Employee compensation represents a significant expense for any company. During economic downturns, employers often face difficult choices, including implementing furloughs or layoffs. While both strategies aim to reduce costs, the similarities largely end there. Understanding the differences between a furlough and a layoff, along with their respective pros and cons, is crucial for employers evaluating the best course of action for their employees and the long-term health of their business.
Defining Furlough: A Temporary Leave of Absence
A furlough is a mandatory unpaid leave of absence or a reduction in working hours. This is typically implemented due to a lack of available work or budget constraints. The key characteristic of a furlough is its temporary nature. For instance, a full-time employee working 40 hours per week might be required to work only 30 hours for a specified period, such as three months. Alternatively, an employee might be instructed not to report to work at all for a certain duration, like two months. Once the furlough period concludes, employees are expected to return to their original positions and work schedules.
Furlough Considerations for Salaried (Exempt) Employees
The Fair Labor Standards Act (FLSA) dictates specific rules regarding furloughs for exempt employees. These employees must receive their full salary for any week in which they perform any work, regardless of the number of hours worked. Therefore, furloughs for exempt employees must be implemented in minimum weekly increments. During the furlough period, these employees are strictly prohibited from performing any of their usual job duties. To ensure compliance, employers may restrict access to work-related programs or even confiscate company-issued devices.
Furlough Considerations for Hourly (Non-Exempt) Employees
Unlike their salaried counterparts, hourly workers can have more flexibility during a furlough. Employers can reduce their total working hours per day or the number of working days per week. Businesses also have the option to implement furloughs for extended periods (weeks or months) for non-exempt employees, a practice sometimes referred to as “zero-hour schedules.”
Furlough Duration: Employer Discretion and Extensions
The duration of a furlough is generally determined by the employer, often corresponding to the length of the economic downturn. It is customary for companies to provide advance notice to employees if a furlough is extended. However, in some instances, prolonged furloughs can ultimately lead to permanent layoffs.
Layoffs Explained: Permanent Termination of Employment
Layoffs, on the other hand, represent the termination of employment due to reasons unrelated to employee performance. These terminations are usually permanent. However, some businesses operating in seasonal industries may rehire previously laid-off employees when their peak season returns.
Furlough vs. Layoff: Key Distinctions
The most fundamental difference between a furlough and a layoff lies in the employee’s status. Furloughed employees remain employees and are typically expected to return to their jobs, whereas laid-off employees are permanently separated from their employer. Other key distinctions include:
Healthcare Benefits
Layoffs qualify as a “qualifying event” under the Consolidated Omnibus Budget Reconciliation Act (COBRA). This is not the case with furloughs. Employees on furlough generally continue receiving healthcare benefits through their employer, unless their reduced hours cause them to no longer meet the provider’s eligibility requirements. In such cases, furloughed employees (similar to those laid off) may become eligible for COBRA, allowing them to extend coverage under the employer’s group health plan.
Paid Time Off (PTO)
Laid-off employees generally receive payouts for any remaining PTO balance, unless the employer’s policy dictates otherwise (and to the extent permitted by law). Conversely, furloughed employees retain their accrued vacation, personal, and sick days. While employees might want to use PTO during a furlough to receive payment while not working, employers often prohibit this practice as it undermines the cost-saving purpose of the furlough.
Unemployment Benefits
Generally, to qualify for unemployment benefits, displaced employees must actively seek new employment. However, since furloughed employees still technically have a job, they may not meet this requirement. Despite this, some states extend unemployment benefits to furloughed workers, while others do not. Laid-off employees typically qualify for unemployment benefits if they have earned the minimum required income in the past year.
Job Security
Furloughed employees usually have the assurance of returning to their job after the furlough ends. Laid-off employees, however, have no such guarantee that their employer will rehire them. This lack of assurance applies even to seasonal workforces experiencing temporary layoffs.
The WARN Act and State Mini-WARN Laws
Depending on the jurisdiction, both layoffs and furloughs might require employers to provide advance notice. The Worker Adjustment and Retraining Notification (WARN) Act requires businesses meeting specific criteria to notify employees at least 60 days in advance of mass layoffs or plant closings. While this federal regulation doesn’t generally apply to most furloughs, some states have their own “mini-WARN” laws that may apply.
Pros and Cons: Furloughing Employees
| Pros | Cons |
|---|---|
| Avoids the costs and time associated with recruiting and training new employees. | Employees may seek new employment elsewhere before the furlough ends. |
| Employees may retain health benefits or be eligible for unemployment benefits. | Navigating COBRA and state unemployment guidelines for furloughed workers can be complex. |
| Provides employees with the security of knowing they still have a job. | Can negatively impact workforce morale and productivity. |
Pros and Cons: Laying Off Employees
| Pros | Cons |
|---|---|
| Reduces costs associated with salaries and benefits. | Hiring and training new employees is expensive when business improves. |
| Provides a clean break, which may be better for employees than a prolonged furlough. | Leads to the loss of valuable employees with expertise and business knowledge. |
| Done respectfully, layoffs may be viewed more favorably than lengthy furloughs. | Remaining employees may become burned out or disengaged due to increased workload. |
Furlough or Layoff: Making the Right Decision
Deciding between a furlough and a layoff is never easy. Employers tend to follow these steps to minimize hardship for all parties involved:
- Estimate the Length of the Downturn: If financial circumstances and labor demand are expected to improve soon, a furlough might be suitable. Longer periods of decline may necessitate layoffs.
- Adhere to Collective Bargaining Agreements (CBAs): Businesses with unionized workforces must be careful not to violate CBAs, which may contain strict guidelines regarding employee terminations.
- Assess Impact on Company Reputation: While layoffs can be seen negatively, prolonging a furlough could damage public opinion of the business even more.
- Consider Employee Preferences: Employers with open communication channels may want to discuss the situation with employees and allow them to provide input.
- Weigh All Options: Seeking advice from attorneys, HR managers, benefits administrators, and other personnel can provide insights into what’s needed to maintain business viability today and ensure future prosperity.
FAQs About Furloughs and Layoffs
Why Furlough Instead of Layoff?
Furloughs allow businesses to retain valued employees. When conditions improve, they can bring back their workforce and avoid the expense of recruiting and training new hires.
Furlough vs. Layoff for Unemployment?
Whether a furlough is treated like a layoff for unemployment purposes depends on state regulations. Some states waive the job search requirement and allow furloughed workers to claim benefits if they meet other prerequisites. Other states do not.
Can an Employee Quit During a Furlough?
Yes, furloughed employees are free to seek permanent employment elsewhere. This is a risk businesses take when reducing their workforce through furloughs. However, employers might restrict employees from taking temporary jobs during the furlough, depending on the terms of the agreement.
Can an Employee Be Terminated While on Furlough?
Yes. If a business’s recovery is insufficient to bring back furloughed employees, they may be laid off. In such cases, employers must comply with WARN laws and state regulations regarding layoff notifications.
Is It Better to Be Furloughed or Laid Off?
Both furloughs and layoffs have advantages and disadvantages. Furloughed employees may retain health benefits and have a chance to return to their job later. Laid-off employees, however, can immediately begin searching for new employment, which may be preferable to a prolonged furlough that ultimately leads to a layoff.
This information is intended as a general guide and does not constitute legal or tax advice. Consult with appropriate professionals for specific guidance.
