Layoff vs. Furlough

It’s a tough decision either way, but it’s important to make the right choice for your company and employees.

By Alexandra Walsh

As the COVID-19 coronavirus continues to impact the country and millions of jobs continue to be lost, all employers are looking at options to protect their teams when they can’t work.

The ideal option is paid leave, but that is not possible for some small businesses. Furloughs, on the other hand, allow employers to cut labor costs without cutting workers loose entirely. But for some employers, layoffs will be inevitable.

Because of the continually changing state and federal directives related to COVID-19, employers should discuss this matter with a local labor law attorney before taking any adverse action against their employees.

Any type of letter or paperwork related to a furlough or temporary layoff should be created or reviewed by the employer’s labor law attorney to make sure it covers information specific to the employer and to verify compliance with any applicable federal, state, and local laws.

What’s the Difference?

There are differences between layoffs and furloughs and several things to consider before determining which one may be the best response for your company.

The term layoff is generally used to describe the termination of an employee based on no fault of the employee. A layoff is considered a loss of employment, while a furlough is a mandatory, temporary unpaid leave of absence. Reducing an employee’s salary or rate of pay without an accompanying reduction in hours would not be considered a furlough.

There are some states that define furloughs as a termination in certain circumstances. Employers should defer to the definition used by their state.

There are both company and employee considerations in determining whether a layoff or a furlough is appropriate.

When employees are furloughed, they are still employed. They may be working limited hours or not working at all for a limited time, but they are still on the employer’s payroll. Often, furloughed employees are still covered under benefit plans, and they can use any paid time off they may have.

But with a layoff—either permanent or temporary—employees are officially separated from the employer. They have no access to benefits. They are issued their COBRA continuation of benefits notice and may file for unemployment.

In some circumstances, even furloughed employees can apply for unemployment. Some states are allowing furloughed employees to collect partial unemployment benefits because of the impact of the coronavirus.

Also, some states are waiving the waiting period for laid-off employees to start collecting unemployment benefits. Plus, states are starting to temporarily relax requirements under their unemployment compensation laws so that people out of work because of the virus don’t have to document that they are looking for work.

Company Considerations

Employers should conduct a cost-benefit analysis prior to deciding how to proceed. Wages and benefits are a large portion of the analysis. In addition to cost factors, employers should consider the need for flexibility in their ability to manage their workforce and consider how to ensure that the employees return to work when the time comes.

One potential cost associated with laying off employees is having to pay employees for any accumulated paid time off in their final paycheck. While there are no federal laws requiring payment of accrued time off, many states mandate this payment. On the other hand, there is no requirement to pay out any accumulated time off for furloughed workers because they are still employed.

Employee Considerations

Generally, laid-off workers will be eligible for unemployment benefits and, depending on state law, furloughed workers may be eligible for unemployment benefits as well. Nearly all 50 states have waived required waiting periods, which allows affected employees to apply for benefits immediately.

In late March, the Coronavirus Aid, Relief, and Economic Security (CARES) Act expanding unemployment benefits was signed into law. While unemployment insurance is a joint state-federal program, it is mainly managed at the state level. However, by early April, all 50 states signed a written agreement with the Department of Labor to administer the CARES Act unemployment benefits in their respective states.

The CARES Act extended all states’ unemployment benefits (26 weeks) by an additional 13 weeks (or until December 31, 2020) and added an additional $600 to the amount received through state systems for 16 weeks, or through the end of July 2020, whichever came first.

Health insurance plan documents contain provisions that address the eligibility of employees during a variety of circumstances. As a result, there is a chance an employee could lose eligibility for health benefits because of a furlough or layoff.

However, if the current documentation does require a loss of coverage for those individuals, there is a chance that the current policy could be amended to allow for coverage for an extended period.

Employers are advised to review the term of their current policy or plan and consult with their applicable insurance carrier or stop-loss provider before making any offers of extended benefits. If a laid-off or furloughed employee does lose coverage, they should be eligible to continue coverage through COBRA.

Federal WARN Act

The federal Worker Adjustment and Retraining Notification (WARN) Act requires employers with 100 or more employees to provide at least 60 calendar days’ advance written notice of a plant closing and mass layoff affecting 50 or more employees at a single site of employment. The law includes certain exceptions, including when layoffs are a result of unforeseeable circumstances.

In addition, there are several WARN-like obligations created through state and municipal laws—Mini-WARN Acts—that have different definitions that can trigger a notice requirement where the federal notice does not.

Layoff or Furlough

While layoffs and furloughs are similar, the main difference is that layoffs tend to be permanent and furloughs tend to be temporary. Depending on your business needs, either may be an appropriate response to the COVID-19 coronavirus crisis.Here are three things to consider:

1. Furloughs are generally used for fixed periods of time. So, whether it’s better to implement a furlough or layoff may depend on how long your business operations will be affected, or how severely.

2. The federal government and many states are offering various forms of relief for small businesses during the COVID-19 crisis. If you qualify, you may be able to keep paying your workers for longer and avoid the difficult choice between furlough vs. layoff.

3. Consider your team’s preferences. Depending on your workplace, it may make sense for you to speak frankly with your workers about all the options on the table before making any final decisions. Ordinarily, a business owner would make a firm decision before speaking to the team, but these are not ordinary times.

When selecting employees for layoff or furlough, it is helpful to develop objective selection criteria, which could include:

  • Performance ratings
  • Job functions
  • Past merit bonuses
  • Job criticality
  • Education/certifications.

While objectivity is preferred, subjective criteria such as performance potential, communication skills, and leadership ability can also be helpful factors to consider. Applying subjective criteria should be done as objectively as possible.

Communication

In a layoff, the employer should communicate:

  • The layoff was a result of COVID-19
  • Information regarding any severance pay
  • Unemployment compensation.

In a furlough, the employer should communicate:

  • The furlough was a result of COVID-19
  • Expected duration of the furlough
  • Explicit instruction that unauthorized work is not permitted during the furlough.

In both situations, paid time off and benefit eligibility should be addressed. Communications should indicate whether affected employees will have access to paid time off, and if so, the procedures to be followed. If the furlough will affect employee benefits, employees must be informed of any changes to their benefits.

_____________________________

Decisions impacting employees’ work status are never easy. However, it’s important employers know all of the facts about layoffs and furloughs so that the best decision for the employer and employee can be made.

Learn More About Furlough vs. Layoff
Brendan Feheley of Kegler Brown Hill + Ritter discusses the difference between the terms furlough and layoff as well as details about the CARES Act in an NGWA: Industry Connected video. Feheley also shares tips and ideas on how to best manage your Paycheck Protection Program (PPP) loan, your staff, and best practices during these uncertain times.

Alexandra Walsh is the vice president of Association Vision, a Washington, D.C.–area communications company. She has extensive experience in management positions with a range of organizations.