When an organization needs to reduce its payroll due to financial hardship, there are two options employers may consider: furlough vs. layoff.
Everyone has heard of these terms, but many people don’t know the difference between what it means to furlough an employee or lay them off. And it doesn’t help that these terms are often used interchangeably.
However, furloughs and layoffs are distinct in several ways that can affect employees’ jobs, income and benefits during the time of their unemployment.
To make the right choice between a furlough and a layoff when you need to downsize, knowing the differences between these two cost-saving employment actions – and what they mean for workers and employers alike – can help in the decision-making process.
What is a layoff?
A layoff is a way for employers to part ways with employees for reasons that have nothing to do with the employee’s job performance.
Even if an organization hopes it can bring employees back in the future, layoffs are a type of termination where all ties between employer and employee officially come to a close. The reason for termination of employment due to a layoff is simply the absence of available work.
Layoffs can be temporary, and you may choose to call back laid-off employees, but an employer who uses the term “temporary layoff” makes no formal guarantee of future job availability.
When employers plan to permanently reduce headcount at the time of termination (e.g., if automation technology or artificial intelligence is replacing a staffed position), this may be called a reduction in force (RIF) but is simply a layoff using a different term.
What is a furlough?
Like layoffs, furloughs are a way for employers to reduce payroll costs when employee performance isn’t to blame.
Furloughing employees, however, doesn’t terminate employees from their positions. Instead, it puts them on an unpaid leave of absence, from which they are expected to return to work in the future.
Employers can use furloughs to separate employees during mandated shutdowns and slow seasons, while avoiding the severity and finality of a layoff.
There is some flexibility for employers who need to furlough nonexempt employees who are paid hourly. A furlough for these workers can be a complete break over a defined period of time or a reduction of the regular work schedule (e.g., only a couple of unpaid hours or days each week).
But for exempt workers, employers must be more careful with partial work time reductions. To maintain compliance with the Fair Labor Standards Act (FLSA), exempt workers must be paid their full salary for any week in which they perform work.
This means the shortest an unpaid absence should be for furloughed exempt employees is one week. And if exempt employees only work a partial week due to a government shutdown, you likely still need to pay them a full week’s salary.
Furlough vs. layoff: what are the key differences?
Now, let’s take a closer look at the important differences between layoffs and furloughs, and their implications for both you and your employees.
With the understanding that layoffs are a form of termination and furloughs may be thought of as a leave of absence, you can begin to see their differences more clearly.
During both a layoff and a furlough, employees are generally eligible to collect unemployment benefits.
Laid-off workers who lose their employment will lose their health coverage at the same time. These employees will generally be able to continue their coverage for a certain period of time after termination of employment under state or federal law. You could, however, elect to delay the termination of benefits for these employees if your benefits plan allows it. Doing so would make sense if you wanted to encourage them to wait to be rehired, or if you want to cover medical needs for a period of time when the employee may otherwise be without coverage. But many times, laid-off employees are ineligible for coverage under group health plans.
Furloughed employees, on the other hand, will usually retain health coverage for a limited period of time depending on the specifics outlined by your plan.
Laid-off employees are removed from the payroll and, in states that require it, must be paid for any unused paid time off (PTO) they have accrued with their final paycheck. Look to your state’s laws for the specific rules.
Because furloughed employees are not formally separated from the company, unless required by local or state law, you generally do not have to pay out their accrued PTO if it’s required by law to do so at termination. You can allow employees to use PTO during the furlough, but you’ll likely want to consider the pros and cons of this option.
If the purpose of the furlough is to temporarily reduce costs – for example, while you wait for a contract to come into effect – then having employees take PTO or vacation time while furloughed may not provide the financial relief you seek.
On the other hand, if your reason for furlough is not financially motivated, but rather because of a lack of work until that contract comes in, allowing employees to take PTO during a furlough may be a viable option.
You may not be able to prevent an employee who has accrued PTO or vacation time available from taking it. By the same token, employees who have time may not choose to use it if they’re eligible to receive unemployment, since receipt of paid time off may inhibit their ability to receive unemployment during the time they receive the paid time off.
What do employers need to know?
Choosing to furlough or lay off employees should be a decision based on the best information you have at the time, considering:
- The likelihood of being able to rehire your employees again in the future
- Which scenario is a better fit for your financial position (e.g., would you prefer to pay out PTO now or take on a future liability?)
- Your employee population and how each option would be perceived. Consider:
- Do you have many employees who expected to be able to retire from your organization?
- Or are they in earlier career stages that would allow them to move on more easily?
- Are there employees with specific skill sets that will be difficult to replace once positions are available?
Other tips for avoiding issues as an employer:
- Check with your legal counsel to understand if a furlough would affect your employees’ full-time status under the Affordable Care Act (ACA).
- Seek outside counsel regarding federal and state Worker Adjustment and Retraining Notification (WARN) Act requirements. In all states, companies that meet the federal WARN Act requirements must abide by this law, and many states have a state-level WARN Act that may have different thresholds or other requirements.
- If furloughing workers, be sure to suspend their access to internal systems and email during the furlough. If they were to log in for any reason, it could negate the furlough, and you would be required to pay them for their time.
Bringing employees back after furloughs and layoffs
If you are able to bring employees back after a layoff, note that some states will require you to recall your laid-off employees first before advertising open positions in the employment market.
Even if you aren’t legally required to offer open positions to these employees first, it’s generally best practice to prioritize bringing former employees back due to the great value in their institutional knowledge.
If furloughed employees don’t want to return to their jobs when you call them back, document their last day worked, last day paid and last day employed. Then, proceed with your standard HR procedures for employees who leave your company.
In times of business hardship, it’s crucial to understand how choices like whether to furlough or lay off employees will affect your organization now and in the future. And a professional employer organization (PEO) can help you navigate these and other challenges.
Are you in search of a PEO? Wondering how to compare them? Download our free e-book, A buyer’s checklist: How to compare professional employer organizations.
[AS1]COBRA is a federal law and only applies to employers with 20 or more employees. Most states have a similar law for smaller employers, so I adjusted the language to account for the size of the employer.