Cube Rules Plan to Avoid Employee Layoffs

By Scot Herrick | Job Performance

Aug 07

Over the course of time, I’ve written a lot about layoffs, being laid off, and how no job is secure. But those are all symptoms of a deeper issue: companies have lost their way in managing their people. The very people, companies always say, that are the most important asset.

My focus, of course, is on the knowledge worker toiling away in the ubiquitous office cubicle. The one that is the most important resource but will be laid off by a company in a brutal minute.

But for this post, I’d like to focus on what management can do to avoid layoffs of those that are considered “the most important asset.”

How to avoid employee layoffs

The Cube Rules plan consists of two points:

  1. 20% of each job title are contractors. This includes the management positions.
  2. All employees are contractors first. You try before you buy for both the employer and the potential employee.


All companies have an attrition rate that varies between five and fifteen percent a year. If your company has an attrition rate of 10%, you can implement this plan relatively well over two years. At that point in time, you will have a solid base of workers – who are temporary.

In addition, most companies have growth. You also get to the 20% of your workforce being on contract with new positions filled with contractors.

Once you are at your 20% level, you can hire new employees – from the contract worker base. This way you get an employee that is proven, already knows the company and the culture, and will move directly into the role with minimal transition time.

If you release contractors because business is not so good, you continue to rebuild to 20% contractors in your workforce base by working with attrition to fill the positions.


Having 20% of your workforce be contract workers gives you a built in buffer to downturns in your business. Being on contract with a company is a completely different expectation on the part of the person under contract: contracts have ends. When a contract ends, it is a planned, expected ending.

Yet, given a downturn, you preserve the employee base. While letting contractors go would, of course, get the employees somewhat concerned, their concern is far different than if it were employees getting laid off.

In addition, by trying a person on contract before you hire, you are ensuring that the fit is right between the employer and the potential employee. This should give you a more productive employee because the risk of working in the environment is gone – they already are working in the environment.

This model also gives companies and employees a much better shot at true talent management. Employees have a greater commitment from management about their work because the threat of losing their job is lessened. Employees are more likely to be engaged in their work because the distraction of the layoff is lessened.


Corporate management of the workforce is broken. One cannot have a disconnect between engagement in the work and the continuous threat of layoff by corporate management. It hurts companies and the career management of employees.

There would be issues with implementation, of course. But I think it is time we start proposing different models of managing the workforce to corporate executives. What we have is clearly not working.

Cubicle Warriors, of course, can be hired resources if that is the direction companies are taking (and it is). But getting the employee back connected with the company mission would be better.

What would you think of 20% of your job titles as contract workers and being on contract before hired?

  • Jason says:

    Good article. That is exactly how American Family Insurance works… I started there as a contract Project Manager and two years later I was an employee… and they are actually a little higher percentage (25%) in contract resources. I have since left and gotten back into consulting.

    In general I think that the contractor position is a solid one for larger organizations for all of the reasons that you noted in your article. Of course, there are downside/risks to this approach as well:

    1) You pay a premium for those human resources – especially if you are not actively trying to move the contractors into permanent positions, as the per hour fee is generally much higher due to the potential volatility (ability to end the contract suddenly)

    2) Contractors have no loyalty to your organization. They can leave on a whim. In theory, they shouldn’t be performing critical tasks – but often this isn’t the case as they do account for 20% of your workforce.

    3) Flutuations in hourly cost for resources. This one can go both ways, as prices for certain skill sets can go up or down in a given area – but often they only go up, and can do so relatively quickly if the market is short on those resources.

    Full time employees do not have this luxury, often they are locked in to a pay grade and only receive a bump in pay on a yearly basis – if at all.

    • Scot Herrick says:

      @Jason – Good comments here. Yes, there is some good thinking that needs to go into this approach with a balance between the percentage of the contract work force and costs.

      In paying the premium for the human resources, you also get a balance of not contributing to the 401(k), health insurance and other benefit costs. Granted, they are usually picked up in the contractor’s firm and built into the rate, but it is a different type of expense. This is the primary area of balance between contractors and cost. This balance would also need to apply with the fluctuations in the hourly cost of the contractors.

      I would disagree on the loyalty issue you noted, in both directions. First, employees can feel loyalty to a firm — but not that much as companies will lay you off in a cold-blooded minute. I think if employees know there is a buffer, it would actually improve the link between the employee and the company mission. Second, a contractor, while perhaps not “loyal,” is a keen observer of the dynamics going on in the company. That observational skill engages contractors.

      The key implementation issue for me with this plan would be the cultural integration of contractors and employees. There are too many companies that consider employees as stars and contractors as second class citizens.

      If that becomes the case for a company that does this, you will have a situation where instead of attracting talent through the contract to employment process, you will get “can’t wait to get done with this contract” and “I’m out of here.” That just kills a company’s talent brand to outside talent. That dynamic would make the internal employees playing fiddles while their company burns.

      A thoughtful comment, Jason. Thanks for taking the time to make it. Any others with similar situations?

  • Pat says:

    The independent contractor…sounds easy, yet a company has to be careful that the US government doesn’t perceive the contractor to be an employee. That’s what happened to Microsoft years back and they had to pay a very big price tag.

    If your contract person can pass the Federal Government’s definition of an Independent Contractor, then you are fine. Check out this link,,id=99921,00.html

    Now if your contract person comes from an agency, then they are taking care of all of the taxes, etc. If you provide a 1099 to the contractor, make sure they pass the independent contractor status requirements.


    • Scot says:

      @Pat – Kate, my wife, works as a vendor consultant with Microsoft, so we’re well aware of the rules. Microsoft follows them as well…there are quite a few contractors there that love the mandatory 100 days off after their time working before coming back.

  • Pat says:

    Scot…yes, I would love 100 days off….like a teacher…oh well back to work.

  • grant kline says:

    I am the principal of an upstart lighting agency, with the economic downturn, the one employee I have which I hired on reasonable terms for a ” normal” economy is now 50% of my overhead with wages, taxes, & health insurance.

    I would NOT like to lay her off and spoke with my treasurer about laying her off but giving her the first look at the restructured position as a 1099 employee sans the health insurance. Not what I want, I have 5 months training in her. I have indications if she did accept the restructured position
    sans health insurance and at a lower wage as a 1099 it would appear I was evading taxes here in Idaho. Your opinion would be GREATLY appreciated

    Grant Kline
    Intermountain Lighting

    • Scot says:

      Hi Grant,

      You have a conundrum facing many small businesses today. First, I can’t comment on taxes in Idaho. That would be practicing law and I’m not going to do that.

      The real question concerns your employee. Is there really work for this person to do? I’m assuming yes, because you want her to stay.

      In addition, though this person is 50% of your overhead, you don’t say (and shouldn’t) whether or not your company is operating at a profit. If it is, then the rationale for the cut in costs is not apparent when this one other person working for you is valuable. And dumping the employee to a 1099 status saves the job — but significantly changes the employee equation with the employee now doing health insurance and taxes. That may serve you in the short term, but in the long term, the employee will remember that the job was saved or that you were cheap and cut all the benefits. Only time will tell.

      If you are not operating at a profit (or the right cash flow), the issue is reducing expenses. Without numbers, we could not tell how much expense needs to go. You may want to consider what the benefits are really costing you and then reducing salary by some amount that represents what is good for you while being better for the employee in comparing the costs of going to a 1099 status.

      And, longer term, if you do well in the recovery, will the new restructured position still be 1099? Or would you want to change this person from 1099 to an employee? If long term it is an employee, going back and forth doesn’t make much sense to the employee.

      I don’t envy your position. Hopefully, this will help with some alternatives to your thinking.

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