Business is business – it faces ups and downs. Some months may be good, while others may be hard. There are several ways a company or an organization copes with tough situations, one of them being layoffs. However, layoffs are a harsh way of dealing with seasonal/temporary irregularities in the financial health of the business.
To counter the permanent damage a layoff does (both to the employee and to the organization as well), furloughs are implemented. Employees on a furlough have a certain assurance of getting work back when the weather is fair.
In fact, furloughs are a gentler way of telling the employees that a company can’t afford to pay them anymore. They have actually been in practice since 2012, mostly by government organizations, as a tool to save jobs of their employees even during difficult times. Especially in the context of the pandemic, furloughs assist employees to readjust to the changing landscape of business before their employer can take them back again.
When the time comes, businesses find it hard to decide between furlough vs. layoffs. Let’s understand furloughs better by covering the following points:
- What is a Furlough?
- How Furloughs Work
- Rights of Furloughed Employees
- Furlough Vs. Layoff
- Making Informed Decisions in Furlough Vs. Layoff
What is a Furlough?
The case where an employee is suspended from work (without pay) for a definite, finite period of time specified by the employer is called a furlough. The employee can choose to get furloughed, or it could be mandatory.
Furloughs mostly occur at governmental establishments, but they happen at private establishments as well. Furloughs are a tactic or strategy deployed by organizations to initiate a cost-saving mechanism during times when they cannot afford to pay all the employees (and some need to be laid off). If a company would rather retain an employee than lay him/her off, furlough is a good method to save their salary when it can’t be paid instead of firing them altogether.
A good example is a hospitality establishment heavily dependent on the tourist season. While during the season, there is enough buzz and inflow of customers to keep a business afloat, off-season becomes harder to navigate with more employees than needed when no income is coming in. Such a scenario compels such companies to furlough the excess staff until the next season when they will be needed again. This way, there is no layoff and new hires involved (which is an additional cost).
How Furloughs Work
The basic concept behind furloughs is to temporarily reduce the manpower employed at a company to save on costs when the season is slow. Building on the trends that a company goes through over the course of a year, furloughs can work in the following different ways.
In case there is a delay in a project that cannot be avoided, your employer may ask you to take a month off (unpaid). There is a high likelihood of the project coming in, and the employer would need you on deck when that happens, which is why you may get furloughed.
In case you are employed at a company that experiences slow times every quarter, your employer would probably give you a week’s worth of unpaid vacation every quarter as a furlough to save expenses during slow times.
In an attempt to save on manhours that the workforce spends working and billing the company, the employer may announce Fridays off for the entire workforce. This way, especially the salaries of the workers who charge per day are saved.
Expenses can be saved indirectly as well. Asking employees to utilize their paid time off reduces the payoff burden on a struggling company. If your employer is asking you to utilize your paid time off, it is probably because of this.
Choosing between furloughs vs. layoff depends on many factors.
Rights of Furloughed Employees
Since furloughs technically aren’t layoffs, and the employees can come back to work when the company is in a position to pay them, there are certain rights that the employees are entitled to when furloughed. Let’s see what the laws and most contracts provision as rights for the furloughed employees.
- Provisions under the Fair Labor Standards Act
- Provisions under the Affordable Care Act
- Unemployment insurance laws of the state
- Provisions under the Equal Employment Opportunity laws
- The Worker Adjustment and Retraining Notification (WARN) Act, federal and state
- Provisions under the Family and Medical Leave Act
Considering filing for unemployment during the tenure of a furlough may or may not be permitted, depending on what the laws of the state say, and how your employer defines it. It is best to check first. It is highly likely, though, that your employer will continue to pay the health insurance premiums even during the furlough period.
Furlough Vs. Layoff
Both furloughs and layoffs are events that are triggered in a company due to an acute shortage of funds. Companies resort to using these methods in extreme cases where it is unaffordable to pay so many employees each month.
There are a few key points between furlough and layoffs that make both sound similar, but are different in concept. A layoff is a practice where a large chunk of employees working at a firm are let go at the same time. The trigger here isn't that the employees are incapable; rather, it is the firm finding it difficult to make ends meet.
