This paper presents an implicit-contract model in which workers are allowed to differ in both their productive abilities and their preferences. It is shown that if firms are able to vary hours costlessly among their workers, workers are risk averse, and there are no outside payments to laid-off workers, then efficient contracts between firms and their workers will never provide for layoff unemployment. If, however, such hours variations are not costless, layoffs are no longer generally inefficient since they are an alternative means by which firms can adjust the labor inputs of selected groups of workers.