Furloughs Demystified: A Guide for HR Professionals
October 22, 2018 by Laura Gariepy
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 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 guide, we will be covering what a furlough is, how it’s used, its impact on your business internally and externally, and how to know if holding one is the right choice for you.
Let’s dive right in.
WHAT IS A FURLOUGH?
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.
What Are the Different Types of Furloughs?
Furloughs are most commonly seen in businesses that are seasonal, such as ice cream shops, landscaping companies, and others. During their off months, these companies can furlough their staff, allowing them to close business during their off-season.
For example, if Bob’s Ice Cream Shop does most of its business in the summer months because that is when people are most ready and willing to buy ice cream, it doesn’t make logical business sense to stay open throughout the colder winter months.
So the ice cream shop closes for the off-season, and the employees who work there go on a furlough for that period of time. When business resumes normal operations, those workers still have their jobs and can then return to work.
In the corporate world, furloughs can be used as a cost-saving measure instead of holding a more permanent event like a layoff. For instance, if a company hits a rocky patch and needs to re-balance its books, leadership can look at staffing as a way to make cuts because payroll is often one of the largest expenses for a company.
Some companies in this situation may hold a layoff, but others might want to retain their staff as much as possible. This is where a brief furlough can come in handy. Instead of laying people off or holding a RIF, the company can furlough employees for a few weeks or even a few days to allow the budget to balance.
Furloughs can happen for other reasons too. For example, the COVID-19 pandemic caused many retail and restaurant businesses to temporarily close or scale back their operations. As a result, many workers had to be put on the sidelines.
Government employees can also get furloughed. When a government agency doesn’t have enough funding to pay its staff, it shuts down until the budget can get reworked.
WHAT IS THE PROCESS OF A FURLOUGH?
How furloughs can work outside of seasonal companies largely depends on the organization planning on using them. A company may, for example, decide to hold a furlough every Monday, meaning that staff members have a shorter week, allowing the company to save money week after week until the business is stable. Another company may decide to do this in a lump of days or weeks all at once.
Here’s what a general furlough process would look like:
- Leadership discovers the company is in financial trouble.
- Leadership decides to furlough staff for a set period of time to save money.
- Leadership and HR determine the furlough length and other details.
- HR drafts and sends furlough communication to the impacted employees.
- The impacted employees refrain from working for the furlough period.
- The impacted employees return to work on the stipulated date that the furlough ends (unless otherwise informed in advance that the furlough has been extended).
Of course, the above process is for an unplanned or unexpected furlough. If your business furloughs staff regularly, you’ll typically only need to follow steps four through six.
How Long Is the Average Furlough?
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 severely damage the company’s reputation and employee morale. Your business could suffer long-term negative effects, including the loss of key talent.
Note: If you are planning on holding a furlough, always make sure you work closely with your legal team to ensure that you are complying with all local, state, and federal laws.
You especially want to consult with your legal department if your furlough ultimately becomes a layoff situation. Terminating furloughed employees can be complicated, particularly in the government sector.
THE DIFFERENCE BETWEEN A FURLOUGH AND A LAYOFF
Despite how we use the term in everyday conversation, a layoff is meant to be a temporary reduction in force. That means that once finances have settled down or new work is available, employees let go during a layoff 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, etc., or because the work is seasonal.
Employees are not terminated during a furlough. Sure, they can find new work elsewhere during the event, but they know they will have a job–if they want it–when business resumes normal operations.
In summary, a layoff is meant to be a temporary reduction event where employees are let go from the company and not guaranteed to be recalled. After a certain period of time, the layoff becomes permanent, and those let go will need to find work elsewhere.
With a furlough, employees still have their jobs but are on unpaid leave. This means that when the business resumes operations at full strength, those employees who took the furlough are welcomed back to their jobs.
Layoff vs. Furlough Benefits
Another key difference is how benefits may work. Those who are laid off may be able to receive unemployment compensation and, sometimes, continue to receive other benefits like healthcare. This is usually to help keep impacted employees on the recall list. More permanent reduction events also typically include severance packages and outplacement services.
