A furlough is an unpaid temporary leave of absence, reduction in hours, or cut in wages required by a company of some or all of its employees. Its purpose is to keep members of staff on the books while a business adjusts to reduced demand for its services, deals with a public health issue, or navigates a cash flow issue.
A company may choose to furlough employees for reasons such as the following.
- Managing seasonal demand
- Reconciling budgets
- Global health emergencies (such as Covid-19)
- A downturn in the global economy
- Health and safety concerns
- A reduction in supplies necessary for the business’s operation
Once your company has put an employee on furlough, you can bring them back at any time. However, an employee on furlough is under no obligation to return to work with your organization and is entitled to seek another job with a different company if they wish.
As an employer, you don’t need to specify the length of time for which your members of staff will be on furlough, but it’s certainly polite to do so.
Different types of furlough
Furloughs fall into two main categories.
This type of furlough typically occurs when a business lacks the cash flow to pay its employees. Shutdown furloughs are particularly common in seasonal industries, such as the construction industry, in which employees are unable to work outside during the winter months.
Often planned in advance, administrative furloughs are typically used to keep members of staff employed through periods of change. For example, a business may implement an administrative furlough if its offices are temporarily closed.
What’s the difference between a furlough and a layoff?
When you furlough an employee, they may be out of work for a set period of time, but they are still technically employed by your company and do not qualify for severance pay. You may also still provide them benefits such as health insurance, depending on your state’s rules and the benefits packages your company uses.
In contrast, a layoff involves the full termination of any employment contract and is typically undertaken when a business lacks adequate work or funds to pay staff. When a company lays off its staff, there is usually no realistic prospect of this situation being remedied in the near future. Likewise, a layoff may occur if two roles are combined or if there is no longer a requirement for the role an employee previously performed.
With a layoff, a former employee will no longer receive any benefits from the company. However, laid-off employees will still be able to collect any severance packages or other benefits they’re guaranteed by company policy or their employment contracts.
Advantages of furloughs
If your business is experiencing difficulties, furloughs can be an extremely useful strategy, as they provide the following benefits.
By placing your employees on unpaid leave, you can enjoy increased flexibility during periods of uncertainty for your business.
Provides time for strategic planning
If your organization needs to pivot in order to succeed, a period of employee furloughs can provide you with time to reevaluate your company’s goals and key offerings.
Retaining your workforce
When a furloughed employee returns to work, they will typically retain the same position and job title they held previously. By technically continuing to employ your current workforce, you won’t need to hire or train new staff when you are ready to resume normal business operations.
Disadvantages of furloughs
Of course, putting some or all of your employees on furlough also includes several downsides.
You risk losing top talent
As mentioned earlier, there is no guarantee that a member of staff will return to work. As a result, you may need to meet the cost of recruiting and training new members of staff should some of your current employees move on.
Although a business can call its furloughed employees at any time, reopening or relaunching a company is rarely straightforward and can take time. As a result, you may lose momentum on any projects that were interrupted by the furlough.
For your employee, the experience of temporarily being unable to work can dampen enthusiasm and reduce loyalty toward your company. Once your employees return to work, you may notice a decline in morale, which can ultimately hit productivity and profits.
Furloughs and the law
While it is perfectly within the law to place employees on furlough, you’ll need to do your research before you begin the process. The two main pieces of Federal legislation to consider in the US are the Work Adjustment and Retraining Notification (WARN) and The Age Discrimination in Employment Act.
Under WARN, employers with 100 or more full-time workers are required to provide at least 60 days’ notice of plant closures or mass layoffs affecting 50 or more employees on a single site of employment. If you fail to provide the required notice, your employees are legally entitled to sue you to obtain 60 days of back pay and benefits.
The Age Discrimination in Employment Act prevents unfair or discriminatory practices against those aged 40 or over when making decisions about the workforce. This includes the decision of whom to furlough.
Furthermore, the US Equal Opportunity Commission states that it is illegal to select employees for hiring or layoffs based on factors such as race, nationality, disability, gender, or religion.
If your workforce belongs to a union, the National Labor Relations Act also states that you will need to negotiate with the union under collective bargaining terms when planning a furlough.
As laws vary by state in the US, you should also check the regulations in your area before placing any of your employees on furlough.
Although you will not need to pay employees wages during periods of furlough, these workers may still qualify for benefits such as health and life insurance while also being able to claim unemployment insurance. You should check the specific terms of your benefit plans carefully to determine whether coverage will continue during furlough. If there has simply been a reduction in your employees’ hours during the furlough, there may be no loss of health coverage.
Note that your furloughed employees also cannot cash out any vacation time they have previously accrued to use during the leave.
Furloughing FLSA non-exempt vs. FLSA-exempt workers
The Fair Labor Standards Act (FLSA) also affects furlough policies. Both FLSA non-exempt employees (typically hourly workers) and FLSA-exempt employees (typically salaried workers) can be placed on furlough.
When a non-exempt worker is placed on furlough, this will normally involve reducing the number of hours they are contracted to work. They must still be paid for any hours they work.
As salaried employees are paid the same amount regardless of how many hours they work, furloughing exempt workers normally involves either temporarily reducing their salaries or placing them on a zero-hour contract.
It is illegal to require FLSA-exempt employees to do any work during a furlough. Even if an individual performs a minor task such as answering a work-related call, this may mean that you need to pay them for this work. In fact, the US Department of Labor states that an employer must pay an exempt employee a full week’s salary “free and clear” for any week in which they do any work at all, regardless of the number of days or hours worked.
Bearing all these factors in mind, it could be worth seeking legal advice before beginning the furlough process.
Tips for managing a furlough period
Although placing employees on unpaid leave is often difficult for both members of staff and HR departments, there are steps you can take to ensure the process runs more smoothly.
If you want to maintain a strong relationship with your employees, try to be clear and open during the furlough process. Your employees will understandably have concerns over how long they will be unable to work. Wherever possible, provide your members of staff with an accurate time frame.
Your employees may also want clarification about their eligibility for workplace benefits during unpaid leave. Again, try to provide this information as early as possible during the furlough process.
Be as fair as possible
As mentioned earlier, it is illegal to base your decision about which employees to furlough on discriminatory factors personal to the employee. Some businesses will even rotate which employees are on leave during certain periods to make the situation fairer for employees.
Encourage social connections
While an employee is on furlough, you should continue to involve them in any workplace social events. As long as this is done with sensitivity, it can remind these individuals that they remain part of your team.
Show your appreciation
As well as being respectful to your employees during any periods of unpaid leave, it can help to demonstrate that you recognize their hard work and the important role they play in your organization. Doing so can make it clear that you see all of your employees as part of your company’s future.
Although placing employees on furlough can provide a business with valuable breathing space during an economic downturn, it is essential that you understand the legal requirements for doing so and consider the impact of furloughs on your employees. If you live in the US, you should also check any state-specific rules for this type of arrangement.