A furlough is involuntary time off that may be required by employers during a time of economic crisis, allowing a company to rapidly reduce expenses. While on furlough, employees retain their benefits but usually do not get paid. Furloughs can range from just a few days per week or sometimes even weeks or months at a time.
To better understand what a furlough is, how it works, and how you can implement it at your business, keep reading. Or use the links below to learn about a specific aspect of furloughs.
- What is a furlough?
- Furlough vs. layoff
- Furlough pay and COVID-19
- Furlough unemployment benefits
- Why would a company choose to furlough employees?
- Why would a company choose to lay off employees?
- Furloughs for exempt employees
- Furlough laws
- Implementing employee furlough
- How to stay compliant
- How long can a company furlough employees?
Furlough is a temporary leave of absence that is required by the employer. When employees are put on furlough, there is an expectation that they will return to their full capacity eventually. Furlough is an alternative to letting go of employees. This option allows them to remain employees, with their associated benefits, but without their regular pay.
Some reasons a company may furlough employees include:
- Government shutdown
- Recession—like the one seen at the height of the coronavirus pandemic
- Seasonal factors
- Business reorganization
- Closure of certain offices, plants, etc.
While on furlough, individuals typically retain their employee benefits and insurance because they are still technically employed.
A layoff is a termination of employment due to reasons that are not the fault of the employee. Depending on the circumstances surrounding layoffs, they may be temporary or permanent. Layoffs are often implemented when businesses downsize. Unlike a furlough, individuals who are laid off are no longer considered employees.
When determining whether layoffs or furloughs are the better solution for your business, consider the following factors:
- How long you think the financial predicament will last. If it’s not realistic that you can bring employees back in the foreseeable future, layoffs may be a better business move.
- Whether you will realistically have a need for these workers in the future. If you’re able to function without these employees or the department, it may not be advisable to bring them back.
- If you’re financially prepared to pay out paid time off (PTO) or vacation. When you lay off employees, you have to pay out their PTO on their final check. This may factor into your decision if you’re in severe financial trouble and need to deal with a large number of employees.
Each business’s situation is different, so only you can know which course of action is best. However, furloughs should be thoroughly considered—especially if it’s pandemic related—because furloughs allow you to retain the skilled workforce you’ve built when things return to normal.
Furloughs have been a widespread response to the effect COVID-19 has had on the economy. Businesses across virtually all industries have had to furlough employees—from airlines to local restaurants—because of COVID-19.
In some cases, employers and government agencies have scheduled furloughs for a few days a month, reducing employees’ overall pay. In other cases, furloughs may be more extensive. For example, the airline industry has furloughed a large portion of their workforce for a period of several months. However, at both ends of the spectrum, the intent is to bring employees back on full time once things stabilize.
During the pandemic, employees who are furloughed do not receive pay, except for the actual hours they work, if any. However, furloughed employees may be eligible for unemployment based on the CARES Act.
As we mentioned, furloughed employees who may not typically be eligible for unemployment insurance (UI) may be able to receive assistance if their furlough was related to COVID-19. Unemployment is only applicable as long as the employer is closed; once they’re recalled for work, unemployment stops.
According to the Society for Human Resource Management, a reduction in hours of 20% or more is usually grounds for collecting unemployment compensation. However, each state dictates its own definition of partial employment, which will determine eligibility for state unemployment benefits. Here are a few examples of how that may work:
- California: UI applies when wages are “reduced by $25 or 25% of the wages payable, whichever is greater, [and] do not equal or exceed the weekly benefit amount.”
- Tennessee: If employees are working a reduced number of hours and their pay becomes less than what their weekly UI benefit amount would be, they may be eligible. The maximum weekly benefit amount in Tennessee is $275, so if they’re making less than $275/week, they likely qualify.
- North Carolina: Employees must be making less than the weekly benefit amount they’d receive. If they make more than 20% of their weekly benefit amount, the benefits will be reduced dollar-per-dollar over that amount.
Furloughs are typically enacted when a company is facing a financial struggle that it believes will be short term. Implementing a furlough allows you to retain the workforce that you’ve invested in, while immediately saving money on payroll costs. If you’re considering furloughing employees, review the following pros and cons before making your decision:
- Quickly cut expenses: The primary benefit of furloughing employees is saving payroll costs right now when you need to most.
- Avoid layoffs: If you’ve cultivated the ideal team for your business, you probably don’t want to lose them. Furloughs allow you to avoid full-on layoffs and hopefully retain as many employees as possible.
