Hard economic times are a reality that every business owner has to deal with at some point. Whether it’s a tightening of cash flow or an economic slowdown like we saw during the COVID-19 pandemic, employers may face situations where they need to reduce operating costs fast. A furlough is one of the options they can consider during this time. We’ll cover how the furlough works, how it’s different from a layoff, and what to consider when implementing one.
What is a furlough?
A furlough is a temporary reduction of pay or working hours meant to help businesses weather financial hardships while keeping their employees on staff. Workers’ hours and pay may be reduced partially or entirely for a specified period of time but should eventually be restored.
Furloughs may occur when funds are tight and need to be diverted to other business-critical areas or when worker activities are interrupted by something like a plant shutdown, a corporate reorganization, or public health event.
While workers’ pay is suspended, a furlough means they still have a job to come back to, and in many cases, they continue to receive benefits. Laws around furloughs vary by state and worker exemption status, so we recommend getting familiar with your local laws and working with a legal advisor should you consider a furlough.
How a furlough works
Implementing a furlough can look different depending on your situation. For example, suppose you are a seasonal business and expect a drop in demand during a particular time of year. In that case, you might keep on one worker with reduced pay or hours (say, 10 hours per week instead of 20) and instruct other employees not to report to work for a period of two months.
In another scenario, your business may need to undergo a temporary closure. Hours and pay could be suspended for the entire team during the closure and restored at the time of reopening. Another simple measure to reduce costs is to schedule mandatory unpaid days off, perhaps between holidays like Christmas and New Year’s or after Thanksgiving. As we mentioned, these scenarios also vary based on workers’ exemption status.
Furloughs for salaried or exempt employees
Exempt employees must be paid their predetermined salary during weeks or months when they perform their duties, regardless of hours worked. Their work cannot be reduced on an hourly basis; they can only be furloughed in increments of days, weeks, or months. It is illegal for them to engage in any work during the furlough period. Any work, even a call or email, might require you to pay the employee for a day’s work.
Furloughs for hourly or non-exempt employees
Hourly workers, on the other hand, can be subject to having their hours cut back during a furlough. This may look like working fewer hours per shift or fewer shifts per week. They may also be put on a “zero-hour schedule” during a furlough. This means that they are not working at all, but they have not been terminated, a common tactic that restaurants and retail businesses used during pandemic-forced closures.
Advantages and disadvantages of a furlough
Let’s take a look at the pros and cons of a furlough as a cost-saving measure.
Advantages
- Employees can continue to receive health and other benefits during a furlough.
- After the furlough period ends, your company will be spared from the expensive hiring and training costs that come with finding new workers.
- In some cases, furloughed employees can access unemployment benefits.
- Workers have the security of retaining their position and knowing they have a job to come back to.
Disadvantages
- Your company will have to manage the ongoing expenses of employee benefits, often in a situation where money is tight.
- If the furlough is for an extended period of time, some employees may seek employment elsewhere.
- Unemployment isn’t always an option for furloughed workers, and the guidelines for benefits during furlough can be complicated.
- Furloughs take an emotional toll, impacting both morale and productivity for workers continuing at reduced rates or hours.
Furloughs vs. layoffs
You may be more familiar with layoffs than furloughs. While similar, they do have some important distinctions:
- A furlough is a suspension of pay to reduce costs for a temporary period of time.
- A layoff is the termination of employment due to a lack of resources, not by any fault of the employee’s own.
In the event that you cannot foresee an end to financial troubles in the near future, you might consider a layoff instead of a furlough. It may even be the right option for your team if the business can no longer support payroll for its staff. Each option differs in how they impact the following factors for employees as well:
- Health benefits: Layoffs trigger COBRA or continuing health coverage for terminated employees, while furloughs often do not. Furloughed workers typically continue to receive health benefits from their employer, but this can change if their hours are reduced below minimum requirements for health coverage. At this stage, they may be eligible for COBRA.
- Unemployment: Furloughed employees don’t usually qualify for unemployment benefits because one of the requirements is that they must be looking for work, while furloughed employees are technically still employed. Some states will extend unemployment benefits to furloughed employees, while laid off employees are eligible so long as they meet the minimum income requirement in the past year.
- Job security: While there may be periods of uncertainty, furloughed employees generally have the peace of mind of knowing they will be able to resume their jobs without reentering the job market—and their employer is usually still supporting them with benefits, too. Layoffs, however, mean no guarantee of rehire and that workers need to find other means of employment, benefits, and income.
- Notice requirements: The federal Worker Adjustment and Retraining Notification (WARN) Act states that employers must notify employees within 60 days of mass layoffs. There is no federal requirement of notice for furloughs, but some states have mini-WARN laws that do require notice for furloughed employees, usually for companies of a certain size.
Furlough FAQs
How long can a company furlough an employee?
The length of a furlough is up to the employer’s discretion, and it generally coincides with how long a downturn persists. While there is no specific federal guidance on length for furloughs, depending on local laws like in California, an extended furlough may be considered a termination or layoff after a certain period of time.
Are employers required to pay furloughed employees?
Non-exempt employees, who can still work at reduced rates during a furlough, must be paid for the time they do work. Salaried employees generally should not work or be compensated during a furlough. However, employees with benefits should continue to receive them.
Can an employee quit while on a furlough?
Generally, employees are within their rights to seek alternative employment during a furlough, but the type of work may vary based on the terms of their employment agreement. For example, furloughed employees may be restricted from working temporary jobs that would prevent them from returning to their positions when needed.
Can an employee be terminated while on furlough?
If a furlough goes on indefinitely, it could trigger a layoff and result in the termination of the furloughed employees. At this stage, employers are met with separate layoff requirements, which can include final paychecks, vacation payouts, and WARN notice laws.
Check out more FAQs from the U.S. Department of Labor here, and keep in mind that on July 1, 2024, the DOL updated the rules around exemption from minimum wage and overtime pay requirements for certain professionals. Make sure you’re familiar with the latest regulations when considering a furlough or pay reduction for your team.
