Reed Hastings says he learned why companies aren’t families after laying off one-third of Netflix: ‘You would never lay off two of your kids’

Long before becoming a Hollywood mainstay with a market cap of over $315 billion, Netflix was struggling to stay afloat. After the dot-com bust, the then-DVD rental company was forced to make its first major round of layoffs in 2001, cutting roughly one-third of its workforce.

For Netflix cofounder Reed Hastings, the experience drove home a lesson about how to think about a company: It may be a tight-knit team, but it isn’t a family.

“People respect great teams, and they respect families and how we operate,” Hastings recently told Semafor. “But if you describe yourself as a family at a company, you better not ever do a layoff. You would never lay off two of your kids, right? Then people get very cynical if you say it’s a family but don’t operate that way.”

Netflix soon found a path forward, capitalizing on the rise of DVD players—pivoting to a subscription-based DVD delivery service—and going public in 2002. But Hastings argued that getting too close makes employees feel protected, even when their performance falls short.

“We realized, wow, maybe we should do a one-third layoff every year,” the 65-year-old said. “And of course that’s impractical—but we said, how about if we keep the bar high and really think about us as a championship sports team rather than a family.”

Hastings, who has an estimated net worth of $4.4 billion, served as Netflix’s CEO from 1999 to 2023. He then became chairman but stepped down earlier this year.

Netflix managers use a ‘keeper test’ to identify top talent—and ‘part ways quickly’ with employees they wouldn’t fight to keep

Like most major companies, Netflix has endured rounds of layoffs throughout its history. But Hastings said the goal hasn’t been simply to cut costs or reduce headcount. It’s about making sure the company has the right roster to compete—and making changes when it doesn’t.

“If you say it’s like a championship sports team and we’ve got all these competitors and we want to win the championship, then people understand why the coaches make changes throughout the year to try to do their guess of the best way to win the championship.”

Today, Netflix defines success by performance, not seniority, tenure or loyalty. Managers are also expected to regularly apply what Netflix calls its “keeper test” to their employees.

“We expect leaders to be strong developers of talent,” it says on the Netflix website. “And to ensure they have the right player at every position, we ask them to apply what we call the ‘keeper test’—asking ‘if X wanted to leave, would I fight to keep them?’ Or ‘knowing everything I know today, would I hire X again?’ If the answer is no, we believe it’s fairer to everyone to part ways quickly.”

Netflix pairs high expectations with flexibility. Salaried employees aren’t bound to traditional 9-to-5 work schedules or even a prescribed vacation calendar. Netflix also offers unlimited paid time off and parental leave.

“While time away may be observed differently depending on your location and role, we believe in taking the time you need so you are bringing your best to work,” Netflix’s website says.

From Airbnb to Shopify, CEOs are pushing back on the ‘company as family’ mentality

Hastings is hardly alone in concluding that the family-business metaphor can create problems—particularly when companies have to make difficult decisions about their workforce.

Airbnb CEO Brian Chesky has admitted he learned that lesson during the pandemic. As he laid off roughly 25% of his workforce, he told employees he had a “deep feeling of love for all of you.” Looking back, he said he realized the language blurred an important distinction.

“I wrote that letter fairly quickly,” Chesky said on the ReThinking podcast in 2024. “I didn’t have a lot of time, and so I wrote what I felt, and that’s what I felt, and I was pretty emotional when I was writing it. And it is true that a company’s not a family. In fact, we had to make that pivot.”

“We used to refer to ourselves as a family, and then we did have to fire people, or they’d have to leave the company, and you don’t fire members of your family,” he added.

Shopify CEO Tobi Lütke reached a similar conclusion. In 2021, he warned managers against describing the e-commerce company as a family, arguing that doing so could make it harder to hold employees accountable.

“The very idea is preposterous. You are born into a family. You never choose it, and they can’t un-family you,” he said in a letter published by Business Insider.

Lütke specifically pushed back against employees using the term “Shopifam,” especially among younger employees.

“The dangers of ‘family thinking’ are that it becomes incredibly hard to let poor performers go,” he added. “Shopify is a team, not a family.”

This story was originally featured on Fortune.com