- Establish the furlough guidelines based on your needs: As the employer, you have the freedom to dictate the furlough parameters. This can be as minimal as requiring employees to cut just a few days a month or one week per month, to an undefined amount of time.
- Furloughs allow you to accommodate for slow seasons: Some businesses have regular furloughs according to their off-season, when they may not need as many or any employees.
- Minimal effort required to bring employees back: Since furloughed employees remain employed, you can easily bring them back to work without the administrative work necessary for laid off employees.
- Risk of losing employees: While employees are still technically employed with your company, they may seek out other opportunities in the meantime. This means that when you’re ready to call employees back from furlough, you may find yourself needing to hire replacements.
- Must maintain contact with furloughed employees: Since furloughed individuals are still employed, it’s your duty to remain in contact with them to provide updates and answer questions. While this isn’t necessarily difficult, it does require your time and attention.
- Employees may have a hard time transitioning back to full-time: Going from a small portion of their workload—or no work at all—to working full time may be difficult for some. In this transition period, you may have to grapple with reduced productivity.
While there are some challenges to face, furloughing your employees could be beneficial to your business in the long run.
The hospitality industry is an example of how furloughs have been successfully implemented during COVID-19. Since many bars and restaurants have gone from open, to takeout only, to outdoor seating and takeout—and back—several times, they’ve turned to furloughs. Working staff a few hours a week for pickups has helped restaurants keep their staff intact. This way, they will be able to return their staff to work ASAP once restrictions are lifted and things go back to business as usual.
Hotels are another example of COVID-related furloughs. While many hotels and resorts have stayed open, they haven’t needed to operate at full staff. After all, many of their amenities, like pools, spas, and salons, have had to close as a result of COVID restrictions. However, once travel picks back up, they will need to get their services up and running at full capacity quickly to accommodate the increase in guests.
Furloughs are not the solution for every business. Instead, a layoff may be a better option. Companies may choose to lay off employees if they have little or no intent of bringing employees back. Examples of when a layoff may be more appropriate include when a department is being consolidated or a division is being closed.
Here are some pros and cons of layoffs:
- Terminates the employer-employee relationship, so you no longer have obligations to them.
- No longer have to pay for benefits. Since employees are terminated, you’re no longer on the hook for paying for a portion of their benefits.
- Unlikely that employees will be willing to rejoin your company if you decide to expand once financial trouble has been managed.
- More difficult to bring employees back.
- May require severance pay, paid-out PTO, and other immediate costs.
If you think your company is going to need to operate at a lower staff capacity for several months or longer, a layoff could be the recommended course of action.
You may need to furlough exempt employees if they make up the majority of your employees, or if those individuals are nonessential at the moment. However, furloughing exempt employees is slightly more complicated. To help you figure out how to structure furloughs without violating labor laws, review the factors that should be considered below.
If an exempt employee works any hours during a week period, they must be compensated fully for that week. So, to help you save money, you will need to furlough exempt employees in full-week increments. If an exempt employee does not work any hours in a workweek, you are not obligated to pay them.
You may be in a position where there’s a significant lack of work for one department, meaning people are getting paid to do virtually nothing. If you’re already struggling financially, cutting hours for this team may be a constructive way to immediately cut costs.
You can reduce an exempt employee’s hours, but if you want to use it as a way to reduce their pay, you need to tread carefully. Otherwise, you may be at risk of violating wage and hour laws. If you’re going to reduce an exempt employee’s hours, you need to think long term.
For example, say you’re going to have an exempt employee start working three days instead of five. In turn, you want to cut their pay, respectively, to 60% of what they’re currently making. To do this without violating labor laws, you’ll need to maintain this work level for a reasonable amount of time, not just a single pay period.
Adjusting their hours week by week to accommodate a shifting workload isn’t acceptable in the eyes of the Department of Labor. However, reducing an exempt employee’s hours and pay for an extended period of time—preferably a few months—is, as long as there’s solid reasoning.
It can be tempting to simply reduce the pay of your salaried employees based on the work demands for positions from week to week. However, this is not allowed. To remain in compliance with Fair Labor Standards Act (FLSA) requirements, an exempt employee must still be paid at least $684 per week on a “salary” basis. This prevents the employee from losing their exempt status.
That said, in the case of an economic downturn, employers may reduce furlough pay for exempt employees. To remain in compliance, pay needs to be reduced with the long term in mind. In other words, you should plan to reduce their salary in a way that can be sustained until the financial health of the company is restored.
For example, if an employee’s salary is $1,500 per week, reducing it to $1,300 per week for the foreseeable future would be allowed. However, continuously adjusting their salary based on your demand for their work is not.
