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Learn what furloughs and layoffs are to determine which staff-reduction option is best for your business.
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.
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.
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:
“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.”
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.”
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:
“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:
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:
Aside from the obvious disadvantage of a temporarily limited workforce, there are three primary downsides to furloughs:
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.
Aside from cutting salary costs, there are three primary advantages to layoffs:
Aside from the obvious disadvantage of having a smaller workforce, here are three downsides of layoffs:
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:
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.”
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.