It’s inevitable that business will go through ups and downs and periods of uncertainty. In these times, the tough decision of how to cut costs always comes into the conversation. Since the outbreak of COVID-19, more and more companies have arrived at that point, putting the future of their workforce in doubt.
Companies typically have two options during periods of economic transition—they can either lay off workers or furlough them for a given period of time.
Each route comes with its own individual complexities and benefits. Here we provide a business guide to both furloughs and layoffs:
- An overview of the differences between each cost-cutting strategy
- The factors that determine which option is right for a company
- Some quick tips on how to communicate the news to your team
Furloughs vs Layoffs: What’s the Difference?
If your company is considering the difficult decision of terminating employees, it is critical that you understand the key differences between each option. In the simplest terms, furloughs refer to temporary layoffs, while layoffs refer to the permanent termination of employees.
There are three major differences between furloughs and layoffs:
1. Return to work – When a company furloughs employees, it usually does so for a defined span, and will inform employees in advance of when they can expect to return to work. During layoffs, employees are essentially terminated and have no guarantee that they will be able to return to their job.
2. Benefits liability – While salaries are always put on hold during a furlough, benefits usually are not. So, if you decide to furlough employees, you will likely be required to continue paying for their health insurance and other benefits. Conversely, a layoff results in a termination of both employee salaries and their benefits package.
3. Complexity issues – Furloughing employees is typically a straightforward process, especially when the option to trigger the action exists within an employment contract. It only requires notifying employees they are being furloughed. On the other hand, laying off employees requires a laundry list of actions, including severance discussions, benefits termination, justification, etc. Because layoffs are final, they will usually only be considered as a last resort if furloughing is permitted.
Determining which option is right for your business depends on varying economic and organizational dynamics. Let’s take a look at some of the factors that contribute towards deciding between layoffs and furloughs during a period of uncertainty.
Furloughs vs Layoffs: Determining What’s Right for Your Business
When determining whether to furlough or lay off employees, every business should consider the following six factors that can have a major effect on which decision is right for the company and its employees.
1. What is the economic outlook for the company?
2. What are the company’s obligations under its employment contracts?
3. Is the business a public or private institution?
4. What liabilities are owed to employees under furloughs and layoffs?
5. What are the severance requirements of the business when laying off staff?
6. What effect will each option have on public perception?
1. Economic Outlook
The most obvious factor when determining whether to furlough or dismiss employees during times of economic hardship is the outlook for the company moving forward. Here are some immediate questions that every manager or business owner should be asking when considering these options:
- How long is the period of distress expected to last?
- Is the causation of the problem external (like COVID-19) or related to internal company strife?
- What are the relative economic effects of furloughing versus laying off employees?
If the company projects that their inability to keep a full staff is temporary, it would likely be a better idea to furlough employees if the option is available. This is especially the case during times of hardship that are influenced by uncontrollable, external events.
However, it is crucial that companies carefully consider their ability to emerge from the crisis. If the company is suffering from internal issues that are expected to persist, laying off employees will likely be a necessity at some point.
While laying off employees is final, it will be possible to engage in re-hiring once the business is back on track.
2. Contract Requirements
Every employment contract is different. While some contracts permit furloughs, pay cuts, or hour reductions, others do not. When determining whether to furlough or layoff employees, businesses must discuss their contract requirements with their HR teams. Or, if there is no HR team, they should consult with legal counsel (in-house or third-party) about the best course of action. While being sensitive to the times is important, it’s also necessary to protect the business from a legal standpoint.
While furloughing employees may be permitted under the terms of a given employment contract, the company might be required to give certain guarantees:
- Provide a clear determination in advance on the length of the furlough
- Dictate a clear plan for benefits coverage (more on this below)
- Communicate with unemployment insurance providers (state and federal authorities)
On the other hand, layoffs will have their own contract requirements:
- Justification of termination (a lack of justification could result in a wrongful termination suit)
- Severance requirements (varies by contract and what the business can afford)
- Sick leave and vacation day settlements
- Communicate with unemployment insurance providers (state and federal authorities)
It is up to each individual business to determine the relative cost benefit of furloughing or laying off employees in accordance with their duties under a given employment contract. While most firms protect their right to furlough or dismiss employees under their own discretion, each situation can result in increased costs for the business.
