What’s the Difference Between a Furlough and a Layoff?

As a small business facing financial hardship, there are rarely easy choices when it comes to protecting your team. While paid leave would be ideal, it’s often unfeasible. 

Furloughs and layoffs are two common alternatives small business owners can explore. In this article, we’ll review the differences between the two options—when each is appropriate, what they entail, and what they’ll mean for your business and employees.

What is a furlough?

An employee furlough is an unpaid leave of absence for a finite period of time. It can be mandatory or voluntary.

While public and private institutions can both furlough employees, you’re probably most familiar with them at the federal level. Workers are often furloughed as a cost-saving measure during a government shutdown, for example.

Generally, organizations opt to furlough employees when they don’t want to lay off staff but temporarily can’t afford to pay them. Common circumstances that warrant a furlough include:

• Sudden revenue drops: Economic slowdowns, seasonal lulls, or loss of a major customer or contract. The company wants to cut payroll costs without losing trained staff.

• Government shutdowns or funding gaps: Federal agencies and contractors furlough workers when appropriations lapse or payments are delayed.

• Natural disasters or emergencies: Hurricanes, fires, floods, or pandemics that force a facility or business to close temporarily.

• Facility or operational disruptions: Equipment failures, plant retooling, supply chain breakdowns, or strikes elsewhere in the supply chain that halt production.

• Regulatory or legal closures: Orders to suspend operations during an investigation, licensing issue, or public health directive.

• Cash-flow crunches or restructuring: A company waiting on financing, an acquisition, or a turnaround plan may furlough staff to preserve cash while it stabilizes.

• Seasonal businesses: Ski resorts, tax prep firms, and similar employers may furlough off-season staff with the expectation of recall.

What is a layoff?

A layoff—also sometimes referred to as downsizing or a reduction in force (RIF)—is a termination of employment by the employer, typically for business reasons rather than anything the employee did. 

Unlike a furlough, a layoff generally ends the employment relationship, along with pay and benefits. Laid-off employees may receive severance pay, but federal law doesn’t require it. Whether it’s offered usually depends on company policy, an employment contract, or state law.

Layoffs can affect a single role or an entire department, and both public and private organizations use them. They’re often a last resort for cutting costs when an employer can’t sustain its current headcount. A company may turn to layoffs for a number of reasons:

• Prolonged revenue decline: Ongoing economic downturns, shrinking demand, or the loss of a major customer or contract that makes the current workforce unaffordable.

• Restructuring or reorganization: Shifts in business strategy, leadership changes, or the consolidation of teams that leave some roles redundant.

• Mergers and acquisitions: Overlapping positions after two companies combine, such as duplicate finance, HR, or leadership roles.

• Automation and technology changes: New systems or processes that replace work previously done by employees.

• Office, facility, or location closures: Shutting down a plant, store, or regional office, or moving operations elsewhere.

• Discontinued products or services: Winding down a product line, business unit, or market, which eliminates the roles that supported it.

• Bankruptcy or business closure: A company that can no longer operate may lay off some or all of its workforce.

Furlough vs. layoff: key differences

Layoffs and furloughs do have some similarities: both describe reductions in work for a number of employees, and both are typically triggered by finances, rather than performance. (Performance issues usually result in firing.)

Now onto the differences: While laid-off workers are sometimes rehired, the term usually refers to a permanent separation in the employment relationship. A furlough, on the other hand, is typically for a shorter, fixed period of time. Furloughed workers keep their employment status, but are told to stop coming in to work. In some cases their hours are cut back instead, which is better described as a reduction in hours.

Here’s a summary of the similarities and differences between furloughs and layoffs:

Pay and benefits

Laid-off workers have been separated from employment, which triggers final pay requirements that vary by state, including the timing of the last paycheck and whether accrued paid time off (PTO) must be paid out. Furloughed workers, on the other hand, are still employed and generally do not receive an official final paycheck or PTO payout. (Although you should carefully review the laws of your state, because in some states a furlough can trigger final pay requirements.) But you can basically think of a furlough as a certain number of unpaid days off.

