Furlough vs Layoff: What Is Best For My Business

Are you considering a furlough or layoff for your employees? Given the current economy, many businesses are making this decision. You need to know here about these two options and how they will impact your business.

Furloughs are a deliberate reduction in work time. They can be taken as an opportunity to rest and rejuvenate your team or to give new employees time to get up to speed. The goal is always the same: to give your employees a break and give you a chance to recharge.

Layoffs occur when an employee is let go from their job, whether it’s because of company policy or economic conditions. A layoff can have serious consequences for both the employee and their families. For the employee, it can mean paying unemployment insurance and losing income while looking for a new job.

Keep reading to discover the difference between furlough and layoff to help you decide what’s best for your business.

What Is A furlough?
What Is A Layoff?

What Is A furlough?

A furlough is a brief leave of absence brought on by the demands of a business or an employee. An employee placed on furlough by a corporation is expected to return to their usual work schedule eventually. The employee may be obliged to work considerably fewer hours or take an unpaid leave of absence (as opposed to a paid leave) during the furlough.

Hormazd Dalal, chief financial officer at Benefit Programs Administration, said furloughed employees might be required to do any of the below actions:

Take a specific number of unpaid hours off over several weeks.
Take a specified number of unpaid days or hours throughout the year.
Take a single block of unpaid time off.

According to Dalal, “an employer may, for instance, furlough its nonexempt employees one day per week for the year’s balance and pay them for only 32 hours instead of their customary 40 hours per week.” The requirement that all employees take several weeks of unpaid leave at some point during the year is another illustration of a furlough.

What Is A Layoff?

A layoff is 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 other reasons.

Although permanent layoffs can be due to financial struggle or economic disruption (e.g., the coronavirus pandemic), temporary layoffs are expected in specific industries.

“Some companies and industries (usually those that are seasonal) will do temporary layoffs, meaning they intend to rehire the same employees shortly – 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 likely to be followed by rehire.”

What Is The Difference Between A Furlough and Layoff?

A furlough is a temporary leave of absence from work where employees are asked to take unpaid time off. During a furlough, employees typically retain their employment status and benefits, such as health insurance and retirement contributions. Furloughed employees are expected to return to work when the furlough period ends.

A layoff, on the other hand, is a more permanent separation from employment. It typically occurs when an employer needs to reduce its workforce due to long-term financial difficulties, organizational restructuring, or other reasons. Employees are typically let go from their positions when laid off, and their employment with the company ends.

The main differences between furloughs and layoffs are the temporary nature of furloughs, the retention of employment status and benefits during furloughs, and the more permanent separation from employment that occurs in layoffs.

How Do Furloughs Work?

A furlough can be structured in different ways and have different causes. Here are a few:

Your employer tells you to stop working completely for a month. A major contract has been delayed, and you have no work to do. They still expect the contract to come through, and then you’ll return to your usual schedule.
Your employer tells you to take four weeks of unpaid vacation, one per quarter. An overall reduction in work is expected to continue throughout the year.
Your employer says you now have Fridays off until further notice. The business has slowed down, but they still want you around regularly.
Your employer isn’t reducing your hours or pay. However, they require you to use all your paid time off by the end of the year.

How Does A Layoff Work?

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.

Restaurants and seasonal enterprises (like tourist attractions or ski resorts) are two examples of sectors where workers may be let go, hoping to be hired back later. Layoffs could be considered transitory in this situation because they usually only last six months. All parties involved must know this is not a given, even when an employer may desire to rehire laid-off workers seasonally.

Furlough vs. Layoff: What Is Best For My Business

The decision between implementing furloughs or layoffs in your business depends on the specific circumstances your business is facing, your goals, and your long-term strategy.

Here are some factors to consider when deciding which option is best for your business:

1. Duration of Economic Challenge:

Furlough: Furloughs are suitable for short-term economic challenges or temporary downturns in business activity. If you anticipate a recovery shortly and want to retain your trained workforce, furloughs might be a better choice.
Layoff: Layoffs are more appropriate for more extended periods of financial uncertainty or when your business needs to undergo significant restructuring. If you believe the economic challenges will persist, layoffs could be the necessary option to align your workforce with reduced demand.

