What is an Employee Furlough, and Why Do Employers Use Them?
With the recent developments in the US government, people, even those who are not affected by the ongoing situation, are getting more and more interested in furlough politics, how and why it is used, what the consequences are, and so on.
At the very beginning, it is important to know that furloughs are a measure taken to avoid even more drastic measures.
Companies use them more often than you would initially think, but not always in such extremes that it becomes a worldwide sensation.
The January 2019 United States Government furlough is not the first of the kind, there have been others (18 of them), equally serious during the years.
WHAT IS A FURLOUGH?
Furlough is essentially and mandatory leave from work issued by your company.
The furlough is a cost-saving action and usually happens when a company experiences a reorganization, a financial setback and/or shutting down.
It gives the company an opportunity to manage finances without having to resort to layoffs and RIFs.
The idea is to avoid laying-off or firing any employees, and instead, all the employees make a small sacrifice, enabling everyone to keep their jobs.
There are different types and durations of furlough and they depend on the company’s needs and even the nature of the business.
As in any action, especially those relating to the people aspect of company management, furlough has its own advantages and disadvantages (we will examine them later in the text).
The furloughed workers are usually informed of the furlough’s duration and have their job waiting for them after the mandatory leave ends.
Pay attention that furlough should not be and cannot be a long-term solution for the company’s economic crisis, and as such, it cannot go on forever.
If it goes on for over a year, companies might want to consider taking some more serious measures like layoffs or closing the company.
WHICH COMPANIES USE FURLOUGH?
As we already mentioned, there is not just one type of company which uses furlough.
Most commonly, federal and government employees are affected by them.
The workers are divided into two categories: essential and non-essential workers.
In government, the non-essential ones are usually employees working in for NASA, Labor Department, Environmental Protection Agency and so on.
Those categorized as non-essential are furloughed i.e. they go on an unpaid leave of absence.
However, not only the government employees get furloughed, it happens with other companies when they face a financial setback and when they want to avoid firing workers.
Some companies and industries have scheduled furloughs due to the nature of the business.
For example, hotels in seasonal tourist locations might want to use furlough during the months that are not a peak of the business season.
Why would you keep a hotel on Santorini up and running November through March when there are no tourists, and inherently no revenue?
In those and similar examples, the owner might choose to furlough the workers, cutting back expenses and prepare for the following season.
Other businesses that could resort to furlough are for example lawn mowers, pool cleaners, companies responsible for clearing the snow off the roads and many others that are in some way connected to a certain season- either climate-wise or if related to a topic (Wedding season, Holiday season and so on)
Note that there are other uses of the word ‘furlough’ that is not related to employment and that can cause confusion.
Those are prison and military furloughs, which grant a prisoner or a soldier some time to visit home and then return to the prison or service.
With prisoners, those are usually occasions like family member’s funerals or weddings, and with soldiers after being on an assignment away from home for more than 2-3 years.
HOW IS FURLOUGH IMPLEMENTED?
The Importance of the Furlough Notice
One of the first things that should be taken into consideration when you are thinking about putting employees on furlough is the way in which you plan on informing them.
Making a mistake in this aspect can lead to employees losing confidence in the management, and create negative emotions towards it. In some, drastic, cases a lawsuit might ensue.
The notice should be in a written form and issued at least 60 days prior to the start of the furlough.
Sometimes, a notice can be provided orally or over the phone but it should be avoided as it can lead to miscommunication and misunderstandings.
When in doubt, resort to the usual method which your company uses to issue statements and notices.
Informing the employee about the furlough needs to be executed tactfully with the highest regard of the employee’s feelings and concerns, as the hit to the income can stress out and worry the employee.
The management should be able to answer all the possible questions regarding the implications of the furlough and take time to do so.
Explaining that furlough is not a punishment for the employee and that it does not reflect their value and performance is also a must.
Doubting in yourself and your competencies lead to the lowering of the morale which in turn leads to weakened productivity.
What is the duration of a furlough?
Another aspect of a furlough is its duration as well as a form it takes.
It can be carried out in various ways depending on the company’s needs, the industry it belongs to and so on. So there is not just one correct answer to the question of how long can an employee be on furlough.
It can last for months (preferably not over a year) or weeks. In this situation, the employees do not come to work at all during this period of time and they do not get their paychecks.
However, in some situations, like government jobs furloughs, the employees may receive their pay retroactively after the furlough had ended.
Another option is that employees take one unpaid week off work during a month.
