Some of the hardest career conversations you’ll ever have are around employee departures. Letting a team member go, even if it’s warranted, can be really tough to swallow. It’s even more difficult when you know that the employee’s a valuable member of the team, and it’s simply down to business performance.
But when you have to let employees go to preserve the financial health and stability of the company, it’s not as simple as just terminating them. There are multiple options at your disposal: furloughs and layoffs.
Depending on the number of roles you’re reducing, your company’s financial outlook, and some other factors, you might opt to furlough employees rather than lay them off — or vice versa. Here’s a close look at furloughs vs. layoffs so you can determine the best approach for your team, if it ever comes down to it.
What is a Layoff?
A layoff is when a company parts ways with an employee for reasons other than poor performance, behavior, or harassment — essentially, it’s completely outside their control. The company has ultimately evaluated its options and determined that it can no longer offer a role to the impacted employee due to a lack of work.
Common reasons for laying off employees include:
- Company downsizing due to lack of funds or growth.
- Changes in technology that make certain roles obsolete.
- Loss of a major contract or key customer.
- Merger with or acquisition by another company that leads to role redundancies.
- Economic downturn or uncertainty.
- Changes in organizational strategy eliminate the need for certain roles.
In the case of a layoff, the role is removed from the organization permanently — or at least for the foreseeable future. The company cuts all ties with the employee and doesn't intend on hiring them back in that specific role.
What is a Furlough?
A furlough, on the other hand, is more of an extended, unpaid leave of absence. It’s typically used in times of financial hardship or business restructure when employers need to reduce labor costs while still retaining their employees.
Often, companies will offer them as an alternative to layoffs to avoid cutting staff altogether and minimize the impact on their workforce. Furloughs are typically temporary and employees return when the company’s financial or business prospects improve.
There are multiple ways to structure a furlough. Companies can tell employees to stop working for a block of time, whether it's a few weeks or a few months. This is usually the case for exempt or salaried employees, who must be paid their full salary if they work at all during a given work week, according to the Fair Labor Standards Act (FLSA). In some cases, employees continue to receive their benefits, like health insurance.
Alternatively, an organization might tell employees to cut back their hours on a reduced schedule while they continue to work. This strategy is usually seen with non-exempt employees or hourly employees. For example, they might be asked to take unpaid vacation time a few days a month.
Furlough vs. Layoff: What's the Difference?
The key difference between a furlough and a layoff is that employees affected by a furlough know their role still exists, even if it’s not needed right now. Employees affected by layoffs don't have this assurance — the role has been eliminated for good. If the company ever rehires them, it will be under a brand new term of employment.
But there are several other differences in how employers need to go about handling layoffs vs. furloughs. Here's what you need to know for your own company:
Because layoffs are a termination of employment, these employees might be offered a severance package once they're let go. Severance usually includes a lump sum of money that's equal to their salary for a certain period of time, basic employee benefits like continued health insurance, and sometimes even outplacement services to help them find a new job. The amount will depend on the organization's existing severance agreement, and could be based on factors such as how long the employee worked for the company.
On the other hand, employees affected by company furloughs usually don't receive a severance package because their employment isn't ending.
Employees who have been laid off can typically apply for unemployment benefits. Depending on their state of residence and other factors, they may receive partial wages to help support their living expenses until they find a new job.
Furloughed workers can also apply for unemployment, depending on their state, according to the U.S. Department of Labor. In New Jersey, for example, they can apply for unemployment for the length of the furlough period — say, if it's a one-week furlough.
Furloughed workers can usually continue their health coverage without interruption, depending on how their employer structures the furlough. Because they're planning on bringing those workers back, employers may continue to sponsor health, dental, and vision insurance for furloughed employees.
On the other hand, laid-off workers usually need to find their own healthcare options because their employer stops paying into their coverage. As part of their severance, they might be covered for awhile on the company's plan, but that's usually temporary. For example, your company could provide extended health benefits for an extra month after conducting layoffs. Whenever employer-sponsored healthcare ends, layoffs count as a qualifying life event to find new insurance under the Affordable Care Act.
But if that's not the case, workers are also entitled to participate in their previous employer's healthcare plan under the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985. This allows them to remain covered under their employer's health plan without interruption — but they're responsible for the full cost of coverage. Furloughed workers may also be eligible for COBRA coverage if their employer opts not to extend healthcare benefits during the furlough period.
Employees affected by a furlough may continue to make contributions to their employer-sponsored retirement plan if they choose. They still technically work for the company and don’t need to make any changes to their 401(k) or any other plans if they’re happy. It’s also important that organizations keep furloughed employees as active participants on their plans, rather than terminated participants, since this can trigger scenarios like 100% vesting or loan defaults.
For laid off employees, because they’re no longer working for the company, employers don't contribute anything to their retirement plans after their employment ends. Workers can keep all of their own retirement contributions and any vested company contributions already made, but they won't receive any further employer-sponsored retirement savings.
For employers conducting mass layoffs, they may be required to give their employees at least 60 days' advance notice under the Work Adjustment and Retraining Notification Act (WARN Act). This applies to companies with more than 100 employees (excluding part-time employees), if at least 50 full-time employees making up one-third of a work site will be losing their jobs. While the WARN Act is a federal law, some states are also introducing their own WARN legislation, so it's important to keep up with local labor laws to ensure you're staying compliant.
Furloughs, on the other hand, typically don't require advance notice as long as the furlough period ends within six months. Depending on your organization's policy or any applicable labor laws, you may still need to give some form of notification beforehand.
What to Consider for Your Company
If you're facing the tough decision of cutting down your workforce, there's plenty to consider to ensure you're setting up your business — and your employees — to be as healthy as can be moving forward. These questions can help you determine which direction is best for your team.
- How long do you anticipate the issue to last? If you're waiting for a major contract to kick in, and you know the issue is temporary, then you could probably get by with a time-limited solution like a furlough period.
- Do you need to scale back or cut down on redundancies? If you need to make a more permanent change to your workforce operations as a cost-saving measure in the long run, then a round of layoffs might be reasonable.
- Do you need employees with a specific set of skills? If you know the roles you're eliminating are ones that will be vital to your operations later on, then it makes sense to furlough those workers instead so you can retain valuable employees.
Support Every Employee With Extensive Benefits
While laid off employees will no longer qualify for your benefits package, you can help them get the most out of your benefits while they’re employed by offering a robust plan that addresses employee wellbeing. The ideal set of perks will set employees up for physical, mental, emotional, and financial wellness, both while they’re with your company and after they’ve left.
This last part is even more important for your team members who are unfortunately making their way down a new path, temporarily or permanently, after a layoff or a furlough. A robust wellness program that covers all of these areas can set them up for success in the months or years ahead.
They can address their fitness needs, target financial health goals, learn new meditative practices — just to name a few ideas. And they’ll have your company to thank for helping them on their journey. Speak to one of our wellbeing specialists today to learn how to get started!
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Severance Pay. U.S. Department of Labor. Retrieved April 18, 2023 from https://www.dol.gov/general/topic/wages/severancepay
The Gympass Editorial Team empowers HR leaders to support worker wellbeing. Our original research, trend analyses, and helpful how-tos provide the tools they need to improve workforce wellness in today's fast-shifting professional landscape.