to comply with the WARN Act?
Sometimes. The federal Worker Adjustment and Retraining Notification (WARN) Act generally applies to employers with 100 or more employees and may require advance notice of certain mass layoffs or plant closures.
Some states have “mini-WARN” laws that apply to smaller employers or impose additional notice requirements. Even nonprofits with fewer than 100 employees should assess state-law obligations before proceeding.
5. If WARN does not apply, do we still need to give notice?
Even if WARN is not triggered, notice obligations may arise from:
- Employment contracts
- Collective bargaining agreements
- Employer policies or handbooks
- Severance agreements
Additionally, providing some notice—even when not legally required—can reduce risk and demonstrate good faith.
6. Are we required to offer severance pay?
No. Severance pay is generally not required by law unless:
- It is promised in a contract or policy, or
- It is negotiated as part of a separation agreement
However, if severance is offered, it may trigger additional legal requirements.
7. What legal issues arise when offering severance agreements?
Severance agreements often include a release of legal claims. When layoffs involve multiple employees—especially employees age 40 and over—federal law may require additional disclosures and waiting periods under the Older Workers Benefit Protection Act (OWBPA).
Failure to comply with these requirements can render the release unenforceable and expose the nonprofit to legal claims. The OWBPA has a complex set of requirements and it is very important to get expert advice when it applies.
8. Can we use a standard severance template?
Using a generic or outdated severance template is risky. Severance agreements should be reviewed or drafted by an employment attorney to ensure compliance with:
- Federal law
- State law
- The specific structure of the layoff
9. How should we notify employees of a layoff?
How the message is delivered often matters as much as the message itself. Best practices include:
- Delivering the news in person whenever possible
- Being direct, clear, and respectful
- Avoiding blame or defensiveness.
10. What information should we provide at the time of layoff?
Employees should be informed about:
- Their last day of employment
- Final paycheck timing (check to see what state law provides and if final pay should include accrued but unused paid time off)
- Options for continuation of health benefits (e.g., COBRA), life insurance, long term disability insurance, etc.
- Any severance pay, if offered, and if the employee must sign a release of claims in order to receive the severance payment.
- Who to contact with questions after separation
- Information about how to apply for state unemployment insurance benefits (some states have specific requirements for providing this information).
Many employee questions arise after the meeting, so clear written communication is essential.
11. Should we allow employees to “vent” or argue the decision?
It is appropriate to allow employees to express emotion, but decision-makers should avoid debating or re-litigating the layoff decision. Listening respectfully without making promises or statements that could be misinterpreted is key. It can be helpful to have a list of talking points and return to these during the conversation to ensure all information has been communicated.
12. How should we communicate layoffs to remaining staff?
Remaining employees often experience anxiety, guilt, and uncertainty. Silence or vague messaging can undermine morale.
Communications should:
- Explain the reason for the layoff at a high level
- Clarify changes in roles or workflows
- Reaffirm organizational direction and stability where possible
13. Can layoffs increase the risk of discrimination or retaliation claims?
Yes. Layoffs are a common context for employment claims, particularly when:
- Selection criteria are unclear
- Documentation about individual position selections is weak
- The layoff disproportionately affects a protected group
Careful planning and review can significantly reduce this risk.
14. Can we tell employees they will be eligible for unemployment benefits?
No, you should not tell employees they will be eligible for unemployment benefits. Eligibility decisions are made by the state agency and not by the employer. Many states require that employees who are laid off receive a specific form or brochure about how to reply.
This article is provided for general informational purposes only and does not constitute legal advice. Because employment laws and specific circumstances vary, nonprofit leaders and employers should consult with legal counsel to obtain advice specific to their situation.