3. Public vs. Private
Furloughing employees is almost always permissible for public institutions. These situations have been made famous by government shutdowns which see hundreds of thousands of workers furloughed without pay.
However, private companies retain their own processes for furloughing or laying off employees. Whether the business functions within the context of a workers union or through non-union labor will directly affect the level of flexibility a business has to furlough or layoff staff.
4. Level of Liability
One of the biggest issues related to furloughing employees is determining the level of liability a company has toward dismissed employees. For this reason, laying off employees could be seen as a simpler process, although it can come with its own requirements depending on the situation.
Under a furlough, a business must consider the following liabilities:
- Does the company continue paying employee benefits?
- Does the company waive employee contributions to benefits?
- Does the company require employees to continue contributions without pay?
- What rights do furloughed employees have during the period?
By definition, a furlough is a temporary hold on employment, so most companies would continue to pay employee insurance benefits and match any 401K contributions, etc. However, many companies require furloughed employees to continue to pay their part during the break, which can lead to costly disputes.
5. Severance Requirements
If a company opts to go with a layoff, it is important to consider whether or not to provide a severance package. While severance packages come at an increased cost, they also have the ability to offset the potential that a former employee takes action against the business.
6. Public Perception
Both furloughs and layoffs come hand-in-hand with a negative public perception. This has the potential to undermine the organizational culture within the business and the profile of the company publicly.
Furloughs generally provide companies with a more limited level of pushback, especially when handled with care. Layoffs will undoubtedly cause a negative public response, but simultaneously retain cost benefits and the flexibility to reduce the number of workers re-hired when a furlough period would otherwise expire.
Communicating Furloughs and Layoffs Tips
Communicating to staff that furloughs or layoffs will take place can be one of the most difficult processes for any business leader. To get you started, we have compiled a few quick tips that will go a long way in calming any resulting issues.
1. Plan ahead – Work closely with HR to determine the criteria for selecting which departments will be furloughed or laid off, and for how long. Avoid making any announcements regarding these actions until everything has been settled and an action plan has been put in place.
2. Be ready for questions – There is no doubt that furloughs and layoffs will be met with a high degree of resistance, so be prepared for immediate questions on the length of time, benefits coverage, unemployment insurance, and return to work dynamics (in the case of a furlough).
3. Present everything to employees from the beginning – When furloughing or laying off employees, it is essential that the business provide all the details from the start to avoid confusion. Be ready to provide a clear perspective on when, why, and how the process will take place, prior to making the announcement.
4. Be transparent – Your employees work for your business day in and day out and are aware of the issues it faces. So, be transparent and honest during this process. Explain what has happened and why you need to take such extreme measures.
5. Be thorough when it comes to financials – Your employees’ biggest concern will be how this affects their financial situation, so explain this part in detail. Let your staff know what type of support the company will be providing and how the process affects their benefits package.
6. Give employees individual attention – Individual meetings will be crucial for both furloughs and layoffs. For furloughs, provide clear communication throughout the process and provide a point of contact for each employee regarding returns to work. Additionally, you can share helpful resources with them, such as the additional $600 per week furloughed workers are eligible for in federal unemployment benefits in response to the coronavirus crisis. For layoffs, offering references and individual information on severance can go a long way in calming tension.
A Business Guide to Furloughs and Layoffs
Determining whether to furlough or layoff employees can be an extremely difficult process for any business. While both situations are unfortunate, each comes with their own benefits and drawbacks depending on a given company’s relationship with its employees and economic outlook moving forward.
If your business is considering either option, be sure to reference this guide to help you make the right decision and communicate with your staff sensitively and effectively.
Resources on how to use Nextdoor to stay connected with your local customers during coronavirus, pertinent news affecting businesses, and more, are available in our Small Business Guide for Coronavirus Relief.