Understanding the differences between being fired vs. laid off is critical, as both carry implications for employers and departing employees.
As a business owner, it’s critical to understand the proper way to let employees go when necessary. Sometimes the separation is the fault of the employee, whose behavior has resulted in the need to remove them from the workforce. Other situations are no fault of the employee. Instead, business conditions have made it impossible to keep them on the payroll. These are the fundamental differences between being fired vs. laid off.
Just like hiring decisions, your termination decisions can have ripple effects across your business. So determining which type of separation will apply matters. Either might carry legal and financial implications for your business and impact future employment for the departing individual. Employers must understand each and how they can affect staff members and the organization in the short and long terms.
What is a layoff?
A layoff is a type of involuntary employee separation that’s done for reasons other than unsatisfactory performance. For a staff member you cannot afford to keep now but would consider rehiring in the future, consider a layoff. This type of separation implies that there will be a job waiting for the employee when business recovers.
For example, employees who work in construction are often unable to perform their duties with consistency during winter. They may be laid off for the season with the promise of returning to work when conditions improve.
In other industries, layoffs could result from loss of business, contract delays, or slow times. There’s no guarantee that an employee will wait for the job to reopen to them. Yet many may still expect that when things improve, they’ll be back on the job at the same rate of pay and with the same employment conditions.
Layoffs can affect all types of businesses. Common reasons include:
- Company downsizing.
- Budget cuts.
- Mergers or acquisitions.
- Seasonal patterns.
Developing a comprehensive layoff strategy can help employers and human resources professionals to properly manage layoffs. Typically it would address policies, expectations, communicating layoffs to employees, future rehiring, and more, for both onsite and remote-employee layoffs.
What is firing?
Firing is the company’s dismissal of an employee for prolonged poor work performance or severe infraction(s).
For staff members you would never want back on the payroll, firing is the correct option. They have committed a significant enough rule break or policy infraction on the job to warrant dismissal. Whatever the reason for terminating them, their professional relationship with your company is ending. They would most likely be ineligible for rehire after termination.
The following are some common reasons for firing employees:
- Employee performance.
- Violation of company policy.
- Gross misconduct.
- Unethical or illegal behavior.
- Breach of employment contract.
Fired vs. laid off: impact and implications
While firings and layoffs both result in a personnel change, the differences between the 2 methods of dismissal are substantial. Whether an employee is fired or laid off can impact whether the employer had grounds for dismissal, what the employee is entitled to, and other items.
What layoffs mean for business owners
Laid-off employees are eligible to collect unemployment compensation. Unemployment insurance is available to workers who lose their job due to conditions outside their control.
Businesses pay for state or federal unemployment insurance through payroll deductions in accordance with the federal or state unemployment tax acts (FUTA or SUTA). These taxes provide limited payments for laid-off employees. If your company is making FICA deductions for employees, you’re already paying into FUTA/SUTA, so funds are available to staff.
Contributing to state unemployment funds can reduce FUTA in some cases. But the more “experience” a company has with unemployment claims, the higher the percentage due for future employees. The lower the experience — or fewer the claims — the lower the employer contribution required. Hence, the fewer layoffs a company makes, the lower their costs for unemployment insurance.
Another consideration for business is the potential long-term loss of a qualified employee. A laid-off employee may look for another job. Businesses risk losing that talent permanently when they lay people off.
What layoffs mean for employees
Laid-off employees are eligible for unemployment compensation. For some, these stop-gap payments are sufficient to tide them over until they are called back to work. For others, the lower unemployment payments are not sufficient — they may have to find another job.
Some businesses choose to offer a supplemental unemployment benefits plan or provide some sort of severance package. Yet this isn’t always possible since layoffs are often due to financial challenges.
Still, offering some form of unemployment compensation can greatly help employees who’ve recently lost their income. Even nominal severance pay added to a final paycheck counts.
When laid off, employees who had health insurance coverage through their employer are usually still eligible for COBRA.
What firing means for businesses
When an employee is fired, the professional relationship is at an end. If there was sufficient cause to separate the staff member, the employee should be ineligible to collect unemployment compensation.
That’s because an employee who breaks a known rule or policy had control over their termination. Companies who fire employees for cause should realize some savings when it comes to unemployment insurance experience, since they shouldn’t have to pay a claim.
What being fired means for employees
Employees fired for cause may need to quickly find another job to maintain their financial situation. But having been fired may directly impact their job prospects going forward. Many prospective employers will be hesitant once they learn that an employee was involuntarily let go.
Fired employees are still eligible for COBRA health insurance, but they don’t receive any severance package.
Document reasons for an employee being laid off or fired
To avoid unemployment liability, businesses must be specific and methodical when they terminate an employee. Depending upon the state, telling an employee, “It’s just not working out” may not be sufficient reason/cause to dismiss someone. Typically there must be a specific business reason why the staff member was fired. And the reason must have been within the employee’s ability to control.
Managers should document rule breaks or infractions through progressive disciplinary action. Still some events are so unacceptable, they may not require progressive discipline.
Staff who are habitually late, for example, can be terminated for cause. A history of notifications, warnings, and even suspensions should have preceded the firing. This establishes the legitimacy of cause for termination. They had ample opportunity, within their control, to correct the behavior but did not. The company had no choice but to fire them. Without documentation for ongoing or individual incidents, employees might be able to file a successful unemployment insurance claim.
For some policy violations, a single offense may be sufficient to terminate for cause.
Employee handbooks and policies must warn staffers that disciplinary action, up to and including immediate termination, may result in the event of serious policy/rule breaches.
Fired vs. laid off: legal implications
Fired employees sometimes pursue legal action, such as discrimination, harassment or wrongful termination claims or lawsuits.
With the hope of returning to work, laid-off staff won’t likely file a claim. Exceptions include those who believe their layoff is in violation of their protected class.
For workers who were fired, however, there’s nothing to lose and potentially much to gain by claiming harassment or discrimination. This is when the organization’s documentation of disciplinary steps can protect the business.
Providing future references
The final consideration for businesses when deciding whether to fire or lay off is reference information. Other employers will undoubtedly inquire once an employee begins a new job search. Many companies avoid providing references for past staff members altogether. Others will provide references since they can impact future employability.
Employees who are laid off have a better response when asked why they left their last employer. Those who were terminated may have difficulty finding new employment if they reveal the cause of their previous job loss.
Some companies provide neutral references only: verifying dates of employment and job titles for former employees. Others provide more in-depth reference information. Of course, even the suggestion of a past firing can have a negative connotation when talking with potential future employers.
Whatever your policy for handling references, make sure it applies consistently to all, regardless of cause for separation.
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