But—and this is an important point—depending on how long a furlough goes on and how many hours are cut, a furlough may be a triggering event for Consolidated Omnibus Budget Reconciliation Act (COBRA) purposes if the employee is dropped from a group health plan due to a loss of work hours. When and whether this happens is governed by the terms of your particular health plan and the requirements in your state. Layoffs are also COBRA qualifying events (unless the termination is for gross misconduct). Federal COBRA generally applies to employers with 20 or more employees, and former employees typically pay up to 102% of the premium.

Note: Many employers want to know how long they can keep their teams on benefits while they’re not working or being paid. Contact your health insurance company directly to find out what timeline applies to your plan and team.

Be aware, if you terminate all your employees, they may not get COBRA or other continuation coverage because the policy will usually get terminated by the carrier. Be sure to contact your insurance carrier before deciding how to proceed.

Similarly, an employer can get into trouble under the Affordable Care Act (ACA) if a furloughed employee is prematurely dropped from group coverage. This is a particular concern for applicable large employers (generally those with 50 or more full-time equivalent employees), which must offer affordable coverage to full-time employees. Plan eligibility terms determine when an employee can be removed.

Employers should also decide how PTO accrual, 401(k) contributions, and employee-paid benefit premiums will be handled during a furlough, and put those decisions in writing along with the expected return date.

Before implementing either a layoff or a furlough, make sure you understand the implications from a benefits perspective—consult your plan administrator if you have any questions. 

WARN Act and state mini-WARNs

The federal Worker Adjustment and Retraining Notification (WARN) Act requires covered employers to provide written notice at least 60 days in advance of: 

• Plant closings (a shutdown of a single site that causes employment loss for 50 or more employees)

• Mass layoffs (employment loss at a single site for 500 or more employees, or for 50–499 employees if they make up at least 33% of the site’s workforce)

WARN generally applies to employers with 100 or more employees, not counting part-time workers or workers with less than six months on the job. An “employment loss” includes a termination, a layoff lasting more than six months, or a reduction in hours of more than 50% in each month of any six-month period. Notice must go to affected employees (or their representatives), the state dislocated worker unit, and the local government. Employers that fail to give required notice can owe back pay and benefits for up to 60 days per affected employee. Limited exceptions to the 60-day requirement exist for faltering companies, unforeseeable business circumstances, and natural disasters.

Many furloughs do not meet these criteria, so the federal WARN Act does not apply. But several states have their own “mini-WARN” laws that provide greater protections to workers, so be sure you understand any applicable laws in your state. 

Exempt workers

Employers generally cannot dock the pay of exempt employees without jeopardizing their exempt status. If an exempt employee performs work in any week, they generally must still be paid their salary.

Exempt employees are typically salaried employees, which is why docking their pay is risky. Non-exempt employees, by contrast, are typically paid hourly and only need to be paid for hours actually worked, so furloughing them is simpler.

Under the Fair Labor Standards Act (FLSA), there’s an exception for furloughs during financial slowdowns. For any workweek in which no work is performed, an employer is not obligated to pay the exempt employee’s salary for that workweek. Pro tip: That’s why you should not implement a furlough that starts mid-week. Furlough exempt employees in full-workweek increments, and make sure they do no work at all (including checking email) during the furlough. Non-exempt employees must be paid for any hours they work, even during a furlough. Some states have additional restrictions, so check your state’s rules.

Unemployment insurance

The unemployment insurance (UI) rules vary from state to state, but in general, both laid-off workers and temporarily furloughed workers are eligible for unemployment benefits if they have earned a sufficient amount in wages over the previous year to qualify. 

While there is often a waiting period between when the work ends (either permanently or temporarily, in the case of a furlough) and when a worker may start to collect unemployment benefits, some states have waived these waiting periods during major crises, such as the COVID-19 pandemic. Check your state’s current rules.

