Furlough Vs Layoff: Differences, Advantages, and Disadvantages

two people discussing furlough vs layoff

With the ongoing pandemic, things continue to be incredibly tough for many businesses. The last thing any employer wants to think about is lost jobs, but if you’re struggling to make payroll, you may need to make the difficult decision to let employees go to cut costs. If you’re facing this situation, you may be wondering if laying off employees is the best option for your business and your workers or if you should consider furloughing them instead.

Complete Payroll Solutions’ HR team advises thousands of clients throughout the Northeast on how to best manage their employees, including dealing with challenging HR questions around terminations.

To help you understand your options when you’re forced to consider the difficult decision to downsize, in this article, we’ll address:

  • The difference between a layoff and furlough
  • Whether it’s better to layoff or furlough workers
  • Legal considerations when laying off or furloughing employees

After reading this article, you will know how to make the right choice for your company when you have to reduce your workforce.

What is a layoff?

A layoff involves terminating a worker’s employment during a period when no work is available –  and not because of the employee’s performance. The decision to layoff an employee can be temporary or permanent.

For example, if you close down but intend to reopen in the relatively near future. Or maybe you have an expected reopening date and plan to rehire employees then. Both of those situations would be considered a temporary layoff. In these cases, however, it’s a good idea to communicate to employees that you’re not exactly sure when you’ll be able to rehire them in case your circumstances change.

A layoff is generally considered permanent if there are no plans to rehire the employees because you expect the slowdown or closure to be lengthy or permanent.

A layoff is generally considered permanent if there are no plans to rehire the employees because you expect the slowdown or closure to be lengthy or permanent.

Regardless of your future plans for reopening, you should simply communicate your decision as a “layoff” to employees since it is effectively a termination.

What is a furlough?

A furlough continues a worker’s employment, but reduces their scheduled hours or requires a period of unpaid leave. During COVID-19, furloughs have been common in many industries, especially retail and hospitality.

Typically, a furlough has a definitive start and stop date, although there’s technically no time limit for how long it can last. For example, you may reduce an employee’s hours to 20 per week for a period of time as a cost-saving measure or place everyone on a two-week unpaid leave.

The idea behind a furlough is that it’s better for employees to incur a bit of hardship rather than losing their jobs completely.

Is it better to layoff or furlough workers?

Generally speaking, if you’re shutting down for something like a 2-week inventory review or you want the flexibility to be able to recall employees quickly, it’s probably better to furlough them. But if you don’t know how long your business may be impacted by an economic downturn like one caused by COVID-19, then you may want to layoff employees instead.

With either decision, there are pros and cons to consider. To help you evaluate your options, we’ll compare the two approaches in terms of their effect on several areas of your business: health benefits, PTO, unemployment, and morale.

Health Benefits

When you layoff an employee, employment is terminated. That means you no longer have to pay for employee benefits like health insurance, which can further reduce your expenses. Your employees, however, would have the option to continue their benefits through COBRA, so you’d have to meet the law’s notice requirements.

If you choose to furlough employees, they’ll stay on your benefit plans and both you and your employee will need to continue to pay your respective portions of the premium costs.

PTO

Since laying off employees terminates the employment relationship, depending on your state or your company’s policy, you may need to pay out any accrued but unused vacation time when they leave in their final paycheck. This can be an important consideration if you’re having a cash flow issue.

In a furlough situation, employees may request to be paid their unused time. However, they won’t accrue any additional time while they’re on furlough.

Unemployment

Since the more unemployment claims you pay out, the higher your state unemployment tax rate can be, you may be wondering if employees you layoff or furlough are eligible to collect unemployment.

Once you layoff an employee, they can apply for unemployment benefits. Furloughed employees, even though they remain employed by you, may also be able to collect unemployment in most states if they’ve earned a sufficient amount in wages over the previous year to be eligible. For example, in New York, a person must have earned wages of at least $2,600 for claims filed in 2020.

