Downsizing: Legal Requirements, Process & Employee Rights

Downsizing is a demanding process that arises when a business must reduce the number of employees due to economic, organisational, or market-related changes. The process is strictly regulated by the Norwegian Working Environment Act (Arbeidsmiljøloven), which sets requirements for objective justification, proper case handling, and safeguarding employees’ rights. The purpose of these rules is to ensure that dismissals based on the employer’s circumstances are carried out in a fair and lawful manner. This article explains the key legal framework for downsizing, including the requirements for valid grounds, procedure, and the employer’s duties toward affected employees.

Read this article on our website Downsizing

What is Downsizing?

Downsizing means that a business reduces the number of employees as part of a restructuring process. The background may be a need to reduce costs, adapt to lower demand, increase efficiency, or implement organisational changes. Downsizing normally takes place through dismissals justified by the employer’s circumstances—typically operational cutbacks, rationalisation measures, or other forms of restructuring. This differs from dismissals based on the individual employee’s conduct or performance, or on the employer as a person. Downsizing instead reflects the company’s need to adapt to new operating conditions.

More specifically, grounds for downsizing due to circumstances within the business may include:

• Declining financial results

• Loss of tasks, projects, or contracts

• Reorganisations or efficiency measures

• Strategic adjustments to improve profitability

• Automation and technological changes

Downsizing differs from temporary lay-offs (permittering) because it involves a permanent reduction. Temporary lay-offs are a short-term measure where the employee is relieved of the duty to work for a period, but remains formally employed.

Read Termination of Employment

Weak and Strong Grounds for Downsizing

It is common to distinguish between strong and weak grounds for downsizing.

Strong grounds exist when the business faces significant financial problems—such as sustained losses, an acute liquidity crisis, or a real risk of closure unless staffing levels are reduced. In these cases, the need for downsizing is evident and easier to justify objectively.

Weak grounds, on the other hand, arise where the business is not facing imminent bankruptcy, but wants to improve profitability or streamline operations. The company may be financially stable, but sees potential for higher profits through fewer employees or organisational restructuring.

When downsizing is based on weak grounds, stricter requirements apply to the balancing of interests, case handling, and documentation. The employer must demonstrate that the measure is objectively justified, necessary, and proportionate—and that alternative solutions have been considered.

Strong Protection Against Dismissal

Norwegian law provides strong protection against dismissal, and this also applies in downsizing processes, cf. Ot.prp. nr. 24 (2005–2006) pp. 2–3 and the Supreme Court’s decision HR-2024-1188-A para. 51. The reason is that dismissal has highly intrusive consequences for the employee, both financially and personally. The Working Environment Act therefore imposes strict requirements regarding objective justification, process, and reasoning before a dismissal can be considered valid. This means, among other things, that the employer must be able to document both the business need and that the selection of which employees are dismissed is carried out in an objective and defensible manner.

Legal Basis for Downsizing

The Working Environment Act (2005) sets out rights and obligations in the employment relationship. Chapter 15 regulates termination of employment, and Section 15-7 covers dismissals justified by the employer’s circumstances—often referred to as downsizing. Under Section 15-7(1), an employee may not be dismissed unless the dismissal is “objectively justified by the circumstances of the undertaking”. When Section 15-7(2) refers to operational cutbacks or rationalisation measures, it reflects what is commonly called downsizing in practice.

Section 15-7 sets out three main conditions that must be assessed together to determine whether a dismissal is objectively justified:

1. The company’s need – the employer must document that downsizing is necessary due to financial or other objectively justified business needs.

2. Proper procedure – the employer must document that legal requirements for information, consultation meetings, and case handling have been followed.

3. Objective selection and balancing – the criteria for selecting employees must be objective, and the employer’s needs must be balanced against the individual employee’s interests.

The following sections outline the main elements of downsizing.

Key Elements of Downsizing

Requirement of Objective Justification

Before an employer can dismiss employees, there must be “objective justification based on the circumstances of the undertaking”, cf. Section 15-7(1). The requirement of objective justification was first introduced in Norwegian law in 1936. Prior to this, employers could generally terminate employment without stating any specific reason, cf. Rt. 1935 p. 467. Since 1936, case law has developed toward a stricter standard. This is illustrated by Rt. 2009 p. 685 para. 52, where the Supreme Court stated that the threshold for dismissal is high and the employer must have good reasons. This has also been confirmed in HR-2021-2389-A (patient journal) paras. 39–41 and HR-2022-390-A (Widerøe) para. 34. These decisions show that “objective justification” is a legal standard that evolves over time.