For example, the employees are divided into 4 groups and each group takes a different week off (group 1 does not come to work on the first week, group two on the second week and so on…).
On the other hand, the employer may decide to have all the workers take the same week off, and temporarily close the company, saving money for electricity, heating and more.
There is another alternative to that and that is sending employees on furlough one day of the week, or reducing daily work hours by one or two hours a day.
During the furlough that takes these partial forms, the employees receive their paychecks but they are reduced for the hours they are not working.
This brings us to the issue of the employee classification that affects calculating work hours.
WHAT IS THE DIFFERENCE BETWEEN EXEMPT AND NON-EXEMPT WORKERS?
The exempt and non-exempt employees differ in the aspect of overtime pay eligibility and the fact that they are receiving wages or salaries.
In furlough situations, this can cause quite a mess since the payment is not carried out in the same way for both groups according to their contracts.
What are they exempt or non-exempt from?
The workers are exempt or non-exempt from the rules and regulations of FLSA – Fair Labor Standards Act. (It establishes a minimum wage, overtime pay, recordkeeping and so on.)
1. Non-exempt Workers
A standard workweek consists of 40 working hours.
Non-exempt workers comply with the rules and regulations of FLSA, they work a minimum of 40 hours per week, receive at least a minimum wage, and are eligible for overtime pay.
This means that an increase in wage is calculated for each hour of overtime work.
If a non-exempt worker is affected by the furlough, they have the right to be paid for each hour they worked during the length of it.
For example, if the workday is shortened from eight to seven hours, the non-exempt workers must receive a recalculated amount according to the seven-hour workday, or if one day a week is a furlough day, they must get paid a regular amount for the other four days.
Pay attention to the fact that each State has its own overtime pay policies, so employers must check those regulations with the State’s Department of Labor before calculating the pays during the furlough time.
2. Exempt Workers
Opposed to the non-exempt workers who receive hourly wages, the exempt workers receive weekly salaries.
They are not eligible for minimum wage or overtime pay. The FLSA does not cover them in any way.
However, companies themselves can offer some sort of an overtime work incentive or a benefits package, and this differs from company to company and is regulated by the employee’s contract.
Exempt employees often have an executive, supervisory or a sales position.
If an exempt worker is affected by the furlough, problems might arise, for example, If an employee in this category works even a little (as far as answering an e-mail or a work-related phone call) during the furlough, they are entitled to receiving a full week’s salary.
Since the aim of furlough is to save money, this is definitely not a good thing, in fact, it is even worse since the employer would be paying for a lot more than the actual work.
This is why the employers introduce the no-work rule which means that the employees cannot work at all during that time.
Sometimes they would even take away work phones and temporarily deactivate work e-mails in order to avoid such situations.
Also, this is why it is usually scheduled that exempt workers go on furlough in blocks that last at least a week.
RECEIVING BENEFITS AND FILING FOR UNEMPLOYMENT
Reducing the work hours opens a new set of questions regarding the possibility of having to file for unemployment and keeping the benefits such as health insurance.
Even though the employees do not get their paychecks, most companies keep paying for their benefits such as health insurance and welfare.
As it still draws money away from the budget, some companies may decide to revoke the benefits during the furlough, especially if it goes on for a month or more.
Also, if an employee’s workweek is less than 35 hours, in some states, the said employee goes to the part-time worker category and loses eligibility for benefits plan (states have their own policies about benefits so check the ones that are related to your location).
In those situations, it can be solved by reconstructing the initial agreement for 35 hours workweek to 32 hours workweek, enabling employees to keep their benefits.
In situations where furlough lasts longer, employees might qualify for unemployment benefits.
The employee will be asked to submit evidence of how long they are not working, how much they earn and so on, and if they qualify they can file for unemployment.
The requirements also differ from state to state but employees usually qualify if they are unemployed due to no fault of their own, such as long-term furlough or layoff.
Filing for unemployment is not a permanent solution, but a temporary one as this is also regulated by the law.
WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF FURLOUGHS?
Like any other action that you take regarding your business and towards its improvement, furlough has some desirable outcomes, but also some less desirable ones.
One of the first disadvantages you could come across is not saving as much money as you initially thought. Your expenses will be reduced but not decimated.
This can especially be seen if you make an oversight regarding benefits plans and salaried employees.
Also, the employees who would have to pull their weight in preparing the company for reopening after a furlough are the ones that come from the exempt category, which means that their pay is substantial, and you will have to pay them.
Morale is another thing that can go either way- it may stay up as your employees see that they are not being laid-off, however, if a furlough lasts for a long time, it can lead to losing faith in the company’s management, existential worries and resigning the position in order to look for another job.