You could say that a furlough is a temporary layoff wherein the company manages its expenses by “decommissioning” part of its workforce for some time. A few other major points of difference in furlough vs. layoff are as follows.
Furlough Vs. Layoff: Pay and Benefits
Layoffs are permanent. The employees are dismissed and are no longer entitled to receive compensation from the company. This event is full and final. An employee who has been laid off then initiates the closure procedure with the company, like severance pay.
On the other hand, a furloughed employee (while not receiving any salary) is technically still employed by the firm. The closure procedures need not be initiated, there is no severance pay, and the employees are usually intimated about the duration of the furlough and when they need to be back to work.
Furlough Vs. Layoff: The Worker Adjustment and Retraining Notification (WARN)
This act stipulates that the workers are entitled to get prior intimation of events like layoffs, plant shut down or decommissioning. The limit is usually set at 60 days in advance. The WARN laws differ by state, and don't apply for all businesses – only the companies that lay off more than 50 people at the same site, and are comprised of over 100 people themselves.
When planning a furlough, it is essential to check with the state-prescribed WARN to check if the term of furlough clashes with any of those mentioned in the WARN.
Furlough Vs. Layoff: Exempt Employees
When implementing a furlough, businesses usually need to check the class of employees working at their companies. It is likely that many don’t classify for the conditions that need to be met for them to be furloughed. According to the Fair Labor Standard Act, there are certain employees who do not classify for minimum wage class and don’t receive compensation for overtime. These workers (usually professionals) are the ones who receive a salary – and must still be paid, unless they are being furloughed owing to a financial shutdown at the company.
Furloughing requires checking the employee profile to see if they can actually be furloughed.
Furlough Vs. Layoff: Unemployment Insurance
Whether furloughed or laid off, both categories of unemployed workers are entitled to this benefit. However, unemployment insurance has certain requirements before it can be claimed by the unemployed. Mostly it stipulates that a worker be employed for a certain amount of time before being laid off or furloughed to be eligible for this benefit. Others require that some time should lapse before the unemployment benefits can be availed of.
However, because of the recent COVID-19 crisis, certain requirements have been put on hold owing to the survival situation – workers can get unemployment benefits (if eligible) immediately after they have been furloughed or laid off.
Furlough Vs. Layoff: Make an Informed Decision
In times of crisis, a layoff or furlough isn’t necessarily the only choice a business can go for to survive. There are other ways to get temporary relief and regroup.
- Many state governments (and even the federal government) have put in place some relief measures for small businesses during the pandemic crisis. If your business qualifies for one of these, consider acquiring it
- Bring your workers and employees on board and have an open talk with them – they may have other better options to suggest instead of furloughing
- Consider the duration of your business’s downtime. Only go for a furlough if it can cover for it effectively
Layoff Vs. Furlough isn't a very tough decision if you have all your cards sorted. Understanding the strategy of business survival comes first, since it gives you an idea of how much time is needed before the organization will be functional again. There is also the consideration factor for the workers and employees involved. Their well-being is also, to some extent, a matter for the company to think about.
How Deskera Can Assist You?
As a business, you must be diligent with employee payroll system. Deskera People allows you to conveniently manage payroll, leave, attendance, and other expenses. Generating payslips for your employees is now easy as the platform also digitizes and automates HR processes.
When an employee is suspended from work (without pay) for a definite, finite period of time specified by the employer it is called a furlough. The workers remain suspended without pay for a fixed amount of time after which they can return to work like usual. It is implemented to lessen the financial burden on a company by removing the duty to pay the workers for their hours of work.
While layoffs are permanent, furloughs give temporary relief to the financials of a company. Certain employees, however are exempt from furloughs, which a company needs to check before implementing it. The conditions of the WARN also apply to furloughing, and the company implementing it must be familiar with it beforehand.
There are other alternatives that are available to small businesses for financial relief, like grants or financial aid by governments. Checking to see if a business is eligible for these is better than sending employees home - unless there is no other choice.