The requirement has two dimensions:

• General objective justification (a genuine business need that makes the measure necessary), and

• Individual objective justification (a fair and reasonable basis for dismissing the specific employee).

General Objective Justification

General objective justification means there must be a financial or other objectively justified business need making the dismissal necessary—for example rationalisation, restructuring, or closure of all or part of the business. In such cases, the employer must be able to demonstrate a genuine need within the undertaking that necessitates the measure.

It is established law that economic reasons are, by their nature, objectively justified grounds for dismissal, cf. Rt. 2012 p. 168 para. 101. However, the employer must document that the business need is genuinely rooted in financial or operational realities. It is not required that the company’s financial situation is critical or acute. As a general rule, it is sufficient that the business considers restructuring necessary for continued operations.

Individual Objective Justification

Individual objective justification means that the dismissal must also be objectively justified with regard to the specific employee. This includes a balancing of interests “between the undertaking’s need and the disadvantages the dismissal causes the individual employee”, cf. Section 15-7(2) last sentence. Even where there is an objectively justified business reason, the balancing may still lead to the conclusion that the employee cannot be dismissed. This is a reasonableness assessment, where consideration is given to how severely the dismissal affects the employee.

A central question is the employee’s ability to manage financially after dismissal. Relevant factors include the employee’s position, age, length of service, and any dependants. The Supreme Court’s decision Rt. 1966 p. 393 is illustrative: an employee at a paper mill was dismissed due to rationalisation, was nearly 48 years old, had worked about 28 years, had health issues, and supported a spouse and two children. The Supreme Court majority stated that in such circumstances the employer had a strong obligation to do everything possible to avoid dismissal.

Selection Assessment in Downsizing

Part of the requirement under Section 15-7(1) is that the employer must decide which employees are redundant—i.e., who will be dismissed. The selection must be objective and defensible, cf. Rt. 1986 p. 879.

The employer must first define the selection pool—meaning which employees are compared to each other. The starting point is that the entire company constitutes one selection pool. However, case law confirms that the pool may be limited to certain parts of the business, cf. HR-2018-880-A and HR-2019-1986-A. Whether it is permissible to limit the pool depends on factors such as the size of the company, geographical organisation, practical challenges, whether there have been multiple downsizing rounds, past practice, any agreement with employee representatives, competence differences, financial situation, and time pressure.

Once the selection pool is defined, the employer must apply objective criteria—unless the employer is bound by criteria in a collective agreement. If the employer sets the criteria, they must be objective, relevant to the business need, applied consistently, and documented. Typical criteria include length of service, competence and qualifications, personal suitability/performance, and social circumstances (age, health, dependants), cf. HR-2019-424-A.

Duty to Offer Other Suitable Work

Under Section 15-7(2) first sentence, a dismissal due to downsizing is not objectively justified if the employer has “other suitable work” available within the undertaking. The duty does not require that a permanent vacancy exists; it is sufficient that there is an uncovered need for labour, cf. HR-2017-561-A para. 82. This may mean the employer must consider whether the employee could fill other roles with training, or whether part-time or temporary roles could be used. However, the employer is not required to create a role that is not needed, nor to offer work at the expense of other employees’ rights.

The work offered should, as far as possible, correspond to the original position in terms of content and salary. If that is not available, the employer must offer other suitable work at a lower level if appropriate, cf. HR-2017-561-A. The employee can then decide whether to accept.

What counts as “other suitable work” is assessed overall. The preparatory works assume that the employee’s own view is relevant, cf. Ot.prp. nr. 41 (1975–1976) p. 72. However, the employee must meet minimum requirements, including suitability and any formal qualifications. The employee does not have to be the best qualified candidate, and a reasonable training period must be accepted.

Priority Right to New Employment

In addition to the right to be offered other suitable work, employees dismissed due to the employer’s circumstances may have a priority right to new employment under Section 14-2. The purpose is to strengthen job security, facilitate effective restructuring, and retain accumulated competence, cf. NOU 2004:5 p. 337. The priority right limits the employer’s freedom to choose who to hire, but does not impose a duty to hire.

