Layoffs and Furloughs: Why They Are Used and What They Mean to You, Your Pay, & Your Benefits
Updated: Jul 31, 2020
During this unprecedented time in modern America, there is a general wave of uncertainty sweeping through the nation in regard to the impact of COVID-19 and its impact on the workforce.
Along with being unsure as to how long this pandemic will last and what the toll on our economy will be, we are also hearing lots of employment terms used that may not be familiar to us.
On the news there is significant coverage of companies issuing massive layoffs or putting a large percentage of their employee population on furlough, but what are the differences between being laid off and put on furlough, and what might be the deciding factors for a company to choose implementing one over the other?
Explaining layoffs and furloughs, their impact on compensation and benefits
In order to try and bring some much-needed clarity to what is a very confusing time for many, we will explain what each of these employment statuses means from a compensation and benefits perspective, as well as discuss why a company would enact one, and some factors impacting which one to choose.
A layoff is an involuntary no-fault separation between an employer and employee, meaning it is not related to the employee’s performance.
This generally occurs due to the elimination of positions because of a recession/loss of revenue, restructuring, merger, or close of business (temporary or permanent).
Some companies choose to offer benefits in the event of a layoff, which may include things such as severance pay, continuation of pay for a certain time period, and/or a streamlined hiring process if the laid off employee wishes to return in a different and available position.
There is also a Fair Labor Standards Act (FLSA) requirement, depending on the size of the business, that provides a temporary continuation of group health coverage that would otherwise be lost due to the layoff; this requirement is referred to as COBRA, and can be a good option for those who don’t have the time or means to shop around for a new health plan at time they are laid off.
Laid off workers are able to apply for unemployment; however, there are different requirements per state that determine eligibility to claim unemployment. For example, many states require (if you are able) that you must be actively looking for a new job in order to collect your weekly unemployment.
When a company decides to layoff workers, senior management has made this decision knowing that when the company opens for business again, or the recession turns around, they will have to go through a total recruiting, rehiring, and training process to get them back up and running.
Often used in reference to government workers during a shutdown, a furlough is a mandatory suspension of work without pay, but all employee benefits remain, and the worker remains an active employee of the company.
While in some instances, workers are given a start and end date to their furlough, there is no limit on how long a furlough can last.
While a layoff is an intentional and permanent change to a company’s workforce, a furlough is meant to be a quick and temporary way to cut costs related to a recession/loss of revenue and/or a temporary closure of the business.
Many seasonal businesses regularly furlough their workforce, as their services are not needed all year; examples of seasonal furloughs may be a small landscaping company, a water park in the north furloughing over the winter, or a ski resort placing its ski instructors on furlough during the warm summer months.
Pay rules differ between how non-exempt (eligible for overtime) and exempt (not eligible for overtime) employees are treated during a furlough.
Non-exempt employees will continue to be paid by the hour for any work they do, if their weekly work hours are simply reduced during the furlough, while FLSA requires that exempt employees be paid their full weekly salary if any amount of work occurred during the applicable week.
Furloughed workers may or may not apply for unemployment, depending on what state they are in, and they may or may not be free to look for work elsewhere during the furlough.
While it is not the norm, some companies may require the workers to sign a furlough contract that specifically forbids looking for other work during the time they are not working.
It is also worth noting that some contracted and unionized employees may have written terms in their contracts that prevent them from being placed on furloughs. Utilizing a furlough allows businesses to be nimble and to more quickly return to the status quo by keeping them from having to recruit and hire a new workforce when the furlough ends.
Should you choose layoffs or furloughs?
The decision of whether to lay off a portion of the workforce or put them on furlough involves more than just determining if the business is looking for a permanent or temporary change.
Using the current COVID-19 pandemic as an example, many companies have laid off employees in order to allow them to collect unemployment, with the full intention of hiring them back when the pandemic ends.
Another reason a business, particularly a smaller or midsize business, may layoff workers versus furlough them is to eliminate the cost of continuing to pay health benefits while not bringing in any revenue; this simply isn’t feasible for all businesses, especially with an open ended timeline on the return to business as usual.
Industry considerations may also dictate the decision, as certain businesses need to be able to turn back on as quickly as they turned off; an example of this would be a company in the hospitality industry, like a hotel chain or theme park.
These companies would need to have a workforce working at full capacity on day one of being back in business, and it would be nearly impossible to accomplish if they had laid off a good portion of employees.
This is again particularly applicable to the current environment, as a company may not necessarily have much notice before being allowed to reopen.
How you communicate your decision is key
Whether the decision was made to layoff or furlough, communication is key to a business successfully making it through the transition period, companies should err on the side of over-communication.
If the company is undertaking a layoff, ensure that all impacted employees are aware of how their final pay will be handled, how to access benefits continuation, and what, if any, reemployment assistance is being offered.
During a furlough, it is important that employees stay abreast of what benefits they still have access to throughout their time away from work; an example of a benefit that is particularly appropriate for furloughs occurring due to COVID-19 is telehealth.
By reminding furloughed workers that there is still value to be had by remaining an employee, a company can set itself up for success for when the business is ready to bring the workforce back.
If companies are being faced with the necessity of enacting a layoff or furlough, they should be aware of the internal and external resources that are available to assist them navigate these tricky waters.
Leaning on and trusting their internal HR teams, as well as reaching out to external consultants, can help these businesses continue to weather the situation, attain their goals, and keep moving forward.
- Amy Svenden, Executive Compensation Consultant at The POE Group. Amy Svendsen has over ten years of experience in compensation management, with an emphasis on incentive design, sales compensation plan design, and executive compensation. Prior to joining the POE Group, Amy worked in the executive compensation department of the McDonald’s Corporation and the executive compensation, Parks & Resorts compensation, and Disney Vacation Club sales planning departments at the Walt Disney Company. Connect with Amy on LinkedIn or email her directly at firstname.lastname@example.org.
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