The Advantages and Disadvantages of Furloughs vs. Layoffs

The Advantages and Disadvantages of Furloughs vs. Layoffs

Unfortunately, no company is immune to financial hardship. It can be the reality of getting a small business off the ground, an economic downturn, or something completely out of left field, like the coronavirus pandemic shuttering businesses across the U.S. last year.

These situations can put your organization in a position where you have to make difficult financial decisions like reducing your labor force in the form of furloughs or layoffs. If you’re stuck between this rock and a hard place, it pays to know the difference between the two so you can understand the advantages and disadvantages of furloughs vs. layoffs and make the right decision when the time comes.

What Is a Furlough?

A furlough is a temporary, unpaid leave of absence, reduction in hours, or pay cut used as a strategy to keep employees on staff while protecting the company’s bottom line. The goal of a furlough is to reduce costs while keeping your employees employed, either as a way to divert funds elsewhere in the business, or to avoid critical spending during a period of closure (like a pandemic).

While employees do not receive pay during a furlough, they do often get to keep their benefits such as health and life insurance and, in most cases, can apply for unemployment. Laws for furloughing employees can vary by state, so you should work with your company’s legal counsel to ensure you are handling the situation appropriately.

Both exempt and nonexempt employees can be furloughed, but the process varies for each group.

Nonexempt Employee Furlough

Nonexempt employees are most often hourly workers. If a worker is paid hourly, their employer can reduce their hours to put them on furlough without terminating them..

For example, an employee who regularly works 20 hours a week could temporarily have their working schedule cut to only 10 hours per week. Alternatively, they could be given no hours, also known as a zero-hour schedule. If an employee is on a zero-hour schedule, they are still considered an employee of the company but are not given any pay or working hours.

This zero-hour schedule was a commonly used tactic by many businesses like restaurants and retail shops during the coronavirus pandemic. Rather than go through the painful and onerous process of laying off their entire staff and rehiring them when things reopened, the businesses could keep them on staff and start assigning hours again as soon as restrictions were lifted.

Exempt Employee Furlough

Exempt employees are your salaried workers. Reducing hours doesn’t make sense for salaried employees because they’re paid the same amount no matter how many hours they work. Instead, when salaried employees are furloughed, the company will temporarily reduce their pay or give them a zero-hour schedule for a set amount of time. This can range from as long as several months to one week a month or even a few days.

When you put salaried employees on furlough, don’t expect them to still do a bit of work or take the occasional call—it’s illegal. Employees cannot do any work while they are furloughed. Even something as small as sending an email could require you to pay that employee for the full day.

What Is a Layoff?

A layoff is termination of employment based on a lack of available work or funds. Employees who are laid off are let go through no fault of their own and are typically eligible for unemployment. They no longer receive any benefits from the company; however, they can continue to use group health benefits from your company health plan if the individual agrees to cover the entire premium under the Consolidated Omnibus Budget Reconciliation Act, commonly known as COBRA. If you are able, you may choose to offer your laid off employees a severance package to help them transition to a new job, but you are not legally required to do so.

Choosing a Furlough vs. a Layoff

Whether you have to put employees on a furlough or lay them off, both situations can be extremely difficult for the employee, especially if they are living paycheck to paycheck. But when your company is in a bind, you have to make hard choices. Understanding the advantages of a furlough vs. a layoff will help you make the right choice and will help your business survive while dealing as fairly as possible with your employees.

What Are the Advantages of Furloughs?

• Employees generally get to keep their benefits.
• The company reduces costs.
• You won’t need to go through a costly hiring and training process once the company’s financial situation stabilizes or the business reopens.
• Employees will be able to collect unemployment (in some situations).

What Are the Disadvantages of Furloughs?

• The company continues to pay expenses for employee benefits.
• Employees are left in limbo.
• Employees aren’t always able to collect unemployment to cover lost pay.

What are the Advantages of Layoffs?

• The company doesn’t have to continue paying for benefits.
• Employees can begin searching for their next job without false hope your organization will take them back.

What are the Disadvantages of Layoffs?

• Hiring and training new employees is costly.
• Company incurs unemployment costs.
• Company loses institutional knowledge.
• It can be harder to “bounce back” or return to full strength.

How Should HR Handle a Furlough vs. Layoff?

As with all things in HR, you should clearly communicate whatever decision you make with your employees.

How to Handle Furloughs

In the case of a furlough, give your employees a timeline for when things will return to normal, if you’re able to, and make sure that employees and managers fully understand that they cannot work at all while they are furloughed. (No, not even to respond to a quick chat Slack message!)

Any hours a non-exempt employee works will have to be paid, and if an exempt employee works at all, they will have to be paid the full day’s wage. If a furlough is for an extended period of time, you may want to turn off employees’ access to their business email and accounts to be sure this rule is followed.

How to Handle Layoffs

If you have to make the difficult choice to lay off employees, here are the steps you should take. 

1. Review all pertinent federal and state laws. In particular, you should review the Worker Adjustment and Retraining Notification (WARN) Act regulations, the Older Workers Benefit Protection Act (OWBPA) regulations, and any state laws to be sure you are compliant. It’s wise to work with your legal counsel so you don’t miss any federal or state requirements. 
2. If you are able to, provide a severance package. This can significantly ease employees’ financial burden as they search for a new opportunity and can leave former employees with a more positive view of your organization. However, as previously stated, it is not federally required. Your severance package may include things like:
   • Salary continuation
   • Vacation pay
   • Continued benefits for a period of time
   • Placement service
   • Counseling and resume workshops
3. Conduct layoff sessions with clear communication. This will most likely be uncomfortable for both you and the employee, so come prepared with information for the employee about why this is happening and reassure them that this is through no fault of their own. Providing your employee with as many resources as possible will help keep things positive and professional. For example, give employees information about:
   • How they can apply for unemployment benefits
   • How they can access COBRA benefits
   • Their severance package, if it is being provided
   • The company’s employee assistance program, if it has one
4. Inform your remaining staff. Rumors travel quickly in the office. It’s best to get ahead of them by explaining the company’s situation to your remaining staff, why you had to make this decision, and what your action plan is for financially recovering. 

No one wants to see a good employee leave, whether temporarily or permanently. The best thing you can do is clearly communicate your choices and hopefully have a strategic plan for getting your business back on top.