Global Payroll — 7 min
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If your company is experiencing financial hardships or restructuring, your first thought might be to lay off your employees to reduce costs. However, it’s not the only cost-saving option.
Another way to manage economic challenges is to furlough your employees, and temporarily suspend their employment.
In this article, we’ll explain how furloughs work, and discuss the best way to handle the process. We’ll also explore the differences between furloughs and layoffs, so that you can make the right decision for your company.
Jump straight to a key chapter
What does furlough mean?
Furlough is when you put your employee on a temporary leave of absence, or significantly reduce their working hours. The employee still retains their job, but they’re not paid their regular salary or wages during the furlough period. They also keep benefits like health insurance, and have the option of returning to work once conditions at the company improve.
Furloughs are a common cost-saving measure when businesses experience:
Economic downturns
Serious budgeting issues
Seasonal fluctuations
Company restructuring
Unforeseen external crises, like the COVID-19 pandemic
How long can a company furlough an employee?
A furlough can be anywhere from a few weeks to several months (or even longer), depending on your company’s circumstances. There is technically no limit to how long they can last, but they’re designed to be a temporary solution and shouldn’t last more than a year.
What is the difference between a furlough and a layoff?
When deciding whether to implement furlough or layoffs, it’s important to understand the differences between the two — and the respective impact on your business.
Furloughs
As mentioned, furlough is a temporary leave of absence, allowing employees to return once your company’s situation improves. This saves you the time and cost of hiring and training new staff. However, there’s no guarantee employees will return. For example, when the Internal Revenue Service (IRS) furloughed 26,000 employees in 2019, only 12,000 decided to go back.
Pros:
Reduces labor costs without resorting to layoffs
Allows you to recall skilled employees when conditions improve
Lets employees retain benefits during difficult times
Cons:
Reduces work productivity
Negatively impacts employee morale
Layoffs
While furloughs are designed to be temporary, layoffs are permanent. Unlike terminations, though, layoffs are usually unrelated to the employee’s performance.
Laid off employees can collect unemployment but, in most cases, they lose access to benefits like health insurance. Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), laid off individuals may be able to stay on their employer-provided health plan for an additional 18 months (or 36 months for a qualifying life event). However, they will have to pay the full premium.
Pros:
Delivers immediate cost savings by reducing payroll
Frees up more cash flow to invest elsewhere
Allows you to remove redundant positions
Cons:
Incurs high unemployment costs
Results in lost institutional knowledge
How does a furlough work in practice?
In the US, furloughs work differently for exempt and non-exempt employees. It’s important to understand these differences when handling furloughs.
Furloughs for exempt employees
Exempt employees are those who earn a regular salary instead of an hourly wage. They’re exempt from minimum wage and don’t qualify for overtime.
If an exempt employee is put on furlough and performs any of their job duties, their employer must pay them a full week of their salary — no matter how many hours or days they work. For this reason, the best way to furlough exempt employees and comply with the Fair Labor Standards Act (FLSA) is to require the employees to take time off in full-week increments. Instruct on-site and remote employees not to perform any work during this period.
Furloughs for non-exempt employees
Non-exempt employees are those who are paid an hourly wage. Under the FLSA, they’re entitled to minimum wage and overtime pay if they work more than 40 hours in a workweek.
Employers can furlough non-exempt employees by simply reducing their hours. They can also lower their hourly rate, but it must stay above the minimum wage. If a non-exempt employee is put on furlough, their employer must pay them for the hours they work along with any overtime.
Handling a furlough
Implementing a furlough is difficult, as you’re essentially upending your employees’ lives with short notice. But if your company is facing financial challenges, you have to make hard choices.
First, evaluate your company’s situation to determine if furloughs are necessary in the first place. Are there other ways you can reduce expenses? If not, develop a plan that outlines the reason for the furlough, its expected duration, and how it will affect changes in work hours and compensation.
Then, communicate the plan to your employees and address their concerns. Provide helpful resources during this period, like how and where they can file for unemployment.
Recall your employees back to work once conditions improve, and help them transition back to their original roles.
Examples of furloughs
Furloughs are fairly common, particularly in the US. Here are some recent real-life examples, and the impact they had:
Disney World
In response to nationwide shutdowns from the COVID-19 pandemic, Disney World furloughed 43,000 Florida-based workers in 2020. These employees were able to keep their health benefits at no cost for up to a year, and could also apply for unemployment benefits.
US federal government
In 2013, the lack of a Congress-backed funding bill resulted in a US federal government shutdown, causing over 850,000 federal employees to be furloughed. According to the Office of Management and Budget (OMB) the shutdown resulted in a staggering $6 billion of lost output.
FedEx
In 2023, FedEx announced the closures of 29 locations and temporary furloughs due to slower demand. The company didn’t reveal how many employees would be impacted, although it called the move a “temporary workforce adjustment” with plans to recall its employees.
Furlough for employees
It’s also important to understand the impact furlough has on your employees. To support them during such a confusing and difficult time, you should provide information and guidance on what their options are.
Do furloughed employees get unemployment?
In the US, furloughed employees can apply for unemployment benefits. However, eligibility requirements vary.
For instance, federal workers who are furloughed can receive unemployment benefits. However, they may have to pay these back once they receive back pay from their employer for the furlough period.
Are furloughed employees allowed to work other jobs on furlough?
Yes. Furloughed employees are allowed to work other jobs to make up for income shortfalls. However, any income your employee receives from their “second” job must be documented, and can impact the amount of furlough back pay they are eligible to receive.
If your employee works another job during furlough, they can also not claim unemployment benefits.
How can Remote help?
It’s difficult for companies to survive periods of financial uncertainty. Furlough is one way to manage such a situation, but taking preventative measures can also help you avoid such uncertainty in the first place.
When you work with an experienced HR partner like Remote, we can save you significant amounts of money and resources. Our employer of record (EOR) service enables you to hire more cost-effectively in diverse talent markets, reducing your wage bill and allowing you to hire from a wider pool.
Our all-in-one HR platform can also significantly reduce your HR and payroll costs, while streamlining your entire HR stack into one secure platform. With our expert guidance, full compliance, and scalable approach, Remote can help you grow while your competitors struggle.
To learn more about how we can save you money and simplify your entire HR process, speak to one of our friendly experts today.
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