Employee compensation is one of a company’s most significant expenses. This is why employers must sometimes make the difficult choice to either furlough or lay off workers when faced with financial hardship.
Furloughs and layoffs are two ways employers address the problem of not having enough work or enough budget for their employees' labor costs. Both options cut costs, but the similarities between furloughed or laid-off employees essentially end there.
Below are general descriptions of furlough vs. layoff - however, it is important to point out that not everyone will use these terms to mean the same thing. Understanding the context of the specific circumstances is more important than the terms furloughs and layoffs.
A furlough is a mandatory temporary unpaid leave of absence from which the employee is expected to return to work or to be restored from a reduced work schedule. Furloughs are often used when the employer does not have enough cash for payroll (for example, a government shutdown due to a lack of budget approval). Another thing is not enough work for all employees during a specific period. Therefore, by reducing employee schedules, the employer can avoid terminating people inside the company.
Employers must be careful when furloughing exempt employees so that they continue to pay them on a salary basis and do not jeopardize their exempt status under the federal Fair Labor Standards Act (FLSA) or corresponding state laws. A furlough that encompasses a full workweek is one way to accomplish this since the FLSA states that exempt employees do not have to be paid for any week in which they perform no work.
A furlough reduces the hours, days, or weeks employees may work and usually has a finite length. A company can furlough employees for a specified time and set the furlough conditions. They can require employees to use accumulated paid time off during the furlough, but generally (for cost-saving measures), they notify employees the furlough will consist of unpaid time.
There are key differences in how employers can set the term for furloughs for hourly (nonexempt) workers versus salaried (exempt) counterparts. The FLSA provides written guidance on when exempt versus nonexempt staff members must receive pay.
For hourly employees, the furlough could include reductions such as:
Because these employees receive pay only for the hours they work, the terms of the furlough can impact any or all the hours they would usually be on the payroll.
For salaried employees, furloughs must be in blocks of at least one week each. Salaried employees must earn their full salary for any week they work because of their exempt status. The FLSA requires explicitly exempt employees to receive payment for any week they perform work — regardless of the number of hours they’ve put in during that week. The only way to furlough exempt employees is to do so for an entire week/s.
A furlough can be structured in different ways and have different causes. Here are a few scenarios:
Your employer tells you to stop working entirely for a month. A major contract has been delayed, and there's no work for you to do. They still expect the contract to come through, and then you'll return to your usual schedule.
Your employer tells you to take four weeks of unpaid vacation, one per quarter. An overall reduction in work is expected to continue throughout the year.
Your employer says you now have Fridays off until further notice. The business has slowed down, but they still want you around on a regular basis.
Your employer isn't reducing your hours or pay. However, they require you to use all your paid time off by the end of the year.
Furloughed workers cannot perform job duties in any capacity during the furlough period. These zero-tolerance rules include everything from simply checking email to performing any work on behalf of their employer. Even a 5-minute phone call will violate the terms of the furlough. For salaried employees, this could require full payment for a week; for hourly employees, it could require payment for the time worked.
Under the rules of the FLSA, an exempt employee must be paid their full salary for any week in which they perform work, regardless of the actual hours. This means that they can only be furloughed in weekly increments at minimum, during which time they are forbidden from engaging in any of their usual job responsibilities.
Their employer may restrict their access to work-related programs and confiscate any employer-issued devices to ensure compliance.
Unlike a salaried employee, an hourly employee who is furloughed may continue to work in some circumstances. Their employer may reduce their total hours per day or their full days per week. A company also can furlough employees for weeks or months at a time – a situation commonly referred to as zero-hour schedules.
Employers with 50 or more staff members have a requirement under the Affordable Care Act (ACA) to offer coverage to 95% of their full-time or full-time equivalent staff members. Furloughs may impact the status of many employees, moving them to part-time temporarily.
The good news about being furloughed is you may not need to look for a new job. Employers often implement furloughs to reduce work across employees because they want to keep those employees.
The bad news is that you may still have enough work—or a strong enough promise of future work—that you can't easily make up for the pay you're losing and don't want to invest much time in a job search. However, the extra time could also allow you to explore a job change or pursue additional education or training that you were already interested in but didn't have time for.
