When businesses hit hard times, or want to make a significant business change, they can reduce their headcount through either a furlough or a layoff. But what’s the difference?
Furloughs are a temporary reduction in headcount. When you furlough employees, you do so with the expectation that you will recall them. During a furlough, employees take an unpaid leave of absence, though companies can continue their healthcare benefits.
Layoffs, meanwhile, are a permanent reduction in headcount. Employees affected by this decision should not expect to be rehired and should begin looking for a new job immediately. Layoffs may or may not include severance pay and extended benefits.
Why a Furlough Makes More Sense
In several situations, a furlough makes more sense than a layoff. For instance, if your business is seasonal, you can furlough employees during the downtime and then bring them back during your busy season.
You cannot require your employees to wait for the furlough to end; They can find a new job. As you are not paying them, your workers can also receive unemployment payments until employed again, either by your or another employer.
Another situation in which a furlough makes sense is when there is a temporary disruption in business. For instance, with many businesses shutting down in 2020, the expectations were that that the closures would be brief and employees would be furloughed rather than terminated. There are several other examples of why a furlough may be a more ideal option:
- You need flexibility—A furlough can last for any period, although exempt employees must be furloughed in full week increments, or you have to pay them for the entire week. But, if you need a two week shut down, a furlough makes a lot more sense.
- Furloughs reduce administrative burdens—You do not have to terminate and then hire employees; people on furlough are still employees.
- You need to reduce headcount and financial obligations (i.e. payroll) temporarily—During a furlough, you can require employees to use their paid time off (PTO), which allows them to receive pay and reduces your future liabilities.
- You can afford to continue benefits—This depends on your state and plan rules, but often the state requires you to continue to pay the employer portion of healthcare while employees are furloughed.
Consequences of Employee Furloughs
Furloughs can help employers manage short down periods, but there are consequences. Your employees may build resentment during furloughs—especially if they receive no pay at all. Cutting staff may also affect your ability to run your business in the future.
If your organization is unionized, you will have strict rules for furloughs in your union contract. If your agreement doesn't allow for what you want to do, you'll have to renegotiate, which can be a complicated process.
Furloughed employees also have rights that terminated employees do not have. For instance, non-exempt employees must be paid for all hours worked. So, if you call up a furloughed employee and ask questions that last more than a couple of minutes (known as “de minimis” or insignificant time), you'll have to record that time and pay it.
An exempt employee must be furloughed in full-week increments. If, for example, you email an exempt furloughed employee and ask work-related questions that require their time and response, you must provide a full week's paycheck. Because of scenarios like this, it's best to have exempt employees turn in all laptops and company-provided mobile devices so that they don't accidentally work.
If you furlough an employee, they are most likely eligible for unemployment payments. During 2020, some additional benefits, like a $600 federal supplement to unemployment, were made available to furloughed and laid-off employees. Make sure you're complying with all of the laws including the new Families First Corona Response Act (FFCRA) if your business has fewer than 500 employees.
When Layoffs Are Necessary
Layoffs should be permanent terminations. Whether it's a reduction in force, where you let go of people with the express purpose of reducing headcount, or a reorganization where you terminate people in one group but may hire people in another, the people who lose their jobs should expect that the action is final.
When determining if layoffs are necessary, consider the following factors:
- Do you expect this change to be permanent? If you close a plant, that's a permanent change, and you will need to lay off employees. If you are closing the plant to do a thorough cleaning or fix machinery, a furlough makes more sense.
- Can you use the employees in a different area? If you're closing one product line, does it make sense to terminate the marketing team for that product, or would it be better for the business to move that team to support a different product? You don't want to fire great marketers for product A, only to have to hire new people for product B.
- What financial consequences should you expect? If you lay off your sales force, will your sales drop to the point that you'll need to conduct future layoffs?
Like furloughs, layoffs can be financially and emotionally difficult for employees. Furloughed employees will come back, so you'll need to focus more on keeping them happy while they are off work. Laid-off employees should be clear that they have been terminated. However, you must treat laid-off employees fairly and professionally, or you'll lose the trust and support of those being retained.
Both furloughs and layoffs may be subject to federal and local laws. For instance, the Workers’ Adjustment and Retraining Act (WARN) requires 60 days' notice before certain layoffs. If you believe a furlough will last longer than six months, then WARN applies as well. States have different rules. There are limited exceptions, such as force majeure or “act of God," that remove your requirement for WARN.
The Bottom Line
Making a reduction in workforce or implementing a furlough is never an easy action to take, but in certain circumstances, it can be the most ideal method to keep your company running.