HR furloughs guide to compliance, planning, and implementation best practices

Organizations have many tools they can use to balance their budgets through staffing changes. One of the most talked about is a layoff, a temporary reduction in force (RIF) that often becomes permanent after a recall period elapses. 

However, there is another way that might suit your business needs better: holding a furlough.

In this HR furloughs guide, we break down what a furlough is, how it’s used, what impact it can have on an organization, and how to know if holding one is the right choice for you.

In short, a furlough is an involuntary, unpaid leave of absence from work for a specific period of time. Generally, a company puts employees on a furlough to save money. 

There are a few different types of furloughs that organizations may use in different ways depending on their business model, financial situation, and external circumstances.

Some businesses operate only during certain times of the year and choose to furlough employees during the slower seasons.

Common examples include:

• Ice cream shops
• Landscaping companies
• Tourism businesses
• Holiday retail operations

For example, if Bob’s Ice Cream Shop does most of its business during the summer months, it may close during the winter when demand drops. Employees are placed on furlough during the off-season and return to work when business picks back up.

In corporate environments, furloughs are often used as a short-term cost-saving measure when a company needs to reduce expenses but wants to avoid permanent layoffs.

Payroll is typically one of the largest expenses for an organization. Instead of conducting layoffs or reductions in force (RIFs), leadership may furlough employees for:

• A few days per month
• Several weeks
• A defined short-term period

This approach allows the company to reduce payroll costs temporarily while keeping employees on staff for when business stabilizes. Click below to download our free Careerminds guide on effective downsizing strategies that can help you cut costs without laying off employees.

Furloughs may also occur when external events disrupt normal operations.

For example, during the COVID-19 pandemic, many retail stores and restaurants temporarily closed or reduced hours. As a result, employees were furloughed until businesses could reopen or resume normal operations.

In the federal government, furloughs often occur during government shutdowns or funding gaps. In these situations, employees are categorized as exempt, excepted, or neither, which determines if and how they will continue working.

• Exempt employees are not affected by the furlough. They continue working and receiving pay during the shutdown, typically funded through sources not impacted by the funding lapse.
• Excepted employees must continue working during the shutdown because their roles are considered essential, though they may experience delayed pay until government funding is restored. They often include employees responsible for public safety or critical government operations.

Employees who are neither exempt nor excepted are typically furloughed and temporarily stop working until the government reopens. You can learn more about government shutdown furloughs on the official US Office of Personnel Management (OPM) website.

Despite how we use the term in everyday conversation, a layoff is meant to be a temporary reduction in force (RIF). That means that once the financial situation has improved or new work is available, laid off employees will hopefully have the chance to be recalled.

In other words, a layoff is very much like a RIF (though the latter is always permanent) in that impacted employees who leave your organization may well wind up working elsewhere because there is no guarantee that they will be recalled.

When it comes to furloughs, on the other hand, employees are given (typically unpaid) leave from work for a specific amount of time. This can be caused by a business need, such as saving costs, re-balancing a budget, or because the work is seasonal.

Employees are not terminated during a furlough. Sure, they can find other work elsewhere while on furlough, but they know that they will have a job, if they want it, when business resumes normal operations.

Another key difference is how benefits may work. Employees who are laid off may be able to receive unemployment compensation and continue receiving other benefits like healthcare. More permanent reduction events also typically include severance and outplacement services, which are typically not offered during a furlough because they don’t last long enough.

Your company can furlough workers for as long as necessary (so long as it doesn’t violate union collective bargaining agreements or applicable laws). However, lengthy furloughs can damage company reputation and employee morale. Your business could suffer long-term negative effects, including the loss of key talent.

Furloughs can impact both paychecks and employee benefits, depending on whether the furlough is full-time, partial, or temporary. Here’s our HR furloughs guide on what HR teams and employees should know about furlough pay and benefits.

• Non-exempt employees (hourly) are not paid for hours they do not work. Overtime eligibility is also unaffected when they do return to work.
• Exempt employees (salaried) must generally be furloughed in full-week increments to avoid violating the Fair Labor Standards Act (FLSA). They also cannot be asked to perform work during a furlough week without being paid their full salary.
• Partial furloughs (reducing hours instead of full-time leave) can be applied carefully for hourly employees, but exempt employees must continue to receive their full salary for any week in which they perform work.
  

Health insurance coverage often continues during a furlough, but employees may be responsible for paying their portion of premiums if no paycheck is issued. Retirement contributions, such as 401(k) or pension plans, may pause temporarily, and employees may also need to suspend their own contributions when not receiving pay. 