These benefits are typically not offered during a furlough because they don’t last long enough. However, always make sure to consult your legal team to make sure your furlough is being handled properly (you’ll hear us say this a lot, but it’s super important).
You can read all about the different types of workforce reductions here.
HOW DO FURLOUGHS IMPACT YOUR ORGANIZATION?
Any reduction event that makes your company look a bit shaky (even if your business isn’t) can be received poorly both internally and externally.
Internally, your employees may start to look for work elsewhere because they don’t want to lose money every week or go unpaid for a long period of time. Some may find part-time work to fill the employment gap created by the furlough.
Externally, clients and shareholders may perceive the move as a signal that the business isn’t on steady ground. Or they might look at the move as a way to stave off layoffs, which would shine a better light on the event.
How the event is viewed largely depends on the individual. But either way, always know that–unless you are a seasonal business that holds furloughs every year or a company that has been using furloughs often–any sudden reduction or cost-cutting measure has the chance to impact the reputation of your business.
Should That Stop You From Holding a Furlough?
It really depends. We don’t know your specific situation, so offering a ‘golden rule’ here isn’t helpful. Instead, you need to take a look at your staff and decide for yourself if a furlough, RIF, layoff, or other event is the right move for your organization.
Sometimes, a layoff is the right way to go. For example, if you need to make a permanent reduction, a layoff is great because it allows you to reduce your payroll and then recall those employees whom you can fit in elsewhere. Again, RIFs (the permanent version of a layoff) could work well if you have a more permanent change to your business, such as closing a plant, making a pivot to a new product line, etc.
How Can Furloughs Impact Your Corporate Brand?
Many HR professionals may never consider corporate branding (also known as employer branding), thinking that it’s more of a marketing initiative. However, in today’s world, it can be very important.
In order to hire great talent, retain that talent, and make sure customers want to work with you, how your company is perceived (both online and through word-of-mouth) is becoming an increasingly important HR concern.
With sites like Glassdoor and LinkedIn, future talent is more equipped than ever to gauge how employees are treated at your company. This means that if you hold a poorly planned layoff event, treat your staff members poorly, or do anything else that has a negative impact, people will know about it.
Also consider the fact that employees are more likely to write a bad review than a positive one. Why would someone feel the need to report something that’s great about their work experience? The same can be said for any other kind of review online.
If you order a product and the product works the way a company said it would, you most likely will not feel the need to go on Amazon (or wherever you got it from) and tell the world about it. However, if that product ends up disappointing you, you will probably want to tell everyone so they don’t make the same mistake.
This can be directly applied to how the job market works in today’s overly-connected internet landscape.
When you hold a furlough–especially a sudden one–you open yourself up to this risk, even though a furlough is generally looked upon in a better light than a layoff or RIF.
The good news is that if you follow all of the best practices and hold a successful, well-crafted furlough, you can get out ahead of these reviews and preserve your reputation. Even holding a layoff can be done in a way that provides the utmost care to employees, making them more likely to leave with no hard feelings.
How you handle a furlough will depend on your company culture, employee expectations, and many other things. But you will definitely want to start out on the right foot with a proper announcement letter.
Let’s dig into that now.
HOW TO ANNOUNCE A FURLOUGH: WRITING A FURLOUGH LETTER
After you have come to the conclusion that a furlough is definitely the right course of action for your business, it’s time to actually implement it.
The first thing you will need to do is alert your staff of the upcoming furlough event.
We suggest doing this by sending a furlough notice letter to impacted staff members via email, with their paychecks, or in the mail. The best way to alert staff members of any important change like this is to use whatever means they would expect such news to come from. For example, if your staff doesn’t use email regularly (e.g. plant workers), you should provide the letter with their checks or by mailing it out to their home addresses. However you send the letter should be well thought out to make sure that your staff members are 100 percent informed.
In writing the furlough notice letter, you don’t want to beat around the bush. Get right into describing why you are sending the letter, and clearly explain what is happening. Give as many details as you can, including how the move will impact worker benefits, paychecks, unemployment, and everything else. Though make sure you run these details by your legal counsel first to ensure the furlough is compliant with all regulations.
Above all, keep the letter direct and to the point. Get everything out there for the employee to consider. There is no sense in making this more difficult to understand than it needs to be.