Procedural Rules

Overview

The Working Environment Act imposes several procedural requirements before an employer can decide to dismiss employees. These rules ensure that the decision is based on correct facts and a proper assessment. The employer bears the burden of proof that the process was properly carried out and must be able to document the steps and assessments. If procedural requirements are not met, the dismissal may be set aside.

Consultation Meeting (drøftelsesmøte) in Downsizing

Section 15-1(1) requires the employer to hold a consultation meeting with the employee and the employee’s union representative, unless the employee does not want this. The meeting must be held before a dismissal decision is made. The purpose is to ensure a correct and complete factual basis. The employee must be given the opportunity to present their situation and views.

In downsizing, the employer must also discuss the individual selection. Otherwise, the employee cannot provide meaningful input, since they may not know the facts and assessments used in the selection process.

The employee may bring a union representative, but is not prevented from bringing another representative such as a lawyer or advisor.

Involvement of Employee Representatives

All employers must comply with the rules on collective redundancies in Section 15-2. In short, a collective redundancy occurs when 10 or more employees are dismissed within 30 days, and the dismissals are not based on the employees’ personal circumstances.

Collective agreements may impose additional duties. For example, under the Basic Agreement LO–NHO § 9-4, the employer must discuss the need for downsizing with employee representatives before making a decision, regardless of the number of employees affected. This cooperation can help identify alternatives, reduce conflict, and increase transparency.

Notice of Dismissal and Formal Requirements

Section 15-4 sets formal requirements for a dismissal. It must always be in writing. A dismissal due to the employer’s circumstances must include information about:

• the employee’s right to request negotiations and bring legal proceedings

• the employee’s right to remain in the position under Sections 17-3, 17-4 and 15-11

• the deadlines for negotiations, legal action, and remaining in the position

• who is the correct defendant in a dispute

• the employee’s priority right under Section 14-2(1)

A dismissal from the employer is considered to have taken place when it has “reached” the employee. The employer bears the burden of proof that it has been received.

The employer does not generally have to provide reasons in the notice itself, but the employee may request a written statement of the circumstances relied upon, cf. Section 15-4(3).

Severance Agreements

Although there is no duty to offer severance packages, it is common in downsizing. A severance package may include:

• Salary for an agreed period

• Release from the duty to work

• Severance pay, courses, or career counselling

The size is often assessed based on length of service, the basis for dismissal, and the employer’s financial situation. Severance agreements are often used to reduce conflict and avoid litigation.

Disputes about Dismissal

If the employee challenges the dismissal, they may request negotiations under Section 17-3. If the dispute is not resolved, the matter can be brought before the courts.

If the case goes to court, the employee may have the right to remain in the position until a final judgment is issued. This process can take from six months to several years, and may be challenging for both parties.

Legal Assistance

Downsizing is demanding—both legally and humanly. The Working Environment Act sets strict rules, and mistakes can have serious consequences. Legal assistance helps ensure the process is compliant, structured, and as low-risk as possible.

A lawyer can ensure that the procedure follows the law, including consultation meetings, selection criteria, and assessment of priority rights. This reduces the risk of invalid dismissals and liability.

A lawyer can also act as a strategic advisor, helping plan the downsizing—assessing which roles can genuinely be removed and ensuring decisions are objectively justified. This contributes to a more predictable process.

In addition, a lawyer can be an independent and professional support in communication with employees and union representatives, helping build trust, reduce misunderstandings, and prevent conflict.

Using a lawyer is recommended in downsizing processes. For employers, it ensures a correct process and reduces dispute risk. For employees, it can be crucial to safeguard rights and assess whether the dismissal is lawful.

Read about Employee Rights During Downsizing: What You Should Know

Read this article in Norwegian Nedbemanning

Contact us

Do you have questions about downsizing? Are you an employee or employer in the middle of a downsizing process?

At Advokatfirmaet Verito AS, we offer:

• Legal advice

• Assistance in negotiations or litigation

• Review of downsizing processes

Contact us today for a free initial assessment of your case. You can reach us via the form at the bottom of this page, by email at post@verito.no, or by phone at 24 02 21 20.

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This article was written on 17.12.2025.

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