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?
Termination is a difficult choice that employers make when an employee's performance is not meeting expectations, despite repeated interventions.
Unlike layoffs or furloughs, termination is related to poor performance rather than economic hardship or fluctuations in labor demand. It usually affects individual employees and is considered a form of permanent termination. When an employee is terminated, they may receive a severance package, but the employment relationship is permanently severed. Rehiring a previously terminated employee would be highly unusual and could pose legal risks without proper legal counsel.
What is a layoff?
Layoffs occur when a decrease in labor demand or financial position makes it challenging for a company to maintain its workforce.
Unlike termination, layoffs are often a cost-cutting measure and are not performance-based. Employees may or may not receive advance notice, depending on federal requirements and any collective bargaining agreements in place. While some layoffs are temporary, there is no obligation to rehire former employees. A layoff could lead to a plant closing if the situation doesn't improve.
What is a furlough?
Furloughs offer more flexibility than layoffs or terminations and are often used as cost-saving measures during times like a government shutdown.
When employees are furloughed, they remain on the company's roster but may face changes in compensation, hours per day, or days per week. Healthcare benefits may be halted or modified, and eligibility requirements for employer-provided benefits like a workplace retirement plan may change.
Furlough plans can vary; some offer reduced schedules, while others may implement zero-hour schedules. The type of furlough often depends on whether employees are exempt or non-exempt. Non-exempt hourly employees are usually paid based on actual hours worked, while exempt employees receive a salary. During a furlough, non-exempt employees might be moved to a zero-hours schedule, allowing them to remain employed without a set number of hours. Exempt employees might be offered reduced pay as an incentive to stay.
Furloughs can be particularly useful for seasonal workforces, allowing employers to ramp up or down without the hassle of hiring and terminating employees repeatedly. They also provide a way for employees to maintain some income and possibly engage in additional education, like online courses, during their unpaid time.
If understanding the differences between termination, layoffs, and furloughs, employers can make more informed decisions that align with both company needs and employment rights.
Each approach has its own set of challenges and should be considered carefully, possibly with the advice of a career coach or legal counsel.
Furlough vs. layoff unemployment
One question employers may have is 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 a permanent 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 after the waiting period.
- Partial furloughs can affect benefits. While partial furloughs allow employees to keep making an income through reduced hours or an 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 after slow periods.
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. This is one of the major cons of layoffs.
- 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. You can lose valuable employees and by the time the financial crisis is gone, they’ve already moved on to some place with better business conditions.
Layoff advantages
- Laying off employees relieves your business of significant financial obligations, including healthcare premiums and health plans, unemployment 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 COVID-19 pandemic triggered rounds of mass layoffs and furloughs around the globe due to changed economic conditions. 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-19 outbreak.
Wrapping up
By now, you should be familiar with the basic differences between a furlough and a layoff and hopefully, you can create a good action plan for your business operations in case things get bad. However, we strongly suggest consulting with a legal professional before doing anything to not only save on business expenses but also to save your business reputation.
And if you’re looking to improve your business operations and keep a tab on what your employees do and when, you can start tracking time in your organization. Sign up for your free trial of Unrubble today and start tracking time efficiently!
Frequently asked questions
What is the difference between a furlough and a termination?
A termination is the same as a layoff. Furloughs mean putting someone’s employment status on paus while the situation with your business gets better and returns to normal business operation. A termination means effectively discontinuing the employment relationship and firing someone from your company.
What are the different types of layoffs?
There are three main types of layoffs: downsizing, right-sizing and natural attrition. There are some major differences between them. Downsizing means cutting down your workforce to save money. Right-sizing means optimizing your resources to make more cash with the the amount of people you have. Natural attrition happens naturally, as the name says, when an employee retires or in the worst case, dies.
How long can an employee be furloughed?
There is no maximum amount of time that someone can be furloughed. It’s not forbidden to furlough someone as long as possible, but long periods of furloughs can hurt your employees’ motivation levels. As a business owner, you should strive to keep furlough periods as short as possible, ideally less than 12 months at a time.
What is the difference between layoffs and furloughs?
The primary difference between layoffs and furloughs lies in the permanence and the employee benefits involved. Layoffs usually indicate a termination of employment and are often a result of cost reduction measures or financial hardship within the company. Laid-off employees generally lose their health benefits and may or may not receive advanced notice, depending on the situation and federal requirements.
On the other hand, furloughs are a temporary reduction in hours or a short-term period of unpaid leave. Furloughed workers remain employees of the company and may retain some employee benefits like health coverage. Furloughs can last for weeks or even months and are often used as a less drastic alternative to layoffs. They offer companies the flexibility to ramp up operations quickly when conditions improve, but for now, they put temporary pause.
How do furloughs affect salaried vs. hourly employees?
The impact of a furlough can vary depending on whether you are a salaried employee or an hourly worker. For salaried employees, a furlough might involve a reduction in pay but usually maintains the exempt status, meaning they are not paid extra for overtime work. Hourly workers, often classified as nonexempt employees, are generally paid only for the actual hours they work during the furlough period. In some cases, hourly workers might be moved to a zero-hours schedule, allowing them to remain on the employment roll without a set number of hours in work-related programs with health care benefits and weekly increments.
What happens to my health and retirement benefits during a furlough?
During a furlough, your employee benefits like health care coverage and retirement plan contributions may be affected. Some companies continue to offer extended coverage for health benefits, but you may be required to pay a larger share of the premiums or tax benefits. As for retirement plans, your employee contributions could be paused during the furlough, affecting your long-term savings. In some cases, a furlough could be considered a COBRA qualifying event, allowing you to continue your health coverage at your own expense.
