Layoff or Furlough: What’s Right for Your Business?

If you are considering ways to manage your workforce to protect the financial viability of your organization, you’re faced with some tough decisions ahead. It’s important to know what your options are, and how each option affects your business and employees.

Furloughs

In simplest of terms, a furlough is a temporary reduction in hours or weeks of work. You can require all employees to go on furlough, certain departments, or specific employees. If you decide to put a widespread furlough into effect, you can exclude certain employees who provide essential services. In other words, you can furlough one, several or all employees.

Furloughing most employees can be a way for employers to share the hardship across its workforce as opposed to having a few employees lose their jobs completely.

A furlough situation also applies when you opt to temporarily close your business for x number of weeks, but plan to re-open and welcome those employees back.

A furlough is the equivalent of saying to employees, “Goodbye for now, but we plan to welcome you back again soon.”

Another method of furlough is to require all employees to take a week or two of unpaid leave sometime during the year.

Furloughs give employers a good bit of flexibility in deciding how to reduce payroll costs on a temporary basis. A furlough can be a favorable way to retain talent and reduce the cost of permanent separation, such as paying out a vacation balance that’s required in a layoff, as well future hiring and training.

The Impact on a Furloughed Employee

A furloughed employee still has a job and remains on your payroll, but they are eligible for unemployment benefits for lost pay.

None of their benefits are affected. For employees whose work is reduced to fewer than 30 hours per week, they can continue their healthcare coverage through COBRA.

How to Furlough an Employee

To start the process, you must communicate your intention in writing to your employee. Include these two critical points in your written notice to the employee: they still have a job, and you want them back. Let them know they can apply for unemployment benefits in the interim.

Other Notes for Employers Exploring Furlough Options

If you cannot make payroll, speak to your attorney to make sure you have your I's dotted and T's crossed. Before you reduce hours or pay, consider the Fair Labor Standards Act (FLSA) and your state’s wage law. Again, it’s best to consult your employment attorney before taking action.

There are different considerations for non-exempt (hourly) and exempt (salaried) employees. Let’s look at non-exempt employees first.

Non-exempt Employees

• You are only required to pay them for hours worked
• If you furlough them after they’ve already arrived at work, note that some states have special reporting requirements
• A reduction in hourly wage may require certain notice and cannot be retroactive if you are mid-pay-period
• Employees cannot volunteer to work for less than minimum wage; they cannot can’t sign away their right to minimum wage and overtime

Here’s an example of a furlough situation for a non-exempt employee:

Todd is a non-exempt employee who normally works 40 hours per five-day workweek in his company's warehouse. You furlough Todd by reducing the number of hours he works in a week for the remainder of the year. He now works 32 hours over a four-day workweek. You pay Todd for 32 hours per week instead of 40 for the remainder of the year. On January 1, your company is in good financial shape, and you welcome Todd back at 40 hours per week.

Exempt Employees

• It’s better to furlough by the week and not by number of days, unless you reduce hours and pay on a prorated basis
• If they worked during the week in which you initiated the furlough, you must pay their full salary for that week
• You can reduce their hours and prorate their pay
• You can reduce pay as long as it’s not below $684 a week; this is an FLSA threshold

Here’s an example of a furlough situation for an exempt employee:

Amy is a full-time exempt employee working in her company's IT department. You furlough Amy so she has to take one week per month off for the remainder of the year. Under the furlough, Amy is paid only for working three weeks every month.

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 FLSA. 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.

Temporary Layoffs

When you temporarily layoff an employee, it means you have the intention to rehire them down the road.

Employees are typically able to collect unemployment benefits while on an unpaid layoff, and frequently an employer will allow employees to maintain benefit coverage for a defined period of time as an incentive to remain available for recall.

The WARN Act comes into play with temporary layoffs. According to the Department of Labor, “The Worker Adjustment and Retraining Notification (WARN) Act helps ensure advance notice in cases of qualified plant closings and mass layoffs.”

There are some important points to consider before putting temporary layoffs into effect:

• Employers are required to pay out accrued vacation in accordance with company policies
• WARN notice does not apply if the layoff is planned to last for less than six months
• If you intend to temporarily layoff an employee for more than six months, you must give 60 days’ notice according to the WARN Act

The Department of Labor has compiled compliance assistance materials to help workers and employers understand their rights and responsibilities under the provisions of WARN.

Permanent Layoffs

A permanent layoff has no anticipated rehire date associated with it. A permanent layoff terminates your relationship with the employee. The employee gets a payout of accrued vacation time in accordance with company policy.

Federal law doesn’t require businesses to pay severance to employees who are laid off. Some states require employers to offer severance packages. Check with your state’s Department of Labor to see your state's policies. Severance packages are at the discretion of business owners.

The WARN Act also applies to permanent layoffs.

Key Takeaways

My primary advice for business owners who are considering furloughs or layoffs is:

• Explore your options thoroughly
• Show empathy toward employees
• Speak with an employment attorney

Need Help?

For employment-related questions, call your employment attorney. We are also happy to be your sounding board as you talk through your organization’s situation. Contact us here or call 800.899.4623.