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Hiring Freeze

A scenario where a company stops hiring new employees or creating new positions to reduce costs and preserve cash flows

What is a Hiring Freeze?

A hiring freeze is a scenario where a company stops hiring new employees or creating new positions to be filled. It is common when a company experiences financial distress and needs to begin cost-cutting to reduce operating costs.

 

Hiring Freeze

 

Hiring freezes are the preferred option by companies to avoid laying off staff members. Other factors that may contribute to a hiring freeze in an organization are market condition fluctuations or economic instability.

 

Summary

  • A hiring freeze is a scenario where a company stops hiring new employees or creating new positions to be filled. 
  • The following scenarios are the common circumstances that may lead to hiring freezes: changes in market conditions, global crisis, budget deficit, and arising liquidity concerns.
  • Hiring freezes allow companies to stabilize costs or slow expenditures.

 

Why Companies Implement Hiring Freezes

Every business is run to ensure financial longevity. In a case where a company experiences notable cash flow problems as a result of unfavorable market conditions or a significant reduction in revenue, the main aim is to preserve finances to keep operations afloat. It is under these conditions when a company’s management is likely to implement a hiring freeze. The following scenarios are some common circumstances where a company may consider a hiring freeze:

 

1. Changes in market conditions

The shifts in market conditions can have a notable impact on revenue generation and overall profitability. An example of this can be a downturn in the ceiling board industry. All firms directly involved in the manufacturing, distribution, or value-added services in the ceiling board industry, may implement hiring freezes in aims to counter the impacts of the changing market conditions.

 

2. Global crisis

As seen with the outbreak of the COVID-19 pandemic, businesses all over the world have been negatively impacted by these crises. During such times, businesses may delay taking on new employees, and continue to monitor global markets and trends. During this time, employers become more conservative and prudent to ensure they can at least keep their current workforce.

 

Hiring Freeze - Global Crisis

 

3. Budget deficit

If a company notices that the recruitment of new employees will result in a budget deficit for a certain financial period (short or long-term), it will hold off on hiring new employees until such a time where the financial position of the company has improved. This delayed recruitment is a hiring freeze.

 

4. Emerging liquidity concerns

When the management of a company sees that there’s been a decline in liquid assets, it may hold off on recruitment processes. Through the use of liquidity ratios, an employer can easily detect liquidity issues. Ideally, there should always be sufficient current assets to cater for short-term obligations. To improve liquidity, an employer may choose to allocate funds from the salary budget towards financing current assets. This is normally performed as a last option.

Hiring freezes allow companies to minimize or avoid creating or filling non-essential roles. With hiring freezes, an employer will be able to reorganize work teams and integrate staff members to achieve greater productivity in delivering the necessary products and services to the consumers. Even after implementing a hiring freeze, a business’s objective remains to increase its profitability.

Furthermore, it should be noted that the pause in hiring does not mean that recruitment’s been completely stopped. Businesses will still need to replace employees who have critical roles such as fulfilling customer needs or for specialist roles in a company.

Such vacancies can be filled more quickly by consultants, part-time, hourly (non-paid), or by contract employees, allowing employers to work around the hiring restriction and still have resources to complete the work to sustain their core operations.

 

Effects of a Hiring Freeze

The pause on hiring new employees may lead to an increased workload for existing employees because the work that may have been the responsibility of the new employees can only be allocated to them.

Similarly, the workload resulting from exiting employees must be divided among the existing employees. It can result in a negative impact on morale and employee productivity in the long term, which may ultimately cause more employees to leave the company.

 

Learn More

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Being Laid Off vs Getting Fired
  • Employee Morale
  • Financial Distress
  • Voluntary Termination

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