Morale

When you furlough employees, there will likely be a hit to morale unless your industry typically experiences furloughs as part of the regular course of employment such as seasonal slow periods. Specifically, the remaining employees may worry about the company’s future or that they could be furloughed next.

The effect on the workforce is similar with a layoff.

While furloughed workers are generally less likely than those who are laid off to seek other employment, the longer a furlough lasts, the greater the chance they’ll start looking as well.

In addition to the impact on the workplace, engagement among those who are laid off or furloughed may also suffer. Given the instability in their employment situation, they may look for work elsewhere. While furloughed workers are generally less likely than those who are laid off to seek other employment, the longer a furlough lasts, the greater the chance they’ll start looking as well. And when employees take another job, it may impact your future operations if you had hoped to be able to bring them back. 

To help lessen the impact on morale with either option, it’s wise to engage in open communication with any affected employees before and during the furlough or temporary layoff period and keep them updated about your plans going forward.

How do I bring employees back?

The process of bringing employees back after layoff or furlough is essentially the same with either option.

  1. Establish a recall date
  2. Send affected employees a certified letter to let them know the date of the recall

The main difference between the two approaches is with benefits. When furloughed employees return, they begin work again as if there was no break in service and their benefits continue uninterrupted. 

With laid off employees, however, you’ll effectively be rehiring them so you’ll have to restore their employee benefits. That means they’ll need to re-enroll in your plans. To make it easier for employees, you can make it your policy to waive any waiting periods for enrollment into benefits. 

Do I need to worry about compliance?

Whether you choose to layoff or furlough employees, there are certain employment laws and regulations you need to be aware of that may require you to take action to be in compliance. These include:

WARN Act

If you’re considering a plant closing or major layoff, the WARN Act requires you to notify employees at least 60 days beforehand to give them time to prepare unless you meet an exception that requires you to simply provide as much notice as possible. Specifically, you’re required to provide a WARN notice if you have 100 or more full-time workers (or part-time workers who work more than 4,000 hours a week in total) and you’re laying off at least 50 people at a single site.

It’s important to note that the WARN Act’s requirements may be triggered by a furlough in certain situations. For example, if you initially planned to temporarily furlough employees for less than six months then your plans change and the furlough will extend beyond six months, the WARN Act notice obligation can be triggered.

FLSA

If you furlough employees, there are some rules around compensation that you need to follow that vary based on whether the employee is exempt or non-exempt.

Pay for Exempt Employees:

Exempt employees don’t have to be paid if they don’t work at all for an entire workweek. However, if work is available for a partial week, they must be paid their full salary for that week, regardless of the fact that they have worked less.

Since you’re furloughing employees to save money, it’s best to make it very clear to exempt employees that they should do absolutely no work during any week you’re shut down. If exempt employees do any work during that time, they will need to be paid their normal weekly salary.

Pay for Non-Exempt Employees:

You only need to pay non-exempt employees for actual hours worked, so you can do a single-day or partial-week furlough without worrying about pay implications. 

EEOC

If you’re not planning to furlough all your workers but rather just certain employees, it’s important to be able to show that staff selection was not done for a discriminatory reason. Be sure to document the non-discriminatory business reasons that support your choice to furlough certain employees and not others, such as those that perform essential services. 

What’s the best way for my company to downsize?

Given the uncertainties around the economy, the difficult decision to layoff or furlough employees is unfortunately all too common right now. But when it comes to these cost-savings actions, it’s important to understand the differences between them and when one option may be better for your business.

A furlough can be better for companies who:

  • Want to avoid layoffs
  • Are planning a temporary slowdown
  • Want to discourage employees from looking for another job

Layoffs may make more sense for businesses that:

  • Want to reduce health insurance costs
  • Are unsure of how long you may need to cut costs

At Complete Payroll Solutions, our HR experts can evaluate your specific circumstances and guide you through the difficult decision of downsizing your organization so you can continue to thrive and grow even in these challenging times. Learn about how we can assist you through our on-demand HR support.

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