When it comes to business, things don’t always go according to plan. At some point, you may find your company struggling to stay afloat financially. And if that time comes, you may need to furlough some workers to avoid drowning. So, what is furlough? Keep reading to learn the definition of furlough, examples, and how a furlough differs from a layoff.
What does furlough mean? A furlough is a temporary leave due to a company’s or employee’s needs. Furloughs are typically unpaid. Although a furlough is an involuntary leave, it’s usually not permanent.
Depending on the situation, one of two things generally happens during a furlough:
- The employer may reduce the employees’ hours
- Employees may need to take an unpaid leave of absence
You may decide to implement a furlough for a variety of reasons. Here are a few examples of reasons why your business may need to have a furlough:
- Not having enough money for payroll
- Having a slower season
- Not having enough materials to keep producing goods
- Needing to cut back on business expenses
Furloughs may include an employee reducing work hours over several weeks, taking a number of unpaid days throughout the year, or taking a chunk of unpaid leave all at once.
Furloughs are common during tough economic times, like the COVID-19 pandemic. You may also see government workers furloughed if there’s a government shutdown.
Once a furlough ends, the employees return to work and go back to their regular schedule.
Furlough vs. layoff
What’s the difference between furlough vs. layoff? Although they may sound similar, they have a few differences.
With temporary furloughs, employees may have limited hours, take unpaid days off, or use paid time off. And, the employees may have specific scheduled time off or be on call for work. Again, employees can typically expect to return to work after a furlough is over.
A layoff is when employers suspend or terminate an employee because of the business’s lack of work, cash, or materials. Employees may receive severance pay or no pay at all. During layoffs, employees usually have no call-back rights or expectations of the job returning unlike with furloughs.
An employer can opt for temporary layoffs where they cut back or temporarily stop an employee’s work, but the employee is still employed. However, unlike furloughs, there is no guarantee that a temporary layoff won’t be permanent. Employers decide if workers are recalled or not. If an employer chooses not to recall an employee, the layoff becomes permanent.
Thirsty for more furlough details? Keep reading to find out answers to commonly asked questions.
How long is a furlough?
There is no set time for how long furlough can be. For some businesses, a furlough may only be a couple of days or weeks. On the other hand, another business may have a furlough for months.
Furlough rules can vary by state. For example, some states may define indefinite furlough as termination. Before implementing furlough at your business, check with your state to find out how they define furlough and other requirements (e.g., whether employees could receive unemployment benefits).
Do you have to pay furloughed employees?
Whether or not you must pay a furloughed employee depends on if they’re exempt or nonexempt (explained more later).
Nonexempt employees paid hourly wages can still be paid for the hours they work. Exempt employees are generally not paid if they’re furloughed. If an exempt employee works during a furlough, they must be paid their salary for the period.
Furloughed employees do not lose their benefits, like healthcare.
How do you implement furlough?
To implement furlough successfully, have a plan in place. If you plan on furloughing employees or have regular furloughs (e.g., seasonal business), be sure to outline the following:
- How long the furlough will be
- How many hours will be cut, if applicable
- Whether employees can use paid time off
- Who can receive pay, if applicable
- How you plan to rehire furloughed employees
If you unexpectedly need to furlough workers, make sure to provide as much information as possible to your employees. The more transparent you are about the situation, the better.
Furlough laws to keep in mind
If you implement furlough at your business, you must follow certain laws. Check out which furlough rules to keep in mind.
Under the Fair Labor Standards Act (FLSA), there are specific rules for exempt and nonexempt employees.
Exempt employees are not covered by the FLSA (e.g., they cannot receive overtime wages). You only have to pay an exempt employee during a furlough if they work during the furlough. If the exempt employee works at any time during the furlough period, you must pay them their entire salary for the period.
Nonexempt employees are covered by the FLSA. If your nonexempt employees work during a furlough, you only need to pay them for hours worked. Make sure you follow minimum wage and overtime regulations when nonexempt employees work during a furlough.
Consider enforcing a “no work” rule to prevent employees from doing any work during the furlough. Make specific rules like having employees leave their devices at the office to prevent working from home. Lay out your requirements clearly when implementing the furlough. That way, there’s no confusion later on.
You must also follow the Equal Employment Opportunity Commission (EEOC) for employee furlough. You cannot issue furlough based on an employee’s race, age, gender, religion, nationality, disability, or genetic information.
You may need to negotiate terms if your business is part of a union. The National Labor Relations Act (NLRA) requires you to negotiate terms and conditions with the union about employee furlough. Discuss details with workers like the spacing of days and whether the employees can choose when to take furlough.
Review individual contracts of employment before implementing an employee furlough policy. Some employees may have contractual rights to compensation or paid leave benefits. Make sure the terms and conditions listed in employee contracts do not limit furloughs.
Generally, common employee benefits are not affected by furloughs (e.g., health insurance). Since furlough is temporary, employees are not entitled to severance pay, early retirement benefits, or outplacement.
Employees may be eligible for unemployment benefits depending on the state. Check with your state for specific laws regarding unemployment benefits.
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This article has been updated from its original publication date of December 26, 2018.This is not intended as legal advice; for more information, please click here.