Many states also offer partial unemployment benefits for workers whose hours are reduced, and some run work-share (short-time compensation) programs. These let employers cut hours across a team instead of laying anyone off, while employees collect partial benefits to make up some of the lost pay. Severance can affect UI eligibility in some states.

Legal considerations specific to layoffs

Layoffs carry some additional compliance risks:

• Fair selection: Choose roles and employees using documented, objective, nondiscriminatory criteria. Even neutral criteria can create legal risk if they disproportionately affect people in a protected group, so many employers review the results before finalizing.

• Releases and severance packages: If you ask employees age 40 or older to sign a release as part of a group layoff, the Older Workers Benefit Protection Act (OWBPA) generally requires 45 days to consider the agreement, seven days to revoke it, and written disclosure of the job titles and ages of those selected and not selected.

• Notices: Many states require employers to give departing employees information about unemployment benefits.

Consider all options

While layoffs and furloughs are similar, the main difference is that layoffs tend to be permanent and furloughs tend to be temporary. Depending on your business needs, either may be an appropriate response to a financial or operational disruption. Other options to weigh include reduced hours, temporary pay cuts, voluntary leave or separation, hiring freezes, and state work-share programs. Here are three things to consider:

1. Furloughs are generally used for fixed periods of time. So whether it’s better to implement a furlough or layoff may depend on how long your business operations will be affected, or how severely.

2. Consider your team’s preferences. Depending on your particular workplace, it may make sense for you to speak frankly with your workers about all the options on the table before making any final decisions. Ordinarily, a business owner would make a firm decision before speaking to the team, but an open conversation can surface voluntary options and protect employee morale.

3. Review the labor laws and benefits obligations of each path, including WARN and state notice rules, COBRA and ACA coverage, final pay, and unemployment eligibility.

Before choosing, consult with legal counsel, a trusted HR advisor, and your benefits administrators as needed to understand all of your options. 

FAQs

Can an employer force employees to take a furlough?

In most cases, yes. Employers can generally require at-will employees to take unpaid furlough days, though they must follow wage-and-hour rules for exempt employees and any applicable state laws. Union agreements and employment contracts may require notice, bargaining, or other conditions first. Employees typically can’t refuse without risking discipline or termination.

How long can a furlough last?

No federal law sets a maximum length, but furloughs are meant to be temporary. A furlough lasting more than six months can count as an “employment loss” under the federal WARN Act, which can trigger 60-day notice requirements for covered employers. If there’s no clear return date, it’s more accurately a layoff.

Can you work another job while furloughed?

Often, yes. Furloughed employees are still employed, so they may take other work unless an employment contract or company policy restricts moonlighting or competing work. Income from a second job can also reduce or disqualify unemployment benefits, depending on state rules. Employees should check their employer’s policies before accepting outside work.

How much severance is typical in a layoff?

There’s no legal standard, but a common formula is one to two weeks of pay for every year of service. Employers set the amount based on company policy, contracts, and budget, and some add perks such as outplacement support. Smaller businesses often offer less or none, since federal law doesn’t require severance.

Can an employer lay off someone who is on medical leave?

Yes, if the layoff would have happened regardless of the leave. Under the FMLA, which covers employers with 50 or more employees, an employee on leave has no greater right to their job than if they had kept working. Employers must apply selection criteria consistently, can’t use the leave as a reason, and should document the business rationale.

Can you furlough only some of your employees?

Yes, but choose who is furloughed using documented, objective criteria such as role, workload, or business need. Apply them consistently. Selections that disproportionately affect people in a protected group can create discrimination risk, so many employers review the results before finalizing.

How should you tell employees about a layoff or furlough?

Speak with them directly and promptly. Explain the business reason, what happens to pay, benefits, and final paycheck, and whether there's an expected return date for a furlough. Follow with written details, and check whether your state requires specific notices, such as information about unemployment benefits.