Short on Funds? When Furloughs Make Sense

July 29, 2020

Furloughs — mandatory, temporary suspensions from work without pay — have allowed many employers to hold on to their businesses during the coronavirus pandemic.

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If you were lucky enough to avoid having to furlough your employees, congratulations! But should you find yourself needing to furlough employees in the future, it’s important to understand when furloughs are the optimum choice over other options and how to implement a furlough that’s in compliance with the law.

When Furloughs Make Sense

If you lack the resources to pay your employees because of a business slowdown or an economic downturn, you may want to furlough them; that is, place them on leave without pay.

Furloughs are ordinarily for a certain number of unpaid days or hours. For example, nonexempt employees might be paid to work only 32 hours instead of their normal 40 hours each week. Or employees might be furloughed until a certain event has passed, such as a pandemic. Other options would be to rotate workers or furlough only those workers in non-essential functions

How a Furlough Differs from a Layoff

The biggest difference between a furlough and a layoff is that a furlough is intended to be temporary, but a layoff is permanent. A layoff allows a company to cut expenditures quickly and save salary and benefit costs. However, a layoff can be a more costly option if an employer intends or later discovers the need to hire staff again since recruiting and training costs must be incurred.

Compliance Rules

If you decide that furloughing your employees is the best option for your business, there are certain rules you must follow:

    Employees must perform no work: It is not legal for you to require a furloughed employee to do any work at all. That includes making phone calls or answering mail. If a salaried employee does any work at all you must pay them the equivalent of their salary for the entire day.

    You must allow employees to seek employment: Although furloughed employees stay on the organization’s books during the furlough, they may look for a new job during that time. One of the downsides to a furlough is that you could lose some of your top talent.

    Furloughed employees can take unemployment benefits for the time they aren’t paid: However, if you pay them back pay for their time away from work, they will probably have to pay back any unemployment benefits they collected. Whether they can collect unemployment at all depends on each state’s rules for unemployment payments. Some states require unemployment applicants to show that they are actively searching for a job. This type of requirement disqualifies a furloughed employee.

    Companies of a certain size must give advanced notice: The Worker Adjustment and Retraining Notification (WARN) Act requires companies that employ more than 100 full-time workers (or part-time workers who work more than 4,000 hours a week in aggregate) to provide 60 days written notice before a layoff, plant closure or furlough that would affect 50 or more employees and one-third of the worksite’s total workforce at a single site or 500 or more employees at a single site. This would apply when there is a layoff or discharge of more than 6 months or a 50 percent reduction in hours in each of the 6 preceding months. The Act makes exceptions for faltering companies, unforeseen business circumstances and natural disasters. In those cases, the Act requires as much notice to the employees as possible.

    Exempt employees might become non-exempt: If you decide to reduce your salaried workers’ pay, keep in mind doing so might trigger the loss of exempt status, which could make those employees eligible for overtime pay.