A layoff is generally considered a separation from employment due to a lack of work available. The term "layoff" describes a type of termination in which the employee holds no blame. An employer may have reason to believe or hope it will be able to recall workers back to work from a layoff (such as a restaurant during the pandemic) and, for that reason, may call the layoff "temporary." However, it may end up being a permanent situation.
A layoff is a qualifying event under the Consolidated Omnibus Budget Reconciliation Act (COBRA), but a furlough is not. Furloughed workers generally continue to receive healthcare benefits through their employer, except when their hours are reduced so much that they no longer meet the provider’s eligibility requirements. When this happens, furloughed employees, much like those laid off, may qualify for COBRA and receive extended coverage under the employer’s group health plan.
Employees who are laid off generally receive payouts for any accrued time in their PTO balance unless the employer’s policy provides otherwise to the extent allowed by law in their final paycheck. On the other hand, Furloughed employees keep their outstanding vacation time and personal and sick days. They may even be able to use PTO to receive payment while not working.
Generally, displaced employees are legally required to actively look for work to qualify for unemployment benefits. But most furloughed employees don't fulfill this requirement because they still have a job. Regardless of that fact, some states will extend benefits to them (such as allowing them to collect unemployment benefits), while others will not.
Laid-off employees, conversely, usually qualify for unemployment insurance as long as they’ve earned the minimum amount of income in the past year to be eligible.
The bad news about being laid off is that you'll almost certainly need to look for other jobs. These can be temporary jobs until you find a new job or more permanent employment. You will also want to immediately look into applying for tax benefits and public assistance you may be eligible for, such as health insurance subsidies.
If you've been with the same employer long enough, you may receive severance pay or a severance package. This can reduce the financial blow of being laid off and give you more time in your job search, but severance may reduce or make you ineligible for unemployment benefits.
You'll have to report your severance pay and unemployment as income when you file your annual tax returns unless your income is below the filing threshold. You may owe tax on these benefits, depending on what your modified adjusted gross income for the year adds up to. It may be much lower than usual because of your layoff, and you may owe little to no additional tax beyond what your employer already withheld when you were working.
Once you are laid off, you will no longer be able to contribute to your workplace retirement plan or receive a matching contribution from your employer.
You'll also need to decide whether to keep your retirement account with your former employer or roll it over into an IRA. Taking a hardship withdrawal from your retirement account is an option if you need cash to stay afloat. If you had a retirement plan loan outstanding when you were laid off, you might need to repay it quickly to avoid taxes and penalties.
Furloughed employees usually resume their job when the furlough ends, while laid-off workers have no assurance that their employer will ever rehire them. Even seasonal workforces that experience temporary layoffs are not guaranteed placement from season to season.
Both layoffs and furloughs may require advanced notice on behalf of the employer, depending on the jurisdiction. Businesses that meet the criteria outlined in the Worker Adjustment and Retraining Notification (WARN) Act must notify employees within 60 days of any mass layoffs or plant closings. These federal requirements generally do not apply to most company furloughs, although some have mini-WARN state laws of their own with strict guidelines.
Although there is often no clear answer as to whether an employer should furlough or lay off employees, companies may be restricted in their choices. For example:
For small businesses that employ union employees under a collective bargaining agreement (CBA), the release of employees for any reason – furlough, layoff, or straightforward dismissal – is governed by several rules in the CBA.
Employees of a major corporation – one that either cannot lose market share or is part of the national security apparatus – are much more likely to be furloughed. This can be the case when a rotating employee schedule might open up more work while easing financial burdens.
Assuming your business has the freedom to choose between furloughs and layoffs, you’ll need to evaluate several factors to determine what works best for your organization and current situation. Employers must weigh the costs of each choice against what is best for their employees (both those being laid off and those who stay behind) as well as the impact of either choice on their reputation.
A small business may choose furloughs over layoffs because it allows them to retain valued team members. When their situation improves, they can bring their employees back and avoid spending more money and time on recruiting and developing new employees.
Choosing to furlough or lay off employees should be a decision based on the best information a company has at the time. There are pros and cons to both furloughs and layoffs. On the one hand, furloughed employees may continue to have health benefits and a chance to return to work later.
On the other hand, laid-off employees get a head start on finding a new job, which may be better than a protracted furlough that results in a layoff anyway.
It’s essential to plan for your company's present and potential needs and consider your employees’ best interests. Understanding the potential impact of furloughs and layoffs will help clarify which option is better in your case.
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