Paid time off (PTO) typically does not accrue during furlough periods, and employees generally cannot use PTO to cover furlough days unless the employer specifically allows it.

Other benefits, such as disability insurance, life insurance, or commuter benefits, may remain in effect depending on the rules of each plan. Since furloughs can impact different benefits in different ways, employers should communicate clearly with employees about what remains active, what pauses, and what costs employees may be responsible for during the furlough.

Implementing a furlough outside of seasonal businesses depends on the company’s goals and financial situation. Some organizations may choose a recurring schedule, like every Monday off, reducing weekly payroll gradually until operations stabilize. Others may implement a continuous furlough lasting several days or weeks all at once.

1. Identify the need: Leadership recognizes that the company is facing financial pressure and needs to reduce costs.
2. Decide on furlough parameters: Leadership determines which employees will be affected, the length of the furlough, and whether it will be partial (reduced hours) or full-time.
3. Coordinate with HR: HR reviews legal and compliance considerations, including pay, benefits, and any union or contractual obligations.
4. Communicate with employees: HR drafts clear, written communication explaining the furlough dates, expectations, and impact on pay and benefits.
5. Furlough period begins: Affected employees refrain from working for the duration of the furlough, in compliance with labor laws.
6. Return to work: Employees resume their regular duties on the specified date, unless there is a furlough update to extend it with proper notice.

Once you’ve decided a furlough is necessary, the first step is to notify affected employees. This is usually done with a written furlough notice, which can be delivered via email, with paychecks, or by mail. Choose the method your employees expect for important communications. 

For example, plant or field workers who rarely check email may need to receive a mailed notice or have a physical copy delivered with their paycheck.

The notice should be direct and clear. Explain why the furlough update is happening, the expected duration, and how it will affect pay, benefits, and unemployment eligibility. Always review the letter with legal counsel first to ensure compliance with regulations.

Finally, be prepared for questions. Employees will want clarity, and timely answers help prevent misinformation or rumors from spreading during this sensitive period.

Even when your business is fundamentally healthy, a furlough or other reduction event can create perceptions of instability both inside and outside your company.

Employees may react to a furlough by:

• Seeking new job opportunities to protect their income
• Picking up part-time work to offset lost wages
• Feeling uncertainty or decreased morale

Even short-term or temporary unpaid leaves can prompt staff to question the stability of the company.

Clients, investors, and shareholders may interpret a furlough in different ways:

• Negatively as a sign that the business is struggling
• Positively as a strategic move to avoid layoffs

Perceptions vary by individual and stakeholder, but the key is to manage messaging carefully to maintain confidence in your organization.

Unless your company regularly implements furloughs (like seasonal businesses) or uses them as part of an established cost-management strategy, any sudden reduction or cost-cutting measure carries the risk of affecting your corporate reputation. It’s important to be mindful of this as you weigh the options for your organization.

There’s no universal answer. The decision depends on your specific business situation, so make sure to consider each option carefully:

• Furlough: Effective for temporary or seasonal cost reductions when you want to retain employees for when business improves.
• Layoff: Best for more permanent reductions, allowing you to reduce payroll while potentially rehiring employees in other roles.
• Reduction in force (RIF): Suitable for permanent structural changes, like closing a plant or shifting to a new product line.

Ultimately, evaluating your staff, financial needs, and long-term business goals will help you determine whether a furlough, layoff, or RIF is the most appropriate path for your organization. 

Furloughs are a valuable tool for organizations looking to manage costs, retain employees, and navigate temporary business challenges.

Here are the key takeaways:

• Furloughs are a temporary unpaid leave, while layoffs typically end the employment relationship more permanently.
• Types of furloughs include seasonal, temporary cost-saving, emergency or crisis-driven, and government furloughs with exempt and excepted employees.
• Hourly employees are unpaid during furloughs and salaried employees must follow FLSA rules; health insurance, retirement, and PTO may be impacted.
• Implementation requires defining parameters, coordinating with HR and legal, notifying employees in writing, and providing support during the furlough period.
• Furloughs can affect internal employee morale and external perceptions, so transparency and careful messaging are critical.
• Evaluate business needs and goals to determine whether a furlough, layoff, or reduction in force (RIF) is the best approach.

If your organization is looking for support with your employee furloughs or considering a RIF, we are here to help. Click below to learn how our Careerminds outplacement, career development, and workforce planning solutions can support you during this process.