Posted on: July 19, 2023                                                                                        

Furloughs can be an effective way to cut costs during times of decreased business activity. However, employers should think through the decision carefully with special attention paid to pay, benefits and other issues. Here are some important factors to consider about furloughs.

Furloughs vs. layoffs 

There isn't a universal definition for “furlough,” though the term is loosely used to refer to a reduction in the number of days or weeks that an employee works because of a decline in business activity. In other words, the employee takes unpaid time off, usually for a short-term, and sometimes defined, period. 

By contrast, the term "layoff" is typically used by employers to refer to an indefinite long-term or permanent separation from employment. The key point to remember is that both furloughs and layoffs may trigger notice, pay, benefits, unemployment, and other compliance obligations.

Deciding who to furlough

All decisions must be neutral and job-related, and not based on protected characteristics, such as age, race, sex (including pregnancy), or other factors unrelated to the job. Make sure to document your objective, and job-related reasons for determining which employees to furlough.

Communicating a furlough to employees

Several laws may govern what type and how much notice employers need to give their employees prior to a furlough. Some states require advance notice of any reduction in pay. Absent a specific notice requirement, provide as much notice as possible.

When notifying employees, be clear with employees about what the furlough is (i.e., unpaid time off), why it’s being implemented, who will be affected, what it means for benefits, that employees are prohibited from performing any work during the furlough, and where they can go if they have any questions. If known, provide an anticipated return date, but be clear that this is an estimate and could change at any time and isn't guaranteed. 

Pay issues 

Nonexempt employees are generally paid on an hourly basis and must be paid for all time spent working. Provided nonexempt employees perform no work during a furlough, there is no requirement to pay them. However, if a nonexempt employee performs work during a furlough, they must be paid for all time spent working.

Under the Fair Labor Standards Act (FLSA), exempt employees must receive their full salary in any workweek in which they perform any work. Therefore, unless a furlough lasts a full workweek, exempt employees must receive their full salary. For this reason, employers generally furlough exempt employees only in increments of full workweeks.

Preventing work during furloughs

Employees should be instructed to avoid checking email or performing any other work during the furlough period. However, if employees do perform work (even without permission), they must be paid. Exempt employees who perform any work during a furlough must be paid their full salaries. Nonexempt employees need only be paid for the time actually spent working and should be instructed to accurately report all time spent working.

Substitution of paid leave 

Under federal law, there is no requirement for employers to permit employees to substitute paid leave for the time missed because of a furlough. In fact, to maximize the cost savings of a furlough, some employers prohibit employees from substituting paid time off. Your policy on the substitution of paid leave should be developed in accordance with applicable law and communicated to employees in advance.

Health and other benefits

A furlough could have ramifications on employee benefits, particularly those that use hours of work to determine eligibility. Review your healthcare, 401(k), and other plans to determine whether a furlough will impact employees' benefits. If employees' benefits will change as a result of a furlough, be sure to provide them with adequate notice in accordance with the provisions of the plan and applicable law. For instance, employees who will have benefits discontinued will likely need to receive a health insurance continuation (or "COBRA") notice.

Final pay

There are federal and state rules for providing final pay and certain notices to employees. Additionally, depending on your state, you may be required to include accrued, unused vacation and paid time off in the employee's final pay. Some states have final pay laws that may be implicated by a furlough.

Generally, though, short-term furloughs with a definite return date (that is clearly communicated to employees) don't trigger final pay requirements. Thus, any pay owed to the employee would be due on their next regular payday. However, some states may have stricter rules. For example, in California, a furlough longer than 10 days or a normal pay period (if shorter) should be considered a layoff. If it is a layoff, final wages and all accrued but unused vacation time and PTO must be paid out immediately. Make sure you comply with all applicable requirements.

Unemployment compensation

Depending on the state, the length of the furlough, and the employee's work history, a furloughed employee may be eligible for unemployment benefits. For instance, while a furlough is generally a qualifying reason to collect unemployment benefits, some states have a waiting period before workers can file. In states with such a waiting period, an employee wouldn't be eligible for jobless benefits if the furlough fell entirely within the waiting period. Check your state law, communicate with employees regarding their eligibility for unemployment benefits, and provide any required notice and information accordingly.

Many states have adopted shared-work programs to provide employers with an alternative to layoffs. Under these programs, the employer temporarily reduces the hours of a group of employees, and the affected employees collect partial unemployment benefits.

New hire paperwork

Various laws and regulations require that employees complete certain paperwork and provide certain notices at the time of hire. Some of these laws address situations in which an employee is returning after a furlough or layoff. For instance, an employer won't generally need to complete a new Form I-9 (to establish identity and work authorization) if the worker is continuing in their employment and has a reasonable expectation of employment at all times due to a temporary layoff for lack of work. If this standard cannot be met, the employer must follow the instructions for "rehired" employees in the USCIS Handbook for Employers. 

For other new hire paperwork and notice requirements, employers should check applicable laws and regulations to determine if/how they address employees who are returning to work.

Conclusion

Furloughs continue to be an option for helping employers adjust to fluctuations in business activity. However, furloughs are not without their own set of challenges. Employers planning to implement a furlough should have a plan in place to implement them effectively and in compliance with applicable laws.