Then always expect there to be a lot of questions. With any reduction event, you need to make sure you are available for workers to ask you any questions they may have. If you keep them in the dark, incorrect rumors may start to spread. And you do not want misinformation to run amok in your organization, especially during a time like this.
Furlough Letters: Rescinding and Extending
Besides your furlough notice letter, remember that you will also need other letters on file that can help save you time later on.
As you go through the furlough process, you may need to extend it or cancel (i.e. rescind) it early. For this to go as smoothly as possible, we highly recommend you keep these additional letters on file so you do not have to write them ad-hoc.
You can download both here:
Both of these letters are short and to the point. They explain whether or not the business was able to gather the funds needed to cancel the furlough, or if more time off will be needed.
Always be upfront with your staff and tell them of these changes as early as possible so that they know what to expect.
THE ADVANTAGES AND DISADVANTAGES OF A FURLOUGH
The biggest advantage to a furlough is that it may save your company from holding a RIF or layoff–both of which are arguably perceived worse than furloughs–and still allow you to get your business back on track.
By guaranteeing your staff members that they will still have jobs after the furlough, you can help retain your talent and show that you are doing everything in your power to protect them from having to find a new role.
Is a Furlough Paid Leave?
Of course, the biggest benefit of a furlough is the costs you save by reducing paid work hours. This is usually the core reason, after all, for any of these moves (unless you are making a larger business pivot or something else along those lines).
Furloughed employees who aren’t actively working don’t need to be paid. This may vary if you have non-exempt employees, who must still be paid for any hours of work done regardless of the furlough. And exempt employees must still be paid a full day’s wage if they are called in to do any work at all during the furlough. But barring these situations, a furlough can provide a lot of potential cost savings for your company.
Seasonal furloughs are another great way to handle these reductions, even if you are not in a traditionally seasonal environment. For example, if you set the expectation that your plant will close every August and reopen every October, your staff members will know that they will have to fill that gap with other work or save up to get through it.
However, if you haven’t set that expectation with your employees, the furlough could be seen as a negative and may prompt some of your staff to find other roles where their employment is more stable.
The last big benefit of a furlough is that you will not, for the most part, have to hire new staff members back after the furlough. If you lay off staff members and then your business rebounds, you will then have to spend more time and money finding talent to fill those roles that you laid off (unless you are able to recall them).
Those are the biggest and most impactful reasons to hold a furlough over a traditional layoff event. However, there are also definitely disadvantages.
One of the biggest disadvantages of a furlough is when it prevents actually saving any costs.However, this can be completely negated if you put a proper plan on paper before launching into the event in the first place.
How might you miss out on saving costs if you are holding a furlough where employees aren’t working? Well, you have to seriously consider what benefits will continue during the furlough and if they are going to wind up costing you about the same as not holding a furlough in the first place.
In other words, make sure that you are actually going to cut costs when it comes to your furlough.
Does a Furlough Create More Staff Workload?
This brings us to our next point: workload.
If the work continues on pace, your returning employees may not be able to handle the increased load. This may prevent your company from being able to fulfill orders, which can make for angry customers, and lead to loss of business.
All of this can lead to more internal stress that can negatively impact your business because workers will feel unfulfilled and overworked. Teams may start to crack as projects take longer to get done, and many employees may start looking for other jobs.
A recent study found that employees who start looking for new work also tend to stop helping their coworkers with their tasks. You need to make sure that you help your teams as much as possible through a furlough, so that you don’t wind up with a talent shortage. Remember, it’s very costly to hire and train new staff members, and one of the biggest benefits of a furlough is that you will be able to retain your staff instead of hiring.
In order to do that, HR has to play a key role in making the move go over smoothly. If the budget isn’t fully and carefully thought out, the increased work and stress levels may cause future problems.
As you can see, a furlough has its ups and downs, much like any cost-saving measure that impacts your staff. It largely depends on whether your company will benefit from the move or if it will only make things worse. You need to work closely with your upper management, accounting team, legal team, and stakeholders to go over every possibility. You don’t want to go into a furlough without a fully thought-out plan in place.