This especially happens if the furlough is not scheduled so as to allow planning and if it happens suddenly without timely notice.
Some of your best employees might resign in search of a more secure job that offers them the opportunity to improve their careers rather than allowing them to become stale.
A furlough that lasts even a week provides them with enough time to schedule interviews and resign, leaving you with a necessity to hire and train somebody else for the post.
Reopening also takes time and resources, since you need to prepare and allow the employees to catch up (if the entire company was not a subject of the furlough) and regain the momentum that was interrupted by the furlough and reach the degree of high efficiency again.
In most situations, and if the furlough is conducted properly, your employees’ morale will stay high as they would realize that there are benefits to the situations.
With the employer’s proper planning, the company may still meet the market’s demands and not lose credibility and/or customers.
Primarily, you avoid layoffs which are leaving the workers without jobs.
They are ready to disregard the fact that they are not receiving pay for that time since they get to keep their health insurance and are grateful to know that their job will be waiting for them after the furlough ends.
They appreciate the opportunity to be able to keep their jobs and remain loyal to the company in return.
The employees’ skills and expertise will remain sharp, if the furlough lasts for a short time, and they might even appreciate a little time off work if it does not affect their livelihood in a grave manner.
After reopening, you will not have the need to hire new people to fill the emptied positions, as many will return after the furlough has ended.
Hiring process takes time and retraining takes both time and resources, so with the furlough, you get your experienced employees back.
If a furlough is scheduled, it allows both the company and the employees to benefit from it.
For seasonal works, for example, the employer gets to reduce revenue during the low activity periods and gets time to gather strengths.
On the other hand, the employees get to plan their own expenses and savings, or even decide to take up another part-time, or seasonal job to fill in the time on furlough.
Planning makes the process less traumatic and allows for the possibility of returning to the post after the furlough.
This does not relate only to seasonal jobs.
If the furlough notice is issued in advance and in a timely fashion, your employees would have enough time to do all the required planning to go through the transition effortlessly.
FURLOUGHS vs. LAYOFFS
So far, we have talked about furloughs in detail but we have mentioned layoffs more than once.
In order to avoid confusion, let us further examine the similarities and differences between furloughs and layoffs.
Layoffs are considered a more drastic and less desirable alternative to furloughs.
The main reason for that opinion s the fact that in a furlough the employees get a guarantee that they will have their job waiting for them at the end of the furlough’s duration, if they want the job back, of course (since they can find another job during the time).
With layoffs, that is not the case. The employees are laid-off without the guarantee that they will be called back when and if the company restarts its business, but there is a possibility.
Layoffs are usually reserved for temporary leaves that are supposed to be longer than furloughs. (Note that it is also different from RIFs – Reduction in Forces, which are almost exclusively actions of permanent termination of contracts.)
Another point of difference is that in furlough the employees may be able to keep healthcare and dental insurances, while layoffs do not allow for that.
Applying for unemployment is always possible with layoffs, and it is conditioned by work hours in furloughs.
Severance packages and outplacement services are offered to the laid-off workers while the furloughed workers never get that option as they technically still have their jobs.
So how do you choose the best tactic for cost-reduction for your business? Basically, the amount of resources decides that for you.
If you are certain that you would be able to call back all your furloughed employees, go with the furlough.
However, if you think that that may not be the case, and you end up prolonging the furlough time, it might be fair to lay-off workers and provide them with the opportunity to look for another job.
Keep in mind that both actions may result in a bad reputation among the workers and the public.
So, what is the bottom line regarding furloughs? Are they a good choice for your company or not?
What you should do to answer these questions after you got acquainted with all the implications, downsides and upsides, is to carefully examine your company’s needs for a cost-saving plan.
Decide whether furlough is enough for your current situation or you need to bring more extreme measures to fix the ongoing financial issue.
After you have made that decision, work up a furlough schedule all the time keeping in mind your company’s and your employees’ wellbeing, so that everybody could benefit from the furlough in the long run, as that is its main aim.
Weigh in the advantages and disadvantages, work out a plan, categorize your employees, figure out the duration, calculate how much you want to save and figure out a support system for your furloughed workers so that they would remain loyal to the company.
Furlough might be a productive and efficient solution for your company at a moment of financial crisis or reorganization but bear in mind that it is not and should not be considered a long-term practice because it will damage your brand’s name, discourage your employees’ loyalty, and, in that case, it will turn out to be a counterproductive move.
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