Downsizing your company is never easy, especially in times of financial hardship. However, employee salaries are one of the highest overhead costs for businesses, so furloughing or laying off employees may be your best (or only) option in a financial crisis.
Before going down this path, learn the differences between furloughs and layoffs to determine the better staff-reduction solution for your business.
Furlough vs. layoff
In times of need, companies often resort to furloughing or laying off employees to cut costs. Furloughs and layoffs may seem like the same thing, but their requirements and effects are very different.
What is a furlough?
A furlough is a temporary leave of absence because of a company’s or employee’s needs. When a company furloughs an employee, the assumption is that they’ll eventually resume their regular work schedule. During the furlough, the employee’s hours may be significantly reduced, or they may be required to take an unpaid leave of absence (as opposed to a paid leave).
Hormazd Dalal, chief financial officer at Benefit Programs Administration, said furloughed employees might be required to do any of the below actions:
- Take a specific number of unpaid hours off over several weeks.
- Take a specified number of unpaid days or hours throughout the year.
- Take a single block of unpaid time off.
“For example, an employer may furlough its nonexempt employees one day a week for the remainder of the year and pay them for only 32 hours instead of their normal 40 hours each week,” Dalal explained. “Another example of furlough is to require all employees to take several weeks of unpaid leave sometime during the year.”
What is a layoff?
A layoff is essentially a termination, often due to a lack of available work. When workers are laid off, their ties with the company are severed. While a layoff is an employee dismissal, it’s usually grouped separately from firing employees for poor performance or any other reason.
Although permanent layoffs can be due to financial struggle or economic disruption (e.g., the coronavirus pandemic), temporary layoffs are common in specific industries.
“Some companies and industries (usually those that are seasonal) will do temporary layoffs, meaning they intend to rehire the same employees in the relatively near future – generally within six months,” said Kara Govro, senior legal analyst at Mineral. “Temporary layoffs are appropriate for relatively short-term slowdowns or closures, but are ultimately just terminations that are likely to be followed by rehire.”
Before rehiring a laid-off employee, check their HR file to see if they’ve been classified as “eligible for rehire” or “not eligible for rehire.”
How does a furlough work?
During a furlough, employees must take unpaid leave or temporarily reduce their work hours. Furloughs often occur when a company does not have enough money to make payroll (e.g., during a state of emergency) or when there’s not enough work for their employees (e.g., during a partial organization shutdown).
During a furlough, an employee maintains their relationship with the company in anticipation of eventually returning to their regular work schedule.
Before enacting a furlough, consider the local, state and federal laws that affect your company in this situation. Karen Stafford, employee experience director at Imagine, listed five key questions to guide your company through the furlough process:
- How will you decide which positions are affected?
- How will you select who is affected?
- How will you communicate the decision to those affected, and then to those who are losing teammates?
- How will you determine when and if to recall employees?
- How will you determine whom to recall first?
“It is also helpful to think through these considerations and establish a plan that complies with the relevant laws prohibiting discrimination before taking action,” said Stafford. “That way, once you are in the throes of the process, you can reflect on your plan to help guide your decision-making when and if the situation becomes challenging or emotional.”
Here’s what employers should do when furloughing employees:
- Notify furloughed employees about their benefits. While employees are typically entitled to their health insurance and other employee benefits while furloughed, this is not always the case. If furloughed employees’ reduced hours make them ineligible for specific benefits, inform them immediately. You should also give them notice of their right to file for unemployment insurance if necessary.
- Keep furloughed employees informed. Govro said employers must keep furloughed employees informed about return-to-work dates, changes to the business, requirements or restrictions on return, and any other information that could help them plan for the future.
- Notify them as soon as possible if the furlough becomes a layoff. A furloughed employee might eventually be laid off, in which case you should clearly communicate this decision as soon as possible. “From an ethical and best-practice standpoint, employers have the responsibility to let employees know if they have decided not to bring them back,” Govro said. “Stringing furloughed employees along because there is a slim chance you will need them again is unfair and likely to create bad feelings that may surface later, either on the internet or in a lawsuit.”
To announce employee departures, whether because of a layoff or furlough, send a brief but informative email to the rest of the team with specifics on the departure date and new workflow protocols.
Pros and cons of furloughing employees
Ensure you understand the advantages and drawbacks – for businesses and employees – of furloughing staff. Aside from cutting costs, these are the primary benefits of furloughs:
- Furloughs reduce the need to recruit. A furlough is meant to be temporary, meaning affected employees will likely return to their regular work duties at some point. This can save you time and money on recruiting, hiring and training programs for new employees when you resume normal business operations.
- Furloughed employees may receive continued benefits. Depending on the circumstances, furloughed employees may be able to keep using their benefits coverage and also collect unemployment insurance for the reduction in their hours.
