Furloughs and Layoffs—Knowing the Difference

Deciding to reduce your employee headcount is never easy. There are multiple ways that you can cut back the number of employees you have on the payroll (and subsequently their benefits) but it is important to determine what style of reduction is appropriate for your business.

There are key differences between layoffs and furloughs and approaches such as hiring freezes that could prevent them. And depending on your business model, the right approach for your organization will be vastly different from other companies. 

What are Furloughs?

Furloughs are periods where employees are not working nor are they getting paid. Essentially, workers are placed on temporary unpaid leave until the business reopens or returns to a level where their work can be compensated. Oftentimes, furloughed employees retain their “employed” status and continue to receive their benefits.

What Are Layoffs?

Whereas furloughs are temporary arrangements, layoffs are permanent. Layoffs are mass firings of employees. A need to cut expenses typically not because of employee performance causes layoffs in this sense. Unlike furloughed employees, laid-off employees no longer have access to their employee benefits, though they typically are entitled to unemployment assistance.

How Furloughs Can Save Employers Money

Furloughs allow a company to retain top talent in anticipation of a return in revenue (or as you might be preparing for, an economic upturn). One form of a furlough is reduced work hours. While not a true furlough, reducing the amount of time that an employee works daily or weekly or even keeping the office open for four days instead of five can help. However, there are payroll legalities that you will need to address if you choose this route. 

If you opt for a furlough, your company can save on payroll costs though many times you still will pay for benefits. There are many considerations to keep in mind, however.

Employees cannot work for you during a furlough. if they check email, voicemail, or any other small task, then you are obligated to pay their full salary. However, employees may use vacation time or accrued paid time off during a furlough to receive compensation. Sometimes employers require this to reduce their liability. Check with your state laws that impact this option.

Even more, depending on your rules (or if you have a contract or union employees) some employees may even be allowed to work for other businesses while on furlough from your company.

While many small or even mid-size businesses do not participate in collective bargaining, a furlough can impact this so, care is to be taken when negotiating an agreement. Also, when it comes to benefits, furloughs will impact 401K plans, so proper education for employees is critical. 

As with any change in employment status, employers must provide advance notice to employees. Even if you do not know all of the details, state laws cover how you need to notify employees. Additionally, the Federal Worker Adjustment and Retraining Notification Act (WARN Act) needs to be referenced so you are in compliance. 

From a human standpoint, there are ways you can lessen the impact on an individual employee, such as potentially spreading the income lost during a furlough over several pay periods and providing flexibility if possible. If able, work with the employee to discuss when a furlough would be beneficial to accommodate vacations, childcare needs, or other obligations. Finally, while it might not be well received, you could liken this to the benefit of taking a “vacation.” This is a delicate area to bring up, as it is more forced than enjoyed, but highlighting health benefits ahead of potential furloughs can help paint a positive mental health picture. 

Potential Legal Concerns

Quite simply, this is a delicate matter and there are potential legal concerns when considering furloughs. Those include wage-an-hour concerns, discrimination concerns, WARN Act compliance, labor relations concerns, and benefits concerns.  Have your labor attorney review your furlough process before implementing it.

Layoffs and the Right Approach

No matter why you need to lay off employees, it is important to handle them carefully and tactfully. This can reduce the likelihood of lawsuits and help maintain employee morale and retain other employees. 

Layoffs are more straightforward than furloughs, though there are still many things to consider. First, educate yourself on employment laws related to layoffs or general terminations in your state. There are federal and state laws that will impact this and you should review policies with your labor counsel.

When offering severance packages, make sure that they are related to employees’ titles and lengths of service. Universal packages likely will not suit everyone’s situation within your company. That is one way to treat these employees with respect. It carries over to while they are gathering personal belongings and if you need to escort them out of the building. Remember, they are human and just experienced a life-altering event. As such, it is imperative that no communications—verbal or written—blame employees for things that they did or did not do or make accusations to justify the layoffs.

Keep the time period in which you are conducting layoffs as short as possible. This will help other employees feel more secure in their positions and help return morale to pre-layoff levels as quickly as possible. Avoiding rumors among employees of imminent layoffs is something that you want to work hard to achieve. Additionally, high-ranking employees should take cuts as well to show that everyone is working toward the same goal and is invested in the successful future of the company.

Finally, again remember that these are humans. These are life-altering events even for those who remain at the company. Do not tell employees not to worry about the decision. Acknowledge their feelings and provide what support you can, even in light of reducing costs. Job counseling services, resume writing guidance, and job search assistance for those being laid off can be offered in a polite way. And always address the concerns of your remaining employees and keep open lines of communication between them and HR.

Hiring Freezes

Hiring freezes are a potential way to prevent layoffs or furloughs. We have some great information on hiring freezes and how they can be a proactive approach available on our website. Download this content to help plan ahead and maintain employee understanding of their job roles and compensation during this time as they might be taking on additional responsibilities.