Updated January 27, 2021
When you need to reduce payroll costs, tough choices have to be made. Whether you’re likely to layoff or furlough employees, here’s how to assess what’s best for both your business and your employees when you’re thinking about downsizing
Let’s start by looking at the differences between layoffs and furloughs — as well as some other options to consider.
A furlough is when employees are put on temporary leave for a specified period of time. Some companies may allow (or even require) employees to use paid time off during a furlough, but these leaves are often unpaid. Workers still have their jobs — and are expected to return when conditions improve.
Employers determine the terms and length of the furlough.
Furloughs for non-exempt employees (who are typically hourly workers) are governed by the Fair Labors Standards Act (FLSA). For non-exempt employees, employers have the option of reducing hours per day or days per week. Or employers can furlough employees entirely by going weeks or months without having them work.
Exempt workers, who are typically salaried, must be paid for any week in which they work — no matter how many hours they work in that week, according to the FLSA. So, exempt workers would be furloughed in entire week-long blocks.
A furlough reduces the average monthly payroll costs for a business on a temporary basis, without permanently reducing the size of their staff. This means that employers can ramp back up quickly without having to hire a new workforce (or deal with any of the legal formalities) when better business conditions return.
While they are not paid, furloughed workers often have access to company-sponsored benefits. Perhaps most importantly, by furloughing employees, you create the expectation that they’ll be able to return to their job at some point.
Furloughed employees don’t get paid. There’s a good chance they’re at high risk for attrition if other work is available to them.
Since furloughed employees are not technically unemployed, they haven’t traditionally been eligible for unemployment payments. However, some of these restrictions are temporarily eased during the COVID-19 outbreak.
A layoff is when workers are terminated from a company for reasons other than poor job performance. Workers no longer have any legal relationship with the employer and are technically unemployed.
By reducing payroll costs, layoffs help employers save money — just like furloughs. But layoffs are different because workers are now unemployed which means they are usually eligible for both unemployment benefits and for health insurance under COBRA (or individual health coverage under the Affordable Care Act).
Layoffs also make it clear to employees that it’s time to move on. Terminating employees can be painful, but if you have a good process for it, laying employees off means they’re not stuck in limbo. If your business plans to make a permanent reduction in force by eliminating positions outright, layoffs also are much more transparent.
Disadvantages of layoffs
Employers lose their workforce and employees lose their jobs. If or when conditions improve, employers will need to find and hire a new team.
Neither furloughs nor layoffs are fun for anyone involved. Another way to reduce payroll expenses can be to reduce the number of hours worked by hourly employees — or by renegotiating compensation for salaried employees.
Employers who try to go this route may want to consult with an employment law attorney about potential pitfalls. For example, employees may no longer be eligible for their employer’s health insurance if their hours are reduced significantly.
The Worker Adjustment and Retraining Notification Act (WARN) was passed in 1988. Its goal is to offer employees who are part of a mass layoff sufficient time to seek out a new job or re-training program. It requires 60-days advance notice when at least 50 people are let go at a single site of employment for businesses with 100 or more full-time workers. We dig deeper into the details and the exceptions of the WARN Act in this article.
Handling these situations can be difficult for everyone involved — no matter what challenges your business is facing. Make sure the employees who stay on the job have clear expectations about what’s to come for them, too. Layoffs and furloughs are difficult and may feel unfair to both employees who lose their job and those who stay on — even if they’re unavoidable. So, it will help your team down the road to be sensitive to what the employees you retain are going through, and how they perceive the changes going on around them.
We hope this information is helpful and that cutting down on the size of your payroll will give you the breathing room you need to get everything back on track.