2. Retaining Talent:

Furloughs allow you to retain your skilled employees, which can be advantageous when business picks up again. Employees won’t need to be rehired and retrained.
Layoff: Layoffs might lead to the loss of skilled employees who could move on to other opportunities. When business improves, you might need to invest time and resources in hiring and training new employees.

3. Legal and Ethical Considerations:

Furlough: Depending on your jurisdiction and employment contracts, furloughs might have fewer legal and ethical implications since employees are still technically employed and maintain benefits.
Layoff: Layoffs can involve legal obligations, such as providing severance pay or complying with labor laws regarding mass layoffs. Consider the legal and ethical responsibilities associated with laying off employees.

4. Financial Impact:

Furlough: Furloughs can help reduce labor costs in the short term while maintaining the potential for a quick rebound once business conditions improve.
Layoff: Layoffs can result in immediate cost savings but could lead to expenses in terms of severance pay and recruiting costs when rehiring.

5. Company Culture and Morale:

Furlough: Furloughs might negatively impact company morale less since employees know they have a job to return to once conditions improve.
Layoff: Layoffs can have a significant negative impact on employee morale, productivity, and loyalty, as they might feel uncertain about their future with the company.

6. Communication and Transparency:

Furlough: Furloughs require clear communication about the temporary nature of the situation and a plan for returning to work.
Layoff: Layoffs necessitate transparent communication about the reasons and potential outcomes, even if it includes potential rehiring.

7. Industry and Business Type:

Consider the specific dynamics of your industry. Some industries have more seasonal fluctuations that could align well with furloughs, while others might require more long-term workforce adjustments.

What Happens When A Company Lays You Off?

The employer may sometimes provide you with a severance payout, albeit this is not required. Severance payments lessen the financial blow of your termination. They may consist of a lump sum cash settlement or COBRA payments that enable you to continue using the employer-provided health insurance plan until you find alternative employment or buy your health insurance.

Some employers could also allow you to apply for a different role within the organization or aid with your job hunt.

There may be a recall list depending on the reason for the layoff. This list tells you if and when you will be asked to return to the job, though it does not guarantee that you will be rehired.

It’s a good idea to begin searching for other jobs, even if there may be a small chance you could be rehired. “If you wait to be called back to work after being laid off, it could create a prolonged gap on your resume,” explains FlexJobs’ former Career Development Manager, Brie Reynolds.

What Happens When You Are Furloughed?

When you are furloughed, you maintain your benefits. For instance, this covers life and health insurance. When you are furloughed, you still have your employment rights; thus, you are not permitted to be dismissed during that time.

Any type of furlough may potentially qualify you for unemployment benefits. Some jurisdictions also let furloughed workers with reduced hours collect unemployment benefits to compensate for any wage gap, regardless of whether they are on a zero-work schedule or have their hours reduced. You can apply for full benefits once you have earned nothing throughout the week.

Employees who have been furloughed are also free to look for alternative long-term positions. You might not, however, be permitted to accept a temporary position.

Some companies view temporary employment performed while on a furlough as “outside employment,” which may be against the terms of your work agreement. Study the tiny print if you are facing a furlough to determine whether you can get temporary work.

FAQs On Furlough Vs Layoff

Do furloughed employees retain benefits?

In many cases, furloughed employees retain certain benefits like health insurance and retirement contributions, depending on company policies and legal regulations.

Can someone be laid off without pay?

Yes, there is no requirement for severance pay (payment given when laid off). It’s an agreement between employer and employee. If the business does give severance pay, the amount will usually be based on how long an employee has been with the company.

Can furloughed employees work during the furlough period?

In some cases, furloughed employees might be allowed to work limited hours or perform specific tasks, but they are typically not working their regular hours or roles.

How do layoffs impact company morale?

Layoffs can significantly impact morale, leading to anxiety, reduced productivity, and decreased loyalty among remaining employees. The fear of job loss can affect motivation and engagement.

Conclusion

Downsizing, whether temporarily or permanently, is never easy. But for businesses, it’s important to understand your options, such as when to do a layoff vs. furlough (or apply a reduction in hours), to make the best decision for your business.

If you’re confident that things will eventually pick back up and you’ll be able to bring your employees back on board, then a furlough might be the way to go. However, layoffs might be necessary if you face long-term financial challenges or don’t see things improving soon.