Determining whether to furlough your employees or lay them off in order to keep the business afloat is a difficult decision. Many business owners suddenly find themselves weighing between what is best for employees and what is best for long term business sustainability. We are faced with a rapidly changing environment in a way that most of us never expected or wanted.  Many of us have had to consider new work options for our employees such as telework or rearranging schedules and hours to promote appropriate distancing. Some of us recognized that our financial situation would be very different during the COVID-19 period. We looked at our expenses, we applied for loans and grants, but we knew something else may have to give: our people.

When evaluating the new landscape, it can be challenging to know what to do or how to do it. We are hearing new buzz words like furlough and old terms like layoffs. We are reading articles that our employees may make more receiving unemployment. Is it true? What is the best approach? It depends.

The difference between a layoff and a furlough is subtle, but important. How long can you last and how drastically do you need to react? Some businesses immediately began layoffs of employees as quickly as coronavirus spread. Others have the capability to make more deliberate decisions.

Let’s discuss the primary reasons behind each approach as well as the pros and cons of each.

What is a Furlough?

A furlough allows employees to either reduce their schedules and/or take leave without pay for a period of time as a method to help the company save jobs.

Employees are generally not allowed to take paid time off, vacation, or sick time during a furlough period.  However, during furlough periods, employees retain their benefits (subject to the provisions of your benefit plans) and are still considered active employees. Usually, furloughed employees have the expectation of returning to work as normal once the furlough period is over. Most states recognize furloughs for eligibility under unemployment benefits.

Furlough Pros:

• Retention of employees
• Continuation of benefits
• Flexible and allows ramp up / ramp down based on business needs
• May build employee loyalty and trust.

Furlough Cons:

• May not result in desired financial decreases
• May need to revise paid time off policies
• More difficult to implement with exempt employees
• Benefit plan implications

What is a Layoff?

A layoff is when an employer terminates the employment relationship due to lack of work. 

This results in the employee being completely removed from payroll and benefits. The employer generally does not expect that the employee will be returned to full employment after the crisis is over but may be rehired if there is work at some point in the future.

Layoff Pros:

• Decreases payroll costs and benefit costs
• Does not create any expectation of returning to work
• May allow employer to “easily” remove low performers
• Unemployment eligible event.

Layoff Cons:

• May result in payout of accrued, but unused vacation or PTO
• Valuable employees who are needed later may not be available
• Employees under COBRA for benefits
• Additional review of selection decisions (i.e., ensure non-discrimination)

Businesses may also use a combination of layoffs and furloughs as well.

The best approach is to consider your situation, the needs of your employees, and the long-term strategy you want to employ. These are not easy times, and these are not easy decisions. Should you need help charting the best course for your business, please do not hesitate to contact Tomako Deaner, HR consultant, advisor and executive coach, at tdeaner@tobuadvisors.com with any of your Human Resources questions.

*This post was written by our favorite HR Superhero Sidekick, Tomako “Tommie” Deaner.  Tommie is an HR consultant, advisor and business coach.