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Understanding the Differences Between Furloughs & Layoffs
Many leaders wish to protect their teams when they are unable to work, and while paid leave is ideal, it is often not feasible for all businesses. For those seeking to determine whether a furlough or a layoff is the right fit for your situation, we’ll explain the basic differences between the two. Furlough and layoff are both terms that are used to describe situations that involve several employees, and usually distinguished by job losses when finances (not performance) are triggering factors. In dealing with the global pandemic and resulting financial stress, many businesses are being forced to reduce their staff.
While the words furlough and layoff are often used interchangeably, their meanings are actually different. However, it is important to note that not everyone will use these terms as defined here. Understanding the contextual difference is important to understanding the specific circumstances in which each term should be used during employment. When communicating with employees, be sure to comply with legal requirements, such as those under the WARN Act or state termination pay guidelines, or for those surrounding unemployment claims.
What’s a Furlough?
A furlough is a suspension from work without pay for a fixed, typically short, period of time. Length of a furlough is determined by the employer and is dependent on how long and how severely operations may be affected. During a furlough, employment is continued, either with dramatically reduced hours or through a period of unpaid leave (either mandatory or voluntary). Workers are told to stop coming in to work or that their hours will be cut back. These employees typically remain on your books as current employees, and are expected to eventually to return to work or have their work schedules restored. Think of this as a certain number of mandatory days off. Since furloughed employees are technically still employed, they often do not receive an official final paycheck. However, carefully review the laws of your state, because in some states, a furlough may trigger final pay requirements.
Example Furlough Situation
During the COVID-19 pandemic, a local restaurant has dramatically reduced their capabilities to only serve take-out orders, resulting in financial hardship for the business and a reduced need for employees on a day-to-day basis. During this period, the company may furlough employees by reducing full-time employee hours to 20 hours per week, or placing everyone on a two-week unpaid leave, as a cost-saving measure. Typically, this is not considered termination, but you will need to provide appropriate notice to employees of the change in relationship as this would make them eligible for unemployment benefits.
A furlough allows employers to cut labor costs in response to dips in business by pausing employees’ pay without officially terminating them when there isn’t enough funds for payroll. Furloughs are often used as a cost-saving measure during a government shutdown or a time when the income of the business is drastically reduced. Organizations often opt to furlough when they do not want to lay their staff off, but temporarily can’t afford to pay them. During a slow period, when there is not enough work for all employees, an employer can avoid mass terminations by reducing schedules. One philosophy behind opting to furlough is the idea that all employees incurring a bit of hardship is better than some losing their jobs completely through layoffs.
Things to Consider
- Don’t Discriminate – If you are furloughing a portion of your staff, not the entire company, it is important to make clear that your staff selection is non-discriminatory. Document the business reasons to support your decision to furlough Employee A but not Employee B, such as maintaining those who perform essential services to the functioning of the business.
- Exempt Employees – If an exempt employee performs work functions during any specific week, they generally must be paid their full week’s salary. During times of financial hardship, in a week where no work is performed, an employer is not obligated to pay an exempt employee’s salary for that week. For this reason, it is generally good practice to implement furloughs that cover your company’s established 7-day work week for exempt employees. Proceed with caution and continue to pay exempt employees on a salary basis to avoid jeopardizing their exempt status under the Fair Labor Standards Act (FLSA). A furlough that encompasses an entire workweek is the best way to accomplish this, since FLSA states that exempt employees do not have to be paid for any week which they do no perform work.
- Benefits – Depending on specific circumstances, furloughed employees may be able to continue receiving benefits coverage and collect unemployment benefits to compensate for the reduction of time worked. Before implementing any furlough, be sure to understand the implications from a benefits perspective – consult your plan administrator if you have any specific questions.
What’s a Layoff?
A layoff refers to a permanent break in the employment relationship. This is an official separation of employment, similar to termination, in which the employee holds no blame. A layoff, triggers final pay requirements and makes those who were laid off eligible for unemployment benefits.
A layoff is a separation/termination of employment due to lack of available work. Layoffs are a permanent break in employment. Laid-off employees are indefinitely separated from employment, serving as an official break in the employment relationship, making them eligible for unemployment benefits. While furloughed workers are employees who still remain on the books, but are told to stop coming into work for a shorter, fixed period of time. The primary difference between a layoff and a furlough is that while a furlough is intended to be temporary, a layoff is permanent. There is no guarantee that you’ll get your job back.
Things to Consider
- Don’t Discriminate – If you are implementing layoffs, and only keeping a portion of your staff, it is important to make clear that your staff selection is non-discriminatory. Document the business reasons to support your decision to furlough Employee A but not Employee B, such as maintaining those who perform essential services to the functioning of the business.
- Benefits – Depending on specific circumstances, an employee who is laid off may begin to collect unemployment benefits to compensate for the reduction of time worked. Before conducting any layoffs, be sure to understand the implications from a benefits perspective – consult your plan administration if you have any specific questions.
- WARN Act – The federal WARN Act requires employers to provide written notice at least 60 days in advance of both plant closings and mass layoffs. Generally, a business must have more than 100 employees and lay off 50 or more people at a single site for the event to be considered a mass layoff.
|Will Workers Get…||Furlough||Layoff|
|Final Check||(depends on state law, but generally no).||Yes.|
|WARN Notice||Unlikely, but if conditions are met.||If applied to more than 50 employees, at a 100+ employee business.|
Layoffs may be a triggering event for COBRA purposes, if individual employees are dropped from a group health plan due to loss of work hours. If you terminate all employees, they may not receive COBRA or continuation of coverage because the policy was likely terminated with your carrier. Depending on your state, your employees may still be eligible for continuation of coverage. The terms of your particular health plan and state requirements will govern this. Contact your health insurance company or benefits broker directly to discuss the particulars of your company plan before you proceed.
Furloughed employees generally do continue to receive company health benefits, dependent on the length and terms of the furlough. Employers may be held accountable under the Affordable Care Act if a furloughed employee is prematurely dropped from group coverage. Before implementing any furlough or layoff, be sure to understand the implications from a benefits perspective – consult your plan administrator if you have any questions.
While unemployment insurance guidelines vary from state to state, generally, both laid-off and furloughed workers are eligible for unemployment benefits if they have earned a sufficient amount of wages over the previous year to qualify. Typically, there is a mandatory waiting period between when work ends and when a worker can collect unemployment benefits. However, many states have waived these waiting periods during the COVID-19 pandemic.
WARN Act & State Mini-WARN Acts
The federal Workers Adjustment and Retraining Notification (WARN) Act, requires employers provide written notice at least 60 days in advance of:
- Plant closings
- Mass layoffs – this applies to businesses with 100 or more employees, generally (not counting employees with less than 6 months on the job or those work fewer than 20 hours per week) that lay off at least 50 people at a single site. Workers must be laid off for more than 6 months of have hours reduced 50% or more during a 6-month period.
Many furloughs do not meet these criteria; however, it is important to also note that several states have their own ‘Mini-WARN’ laws that provide workers with greater protections, so be sure to review and understand the applicable laws in your state.
Consult with legal counsel, a trusted HR advisor, and your benefits administrators as needed to weigh all options and make the best choice for your business and your team during this time.