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.
Skip Ahead
- What is a furlough?
- Furlough vs. layoff
- How long is a furlough?
- Do you have to pay furloughed employees?
- How do you implement furlough?
- What are the benefits of furloughing employees?
- Furlough laws to keep in mind
What is a furlough?
A furlough is an unpaid temporary leave or reduced employee hours due to a company’s or employee’s needs. 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?
A furlough is a mandatory, temporary unpaid leave of absence or hour cut a business might issue to some or all of its employees. Employees can typically expect to return to work after a furlough is over. Employers might furlough employees due to lack of work or funds.
A layoff is when employers permanently 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. However, companies may try to rehire employees.
A furlough is like a pause in employment, whereas a layoff is a termination of employment.
Furlough | Layoff | |
---|---|---|
Definition | Temporary unpaid leave of absence or hour cut. | Permanent employee termination. |
Unemployment Access | Sometimes | Yes, if the employee is laid off through no fault of their own |
Health Insurance Continuation | Yes, likely | No, COBRA likely |
Job Assurance | Yes, likely | No |
1. Permanency
Again, a furlough is a temporary leave of absence that takes place over a short-term period. A layoff is a permanent termination.
Employers generally give employees a timeframe of how long the furlough will last (e.g., one month).
In addition to being temporary, a furlough might not be a continuous unpaid leave of absence. It may be a cut in hours rather than a full-blown pause in business operations.
For example, you might decide to furlough employees one week per month for X number of months. So, if you still need help at your business but want to cut back on employee hours, you may consider furloughing your employees.
Employers who need to permanently let go of employees would lay off their staff rather than furlough them.
2. Access to benefits
Some businesses that furlough employees let them use paid time off (PTO) benefits so they can get paid for some or all of the days they’re not working. And typically, employees who are furloughed continue receiving health insurance coverage.
Laid-off employees generally cannot use paid time off. However, employees may be entitled to any accrued paid time off payments, depending on your state’s PTO payout laws. Employees who are laid off typically lose their health insurance benefits. When you lay off employees, you may be required to provide COBRA continuation coverage.
3. Employer responsibilities
If you furlough employees, stay in contact with them. Give them plenty of advance notice if you have to extend the furlough.
Your employer responsibilities are a bit more involved when you lay off workers. You may need to provide severance pay. And again, you might have to include each employee’s PTO payout with their final paycheck and provide COBRA continuation coverage.
4. Unemployment accessibility
Can employees who are laid off through no fault of their own receive unemployment benefits? Yes.
What about employees who are furloughed? It depends.
States can create their own rules that determine unemployment eligibility. Ordinarily, some states extend unemployment benefits to furloughed employees while others do not.
And to receive benefits, individuals generally have to go through a waiting period and be actively searching for work (which many furloughed employees don’t do).
Keep in mind that when the furlough is over, your employees cannot stay on unemployment. They must get off unemployment and return to work.
If you receive an unemployment claim for the employee(s), you must respond to it. You can either accept or contest the claim.
5. Return to work
Employees who are furloughed return to work when the furlough ends (unless they are laid off or seek other employment). Although employees can search for other employment during a furlough, many don’t since it’s a temporary leave of absence.
On the other hand, employees who are laid off are permanently separated and would need to be rehired or replaced.
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
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.
What are the benefits of furloughing employees?
By furloughing employees, you can:
- Avoid layoffs
- Lower your business’s payroll costs
- Avoid severance pay
- Quickly bring employees back (without spending time looking for replacements)
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.
FLSA
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.
EEOC
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.
NLRA
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.
Contracts
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.
Employee benefits
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.