When your business is facing uncertain or decreased demand, it’s natural to consider your options for lowering your expenses, namely furloughs vs layoffs. Payroll is one of the largest expenditures for most businesses, and cutting down your staff could make the difference between surviving and shutting your doors.

If you’re deciding between layoffs and furloughs, learn about the pros and cons of each approach, how they differ from termination, and how furloughs and layoffs affect unemployment compensation.

Furlough vs Layoff vs Termination

Furloughs, layoffs, and terminations may seem indistinguishable on the surface, but there are important differences between these three employment strategies.

What Is Termination?

When an employee is not performing to expectations and repeated intervention has been unsuccessful, termination is the last resort.

Termination is related to job performance rather than fluctuation in labor demand. As such, termination usually affects individual employees rather than the entire company.

When an employee is terminated, the relationship is permanently severed. It would be very unusual to rehire a previously terminated employee.

What Is a Layoff?

When a decrease in demand for labor or a decrease in profitability makes it difficult for a company to keep paying workers, layoffs are a common solution. Like a termination, a layoff severs the relationship between employer and employee. While many companies intend for layoffs to be temporary, there is no obligation to rehire former employees or keep positions open for them.

What Is a Furlough?

When employees are furloughed, they remain employees of the company. Compensation and benefits may change or halt. Furloughs are more flexible than terminations or layoffs. It’s possible to offer reduced schedules or alternative working arrangements to furloughed employees, allowing them to maintain an income source and keep your company running.

In industries where demand for labor fluctuates, seasonal furloughs are a good option to avoid the hassle of repeatedly hiring and terminating employees every year.

Like layoffs, furloughs are independent of job performance. Because your workers remain employees, furloughs provide staffing flexibility. When it’s time to ramp operations back up, you still have a stable of trained, skilled staff at hand.

Furlough works differently for exempt and nonexempt employees. Non-exempt employees are paid based on the amount of time they spend on the job, usually on an hourly basis. Exempt employees receive a regular salary for completing specified duties, unrelated to their hours on the clock.

Non-exempt employees can be moved to a zero-hours schedule, allowing them to stay on the employment roll without the obligation to schedule for a specific number of hours.

Exempt employees are sometimes offered reduced pay as an incentive to stick around. If you go this route, be sure to advise your employees not to work while they are furloughed. Even checking email is considered an illegal breach of furlough.

Furlough vs Layoff Unemployment

One question employers may have are the unemployment implications of a furlough vs a layoff. In the US, unemployment benefits are administered at the state level. Before proceeding with any layoff or furlough, check the regulations governing furloughs, layoffs, and eligibility for unemployment compensation in your state.

A furlough nearly always represents a significant drop in income for affected workers, while a layoff cuts off employment income entirely. Furloughed and laid-off workers are usually eligible to collect unemployment benefits.

Collection of unemployment benefits, whatever the cause of unemployment, usually requires looking for new work. If the furlough takes place during a major economic crisis, this requirement may be waived on a state-by-state level.

When it comes to furloughs vs layoffs, both actions can affect your tax obligation for years to come. Before instituting a furlough or layoff, consult a tax professional to ensure you are prepared for the future.

Furlough vs Layoff—Pros and Cons

Before you make a decision that could have long-term consequences for your business, consider the advantages and disadvantages of furloughs vs layoffs.

Furlough Disadvantages

  • Furloughed employees may not stick around. If other career opportunities are available, you can’t expect your employees to wait around until you can offer a paycheck again. Furloughs may ease the transition back to full staffing capacity, but you’ll still likely need to do some hiring as you can’t expect everyone to return.
  • Partial furloughs can affect benefits. While partial furloughs allow employees to keep making an income through a reduced or altered workload, dropping below full-time could affect eligibility for important benefits such as employer-sponsored health care.
  • Furloughs can increase work. Operating on a reduced staff takes ingenuity and effort. It’s essential that you continue to provide goods and services to your client base in an organized and orderly fashion. Unless the workload has decreased, decreasing your workforce could damage your company’s reputation.
  • Furloughs may be considered ‘unemployment activity. Depending on the location of your business, instituting a furlough could increase the amount you owe in future state unemployment taxes.

Furlough Advantages

  • Employees may be able to keep their health insurance and other important benefits. Knowing they have a job to come back to can be a significant reduction in stress during a difficult time.
  • Furloughed employees can resume work at any time. Make sure to keep furloughed employees informed as the furlough progresses. Keep them up to date about your plans, without making any promises that you might not be able to keep.
  • Furloughs maintain the relationship between employers and employees, reducing recruitment and selection costs when business improves.

Layoff Disadvantages

  • Layoffs can put employees on edge, wondering if they will be next. Your top performers may look for more stable opportunities. Repeated rounds of layoffs can damage employee morale and lead to a lack of confidence in the company.
  • There are costs associated with layoffs, such as paying out unused vacation time, that can place a temporary strain on your cash flow and mitigate the cost-saving effect of laying off employees.
  • Without a robust workforce, the production or earning capability of your business may be decreased. Decreasing your sales force, for instance, generally results in fewer sales. Lack of administrative support can lead to inefficiencies, delays, and poor customer service.

Layoff Advantages

  • Laying off employees relieves your business of significant financial obligations, including healthcare premiums, insurance payments, and employee compensation. When you’re in dire straits, a layoff can replenish the business’s cash reserves and allow the operation to continue through difficult times.
  • Layoffs allow businesses to quickly shift direction, phasing out old technology or pursuing new goals without being weighed down by excess staff.

Furlough vs Layoff–COVID Lessons

The global pandemic triggered rounds of layoffs and furloughs around the globe. In general, it seems that employees prefer furloughs to layoffs. Knowing they have a job to return to and being able to keep their benefits has been a source of security and encouragement to many workers furloughed by the COVID crisis.