Managing Employee Furloughs and Company Policies

In an ideal world, every startup and small business would start strong and keep growing without ever faltering or experiencing decline. That’s what we’d all like to see, but the reality is that small businesses don’t always experience linear growth. Growing companies often take a few steps backward in between gaining ground and market share. 

It’s not unusual for small businesses to experience setbacks that create financial hardship and make it difficult to meet payroll obligations for a period of time. 

Utilizing a furlough is one potential option when navigating difficult financial times. Furloughs provide an opportunity to maintain employee connection while also making tough – but temporary decisions – that are sometimes necessary. The best time to consider how to manage furloughs effectively is before you need to implement one. That way, you’ll be prepared and ready to act, without assuming that layoffs or a permanent reduction in force are your only option for cost control when time gets tough. 

What Does Furlough Mean?

So, what does furlough mean? Think of a furlough as a mandatory leave of absence that’s temporary in nature. While a leave of absence is usually something that an employee requests, furloughs are initiated by the employer, and they’re not voluntary. Instead, they’re a retention strategy used when a company doesn’t have enough work or funds to sustain its full workforce for a short period of time. 

A furlough can help reduce payroll costs when there’s a downturn in business or a cash flow challenge that isn’t expected to last indefinitely. A furlough can result in a total leave of absence, with affected employees not working at all for a brief period of time. Or, it can result in  a reduced schedule for affected employees. For example, a company might furlough non-exempt employees who usually work five days per week for one day each week. In that case, they’d only work (and get paid for) four days.

Both furloughs and traditional leaves of absence are intended to be temporary.

•  An employee who asks for a leave of absence isn’t quitting their job. They just want or need to be away from work for a while, but they do intend to return. 

• In the case of a furlough, the employer doesn’t terminate the affected employees. The company doesn’t pay for time on furlough, but may keep employee benefits in place.

Difference Among Furlough, Layoff and Reduction in Force

A furlough is not the same as a layoff or a reduction in force (RIF). It’s important for founders and small business managers to know the difference. 

• Reduction in force (RIF): A reduction in force is a business strategy to reduce payroll expenses by a certain percentages and/or headcount by a certain number. It may involve eliminating some roles altogether, or reducing the size of some teams or departments. 

• Layoff: The term layoff is sometimes used in the same way as RIF, however, it is not necessarily as permanent in nature. It is also commonly used with project-based work. For example, a construction company may hire a crew for a project, then lay off the crew when the project is over. If they get a similar project in the future, the company may opt to offer positions to employees who were laid off. 

• Furlough: A furlough is not an actual termination. Some furloughed employees work a reduced schedule and some are temporarily placed on an unpaid leave of absence for a period of time, but they remain employed. 

Key differences (and similarities) include: 

• Both layoffs and RIF actions involve terminating the employment of affected individuals. A furlough is not a termination, so furloughed individuals remain company employees.  

• When an employee is laid off or affected by a RIF, they lose eligibility for employee benefits. Furloughed employees are still employees, so they retain eligibility for benefits. 

• Employees who are laid off or lose their job in a RIF are eligible for unemployment benefits (assuming they otherwise qualify). Furloughed employees may also be eligible for unemployment compensation (UC), depending on their state’s specific regulations. 

• Reductions in force are permanent reductions. Layoffs may be permanent or temporary. Furloughs are temporary.

• For companies with 100+ employees, layoffs or RIFs can trigger Worker Adjustment and Retraining Notification (WARN) Act  requirements, as can furloughs that exceed 60 days.  

How to Handle Furloughs in your Business

A company should not enter into the decision to furlough employees lightly. Sure, furloughs can be a retention strategy and may sometimes be preferable to a layoff or reduction in force, but the reality is that any decision that is going to impact your employees’ pay is going to have serious implications for everyone involved. 

Crafting a Furlough Policy: Key Considerations

With so many potential compliance-related pitfalls, it’s a good idea to seek legal counsel when creating a furlough policy or plan. For example: 

• FLSA - As with all matters that impact employee pay, you’ll need to comply with the Fair Labor Standards Act (FLSA). The Department of Labor provides a Fact Sheet on furloughs with information on common furlough-related challenges. 

• EEO – When determining who will be furloughed and for how long, it’s important to consider potential Equal Employment Opportunity (EEO) compliance considerations. Furlough decisions must be made in a nondiscriminatory manner. 

• State or local regulations – You’ll also need to find out if there are any state-specific regulations — in every state where you have employees — that need to be considered.  

• Contracts - Depending on the terms of any employment agreements your company has in place with some or all employees, it’s possible that implementing furloughs could represent a breach of contract. 

Compliance isn’t the only important factor to consider. Before you decide to furlough employees, it’s important to be aware that word may get out. Employees will talk, and it’s possible that the furlough will be discussed via social media or even the news. You should be prepared to address the furlough prior to initiating it. 

Implementing a Furlough

If you determine that a furlough is the best course of action for your business, you’ll want to be very purposeful in its implementation. It’s important to be forthcoming, truthful, and transparent with employees, while also exhibiting empathy for the hardship that being furloughed represents. 

It’s a good idea to announce the decision to the full team at the same time and follow up in writing with specific details about the furlough. You’ll want to include complete information on how employee benefits will be handled, as well as provide specific instructions employees can use to file for unemployment compensation benefits, if applicable. 

If your company offers an employee assistance program (EAP), it’s a good idea to make sure employees know how to access services that may be particularly beneficial to them at this time. 

How to Bring Employees Back From a Furlough

When it’s time to bring employees back from a furlough, you’ll want to communicate with them in advance and in writing. Send an email or letter to each employee using a method that will allow you to verify that the document has been delivered and/or received. The communication should specify when the employee is expected to return and whether their schedules or shifts will be the same as before the furlough. If there are any differences, those should be clearly explained. 

Rather than assuming that everyone will return, it’s advisable to request employees reply within a certain timeframe to verify their intent to return to work. Provide them with a contact person to speak with in case they have any questions or concerns.