FURLOUGH REQUIREMENTS, OTHER CONSIDERATIONS, AND TIPS
Now that we’ve gone over every aspect of furloughs you need to get started, we need to go over what else to consider outside of the major concerns.
Furloughs and Employee Benefits
The biggest thing you need to think about is how benefits will work over the course of the furlough. We mentioned this briefly above, but in order for your furlough to do what you want it to, you need to review the terms of your benefit plan to ensure that you are paying out the correct benefits to impacted staff members and that they know what those benefits are.
You also have to consider what groups will be impacted by the furlough. While layoffs have stringent rules for employers based on guidelines by the US government, the Older Workers Benefit Protection Act (OWBPA), and state regulations, furloughs mainly have to worry about union rules (if union members are going to be impacted by the furlough).
Again, these issues need to be addressed by your legal team. We won’t go into every single law or union guideline here that you may need to follow, as we are not lawyers. But by working closely with your legal counsel, you can ensure that you are following all local, state, and federal laws, allowing your furlough to run smoothly and legally from start to finish.
Furloughs and Company Communications
The last major concern is that you need to be consistent with your communication and messaging throughout the furlough.
In HR, communication is key. Your staff needs to be properly informed on what is going on, how it impacts their jobs, and anything else that might be relevant. Be as transparent as possible, and try to avoid doing things that don’t make sense.
That last part may seem like a no-brainer. But we often hear about companies that lay off staff members, cut hours, or hold furloughs and then reward executives with bonuses. This doesn’t make sense. If the business is struggling, hold off on any bonuses. What message does it send to lower-level staff–the ones typically doing the bulk of the work–when they are struggling while their bosses are thriving more than ever? That’s one way to lose your staff and reputation all in one move.
So be mindful of your communications and actions during your furlough, keep them clear and consistent, and refrain from sharing management team bonuses if your message is about the need for cost savings.
FURLOUGHS: THE KEY TAKEAWAYS
We’ve covered a ton of information here,so let’s do a quick recap.
Furloughs are involuntary, unpaid leaves of absence from work. Usually, furloughs are used to help reduce costs and stave off the possibility of a layoff or RIF.
For many industries, furloughs are the norm. Consider ice cream shops, landscapers, and other seasonal businesses that close their doors in their off-season and then reopen later with the same staff.
As indicated in the example above, furloughs are not permanent reduction events. In fact, they aren’t truly reductions at all because employees who are furloughed are still employed by the organization, even if the organization is not operating at that time.
When a furlough is over, the employee returns to their normal working hours.
Furloughs can impact an entire organization overall or just individual teams. For example, if you have no current work for your plant workers for whatever reason, they can be furloughed while your management team finds new work for them to do.
The goal of a furlough is to reduce costs while retaining talent. If done right, furloughs can be super successful in accomplishing both. However, if furloughs are mishandled, last for too long, or are extended too much, employees may start to leave the organization.
The key benefits of a furlough are:
- Reducing overall company costs
- Retaining staff members during financial hardship or business loss
- A safer move for company reputation than a layoff (though layoffs also have their place)
- Reducing training costs
- Reducing stress levels
To make these advantages shine, you need to handle your furlough with the utmost care and preparation. For some companies, furloughs are a normal event. But issues can arise if you implement them too suddenly.
To learn more about implementing furloughs, especially writing the necessary communications, check out our guides here:
Some of the key downsides that can come with furloughs are:
- Not cutting enough costs (if you have to pay a lot of benefits and unemployment)
- Taking a hit to company culture
- Too much employee workload when returning from the furlough
- Talent leaving the company
- Corporate branding issues
Most of these issues can be prevented with proper planning and implementation. Always make sure that your furlough will save you money without causing a talent shortage or a hit to your company image. And we can’t say it enough, make sure that you consult with your legal team and follow all pertinent legal regulations.
In the end, a furlough can save you significant costs and reduce the chance that you will have to hold a reduction event in the future. However, without the proper plans in place, it can also hinder your overall performance.
Always make sure that your business moves reflect your employee expectations. And in case they don’t, always be transparent with your staff. There is no sense in hiding information, especially when that information will directly impact the livelihoods of your staff.