Layoff or Furlough? Decreasing Costs During COVID-19

COVID-19 has forced organizations to downsize across the United States. In the face of diminishing revenue, organizations from massive corporations to small businesses have been faced with the task of cutting costs. For many, this means making the decision to either furlough or lay off employees. No matter what decision you make, it has a substantial impact on both the organization and your employees. We can’t suggest one over the other, but we do stress the importance of understanding the difference and how each will impact you, your organization, and your employees.

A layoff is a complete, though sometimes temporary, separation from employment. While it can be a solution, it’s important to know that it comes with its costs, such as outplacement services and/or paying severance packages (if this is even possible during this unprecedented crisis). In most cases, layoffs occur when employers do not have enough work to go around; employees are laid off and the hope is that business will pick up and the employees will be able to return to work. For example, Macy’s department stores laid off the majority of their workforce, hoping that the economy will recover, and they will be able to rehire many, if not all, of their employees.

Employees who have been laid off may collect unemployment benefits, which have been expanded under the CARES Act.  Employers may also choose to provide incentives for their employees to maintain their availability, such as paying for their benefits continuation (either COBRA or state continuation coverage).  A temporary layoff can provide an opportunity for an organization to cut costs at a time when they believe their organization will bounce back. If the organization does not bounce back in the time allotted, ties with the employee have already been severed and they can choose not to rehire.

A furlough, often seen as an alternative to layoffs, is when an organization requires a mandatory, temporary, unpaid leave.  The individuals are not separated from the organization, so they remain benefited employees.  Employers can request that employees work fewer hours or take a specified amount of time off without pay. This can get tricky with exempt employees who are required to work full-time hours under the Fair Labor Standards Act (FLSA) to maintain their exempt status. In this situation, if an organization finds it necessary to furlough employees, exempt employees must be furloughed for the full workweek. If they work even an hour, they must be paid for the entire pay period.

With furloughs, it’s important to check with your benefits broker and insurance carriers, since most contracts require employees work a certain number of hours to be benefits eligible.  Almost all carriers are providing leniency during this crisis, enabling employees to maintain benefits eligibility even though they may not be working the required number of weekly hours.     

Under the CARES Act, furloughed employees are also eligible for unemployment benefits. A furlough can be an easier option, without costs of off-boarding employees, that allows your employees more confidence that they will have a job to come back to, whereas a layoff can be more uncertain.

No matter what decision you make, these uncertain times create challenges for your employees as well as your organization. Ensure that you are in compliance with local, state, and federal laws and most importantly remember the ‘people factor’. Be understanding and empathetic when you deliver the news and be prepared to point your employees to resources (both emotional and financial) to help them get through COVID-19.

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