Voluntary time off
Exempt employees can decide to take voluntary time off without pay during a furlough period. As long as it is voluntary, these days off can be deducted from their usual pay.
During a furlough period, some employees may choose to take unpaid leave to enjoy some extra freedom. Since their work schedule may be inconsistent, they may take this opportunity to travel or focus on personal matters. After all, it isn’t common that individuals can take extended time off under regular circumstances.
Before you take any steps to furlough your employees, you should familiarize yourself with the laws that stipulate furlough terms. Here are a few of the most pertinent laws you should have a working understanding of when implementing furloughs:
FLSA is a federal law that sets the standards for minimum wage, overtime eligibility, and other labor laws pertaining to exempt and nonexempt employees. In the simplest terms, the FLSA sets regulations for how employees are classified and compensated. As we mentioned earlier, the FLSA dictates the rules for paying furloughed employees.
2. Collective bargaining
Collective bargaining refers to the stipulations for negotiating with unions. Collective bargaining is protected under the National Labor Relations Act (NLRA) and requires employers to negotiate all aspects of furloughs with unions.
3. Employee benefits
In regard to most employee benefits, it’s up to the employer whether they’re continued for furloughed employees. However, health insurance may be a different story. Under the Affordable Care Act (ACA), employers are required to provide affordable health care coverage. However, this requirement only pertains to employees who are considered full time—130 hours per month—under the stability period. The stability period refers to how long you require employees to work before they qualify for health care benefits. This health care coverage requirement only applies to companies with 50 or more employees.
According to a survey by the Commonwealth Fund, 41% of respondents reported that they had health care coverage through a lost or furloughed job.
The Family and Medical Leave Act (FMLA) allows qualifying employees to take unpaid, job-protected leave for certain medical or family-related reasons. However, if an employee is furloughed, they are not entitled to take family or medical leave during that time. It’s important to note that if an employee is currently using family or medical leave, it cannot be a deciding factor in furloughing them.
The Families First Coronavirus Response Act (FFCRA) dictates rules for employees being able to take sick leave or family or medical leave related to COVID-19. However, furloughed workers are not allowed to take advantage of these benefits.
The U.S. Equal Employment Opportunity Commission (EEOC) protects employees from being discriminated against based on their race, color, religion, sex, national origin, age (40 or older), disability, or genetic information. If you’re going to implement a reduction in force, you will need to ensure you are not targeting one specific group. For example, the majority of individuals furloughed should not all be women or over the age of 40.
7. WARN Act
The Worker Adjustment and Retraining Notification (WARN) Act protects workers’ rights to an advanced notice of plant closure or mass layoffs. The WARN Act also applies to a reduction of hours by 50% or more, or a temporary layoff that lasts six months or longer. So, if you’re planning a long-term furlough, you will need to comply with the WARN Act and provide at least a 60-day notice.
While these laws are a good start toward limiting your liability, you should consult with an HR professional when considering furlough. If you don’t have one on your team, QuickBooks HR services will allow you to connect with an HR expert who can help.
Here are a few steps you can take to ensure the furlough process goes as smoothly as possible:
- Establish a furlough policy that’s in compliance with the above laws.
- Notify employees of intent to furlough.
- Provide details of when furlough will start and what it will entail—for example, what the furlough days will be each month.
- Keep in contact with employees, providing updates regarding the furlough.
- Give sufficient notice when ending the furlough.
- Ensure employees have the resource they need to successfully transition back into full-time work.
Remaining compliant with furlough laws is important. Otherwise, you could be facing fines or lawsuits. Understanding all of the laws mentioned above and ensuring you remain on top of any changes can be challenging when you already have so much on your plate. However, it’s of the utmost importance that you do.
Instead of allowing that responsibility to fall on you as the business owner, consider consulting with HR experts. One way to do this is with HR services. HR services allow you to get external help with HR compliance and management. With QuickBooks HR services, you get assistance from HR experts as well as access to helpful HR tools and resources. An HR professional can provide guidance when structuring and implementing furloughs at your business.
There is no specific limit to how long you can furlough employees. However, if you’re planning to furlough employees for longer than several months, it may be in your best interest to lay off employees instead. A layoff may be better than a long-term furlough both for financial reasons and in regard to liability.
Furloughing your employees can be a good alternative to layoffs, as long as it’s handled correctly. With these guidelines in mind, you can implement a furlough policy that complies with your employees’ rights and protects your business. When in doubt, using QuickBooks HR services to consult with an HR expert can help you ensure that you’re taking the right steps.
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