In this challenging time, many employers are exploring all available options to cut costs until the economy recovers. To achieve this goal, furloughs and salary reductions are often better alternatives to layoffs. Both strategies temporarily reduce payroll in economic downturns while positioning employers to quickly resume normal operations when business picks up. We explore some relevant considerations below.
What should employers consider when deciding between furloughs and layoffs?
From the standpoint of employees, furloughs tend to be better received than layoffs. Depending on the employer's needs, furlough may mean a specific time period without work/pay or a temporary reduction in hours or days worked while employees continue to accrue leave and receive health benefits. Furloughed employees know they will have a job waiting for them when business picks up.
By contrast, layoffs are a complete separation from the company. While layoffs can also be temporary, employees don't perceive layoffs as having any guarantee of returning to work, so laid off employees tend to start looking for other jobs. Employers are more likely to permanently lose laid off employees, and layoffs can also have significant implications for company morale. Since coronavirus is a temporary event, which will hopefully come under control in the coming months, furlough is the better response for many employers.
How are furloughs different from layoffs?
Furloughs are temporary periods in which employees do not work and are not paid. Furloughed employees usually retain their health insurance and other benefits, have their regular job waiting for them when circumstances change, and start working again without any kind of onboarding process. Layoffs can either be temporary or permanent. Unlike furloughs, layoffs entail a full separation from the company, complete with an involved separation process and subsequent onboarding process (if employees are rehired). Laid off employees are much more likely than furloughed employees to seek other employment and permanently leave the employer.
Do WARN Act requirements apply the same way to furloughs?
Whether it's called a furlough or a layoff, the WARN Act is triggered by a break in employment of more than six months. Since typical furloughs are fairly short-term, they generally do not trigger WARN Act requirements. The same goes for a temporary layoff of less than six months. However, either a furlough or layoff of six months or more would trigger WARN Act requirements.
Are pay cuts a viable alternative?
For hourly employees, employers generally have the flexibility to offer fewer hours and fewer days of work. However, for exempt employees, employers can't reduce weekly hours and correspondingly reduce compensation. Employers must pay exempt employees the same amount for each pay period in which they work, regardless of how many hours they work. So, for example, employers can't have exempt employees work three days a week and earn a fraction of their normal pay. Employers can have exempt employees work fewer pay periods while fully paying them for each pay period in which they work.
The Department of Labor explains that employers are also allowed to make a bona fide reduction of an exempt employee's salary "during a business or economic slowdown" if such a reduction is not related to the "quantity or quality of work performed" and is in place for a significant time period (i.e., it does not change pay-period by pay-period but is consistent and long-term). Alternatively, employers can switch exempt employees to part-time status and pay a reduced weekly salary. Assuming the part-time salary exceeds $684 per week, the employees would remain exempt. If the salary falls below $684 per week, then employers can convert exempt employees to non-exempt status for a period of time and pay them on an hourly basis.