- Employers and employees can look forward to the return. Although furloughs are often associated with difficult times, it might give you peace of mind to know you’ll still have competent employees when you’re ready to resume business as usual. It can also give employees some comfort to know they have a position to return to (and perhaps back pay) once the furlough is over.
Aside from the obvious disadvantage of a temporarily limited workforce, there are three primary downsides to furloughs:
- The furlough process can be tricky to navigate. Some states have strict guidelines about what constitutes a furlough vs. termination and require businesses to pay vacation time. You may also incur some continued employment-related expenses for furloughed employees. Additionally, you must maintain clear communication with furloughed employees and possibly the state unemployment insurance department.
- Valuable employees might quit. During a furlough (especially an extended one), employees may seek employment elsewhere. Although the goal is to retain top talent through a furlough and bring them back when it ends, nothing is stopping them from looking for other jobs in the meantime.
- Furloughs can lower employee morale. When you furlough employees, you may see a decline in company morale. Furloughs are often associated with unstable environments, which can put employees on edge. Subsequently, when you bring furloughed employees back on the schedule full time, you may notice a decline in their job performance or employee engagement.
How does a layoff work?
Laying off employees is less complex than furloughing them. A layoff is essentially an employee termination, meaning the company completely severs ties with the employee.
However, Govro said a layoff differs from a typical termination in that the employer and employee acknowledge that the end of the employment relationship is due to a lack of work or funds and is not a case of being fired for cause.
“Employers doing a large layoff (relative to their size) will also need to consider state and federal WARN laws, which require a certain amount of notice to employees and state agencies prior to the layoff,” said Govro.
Some industries, including restaurants and seasonal businesses (like tourist attractions or ski resorts), lay off their employees with the intent to rehire them eventually. In this case, layoffs may be considered temporary and typically only last up to six months. Although an employer may intend to rehire seasonally laid-off employees, all parties must understand that this is not guaranteed.
In addition to laying off employees, seasonal businesses must find other ways to minimize or cut business expenses in the offseason or expand sales into slow periods.
Pros and cons of laying off employees
Aside from cutting salary costs, there are three primary advantages to layoffs:
- Layoffs can save your business money. Laying off employees can save your business more than just the money you were paying for salaries. Following a layoff, the employer is not responsible for providing the terminated employees with benefits and insurance, as they would with a furlough.
- Laid-off employees get a clean break. Govro said layoffs make it clear to the employee that it’s time to move on and look for new employment, whereas a furlough may give them false hope and delay their job search. That clarity can be better for the employee in the long run.
- Layoffs can be better for your business reputation. The employee’s clean break can also be positive for your company’s reputation. Treating your employees with respect when you lay them off can foster more goodwill than leading an employee on with a furlough that never ends (or that ends in a layoff).
Aside from the obvious disadvantage of having a smaller workforce, here are three downsides of layoffs:
- Terminating, recruiting and hiring employees is expensive. Firing and hiring employees can cost your business a lot of time and money. Govro said replacing an employee generally costs between 20% and 200% of their yearly pay, which is a strong motivation to avoid high employee turnover rates. Compare how much you will save by laying off employees to how much it will cost to replace them if or when you are ready to increase your workforce.
- You may permanently lose valuable employees. Unlike a furlough, a layoff does not afford the luxury of retaining your employees. If you lay off top talent, you lose out on their valuable expertise and company knowledge.
- Layoffs can lower company morale. Layoffs are similar to furloughs in that you will likely encounter lower company morale. The employees who aren’t laid off often have to take on a bigger workload, leading to workplace burnout. Stafford also said that the survivor’s guilt of those who did not lose their job can be weighty, impacting the organization long after the decision is made and communicated.
Choosing between furloughing and laying off employees
Although there is often no clear answer as to whether an employer should furlough or lay off employees, some businesses are restricted in their choices. Dalal gave some examples:
- For small businesses that employ union employees under a collective bargaining agreement (CBA), the release of employees for any reason – furlough, layoff or straightforward dismissal – is governed by several rules in the CBA.
- Employees of a major corporation – one that either cannot lose market share or is part of the national security apparatus – are much more likely to be furloughed, such as when a rotating employee schedule might open up more work while also easing financial burdens.
Assuming your business has the freedom to choose between furloughs and layoffs, you’ll need to evaluate several factors to determine what works best for your organization and current situation. Govro said employers must weigh the costs of each choice against what is best for their employees (both those being laid off and those who stay behind) as well as the impact of either choice on their reputation.
“It is a delicate balance to weigh the needs of the business in the moment with the business you envision for the future,” Stafford added. “Having a clear picture of what’s needed today for your business to survive and laying it out on the backdrop of what you want to achieve long-term can help.”
A choice with business and human implications
Furloughs and layoffs have advantages and disadvantages. It’s essential to plan for your business’s present and potential needs and consider your employees’ best interests. Understanding the potential impact of furloughs and layoffs will help clarify which option is better in your case.
Ross Mudrick contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.