What Is an Employee Furlough, and Why Do Employers Use Them?

An Alternative to Employee Layoffs, Furloughs Can Save Companies Money

Government Shutdown Looms in Washington

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Employee furloughs are when employees are required to take mandatory time off work with no pay. The goal of an employee furlough is to save money for the company or organization by lowering employee salary expenses. While employee furloughs can be a positive alternative to layoffs for employees, they can have negative consequences, too.

Who Uses Employee Furloughs?

Employee furloughs can occur in public- as well as private-sector organizations when revenue or projected revenue fails to match expenses. Revenue is generated through product sales, grants, and governmental support and subsidies.

Some companies have regular furloughs. For instance, a lawn care company might shut down after fall cleanups are done and not reopen until spring. In a second example, a manufacturing company may produce products that are needed only seasonally, such as snow blowers,

However, seasonal work isn't the only time when furloughs can occur. When a factory has difficulty getting suppliers to provide enough materials, it may make sense for the company to go on furlough rather than to continue to pay employees who cannot make the product.

In an unprecedented situation during March-June 2020, employers across the world placed employees on furlough due to the need to stop the spread of COVID-19,  a serious coronavirus,

For example, "Marriott International Inc., the world’s largest hotel company with nearly 1.4 million rooms worldwide, said it is starting to furlough what it expects will be tens of thousands of employees as it ramps up hotel closings across the globe."

How Is an Employee Furlough Different From a Layoff?

In mandatory employee furloughs, employees take unpaid or partially paid time off of work for periods of time. The employees generally have either scheduled time off or call-back rights and expectations.

In a layoff, employees generally have no right to recall and no expectation of the job returning. In a furlough, employees are usually given a time frame—although this sometimes changes, especially in a product shortage situation.

To schedule employees with a contract for a furlough, including union-represented employees, employers must renegotiate the contract. Negotiations about employee furloughs generally include a call-back date.

Examples of employee furloughs include closing a business for two weeks, reducing employee time on the job to three weeks a month instead of four, and asking employees to take two days a month off without pay. Employees have also been put on furloughs indefinitely, as is likely with the spread of COVID-19 mentioned earlier.

What Happens to Employee Benefits?

During employee furloughs, benefits usually continue, which is one of the ways in which employee furloughs are distinguished from a layoff, where benefits generally end either on the last day of work or at the end of the month. Some companies extend benefits as a part of severance packages.

Some states have implemented work-sharing programs. Work sharing is a type of unemployment insurance (UI) program that allows an employer to reduce the number of hours an employee works during a week while unemployment compensation makes up some of the difference in income. This arrangement allows employees not to suffer as much financially in a furlough.

When federal or state governments implement employee furloughs, the employees are usually paid for the time on furlough when the budget crisis is over. This, of course, is a bad deal for the taxpayers who must pay salaries for the time when no work was performed.

What's the No-Work Rule?

In a furlough situation, it's critical to enforce the no-work rule. Exempt employees who do no more than answer an email are entitled to a full day's pay, so make the rules specific. Perhaps tell employees to leave their devices at the office or stop your servers from delivering email during the furlough.

This may seem drastic, but the point of a furlough is to save the organization money. You can't do that if you have to continue to pay people—it's unconscionable that employees work for free.

A nonexempt employee who performs any work during the furlough must also be paid, but only for the time actually worked.

Final Tips on Employee Furloughs

If you're considering implementing a furlough, make sure your communication is clear and consistent with employees. Don't talk about the need for cost savings by furloughing your hourly employees while the management team receives bonuses. The furlough should be perceived as a group effort. You need not furlough everyone, though. Furloughing the manufacturing team while the marketing team continues working could make sense in a situation when the company needs to build sales.

Article Sources

  1. Wall Street Journal. "Isolate So Government Will Let Us Have Our Economy Back." Accessed March 17, 2020