Furloughed vs Laid Off: Advantages, Disadvantages, and Differences

With the coronavirus pandemic stretching employer resources to the limit, organizations of all sizes are contemplating employee furloughs and layoffs to keep afloat. Most people are more familiar with layoffs. Layoffs are when employers terminate an employee for reasons other than an employee's actual performance. Layoffs can be permanent or temporary. General Electric announced layoffs for 10% aviation workforce, and temporary layoffs of its maintenance, repair, and overhaul employees for 90 days. Furloughs, in general, are more defined. Furloughed employees expect to return to work and retain access to benefits. Furloughed workers are technically still employees. Marriott announced it will furlough tens of thousands of its workers, taking them temporarily off the payroll, but letting them maintain their healthcare benefits. Furloughs can affect only certain portions of the workforce. For example, furloughs can affect corporate-level staffers while essential staff members stay employed. Employers set the terms of the furlough. They can:

• Require employees to use up any accrued paid time off
• Continue to pay employee health benefits during the furlough
• Set hours, days, or weeks as part of the furlough plan

As business determines what is best for the organization and its workers, the terms of a furlough or a layoff evolve.

Is a furlough the same as a layoff?

There are differences between a furlough and a layoff, some of which may be significant for your business and your employees. In general, furloughed staffers are still technically employees: they retain their employment rights and generally their benefits. Laid off workers are no longer employees, and lose their benefits and protections.

What is a Furlough?

A furlough reduces hours, days, or weeks employees may work and usually has a finite length. As mentioned earlier, businesses can furlough employees for specified amounts of time and set the conditions of the furlough. They can require employees to use accumulated paid time off during the furlough, but generally (for cost-saving measures) they notify employees the furlough will consist of unpaid time.

In general, furloughed staffers are still technically employees: they retain their employment rights and generally their benefits. Laid off workers are no longer employees, and lose their benefits and protections.

Furlough: hourly versus salaried

There are differences in the way employers can set the term for furloughs for hourly (nonexempt) workers versus salaried (exempt) counterparts. The Fair Labor Standards Act provides clearly written guidance on when exempt versus nonexempt staff members must receive pay. For hourly employees, the furlough could include reductions such as:

• Fewer hours per day
• Fewer days per week
• Weeks to months on furlough

Because these employees receive pay only for the hours they work, the terms of the furlough can impact any or all the hours they would normally be on the payroll. For salaried employees furloughs will need to be in blocks of at least 1 week each. Salaried employees, because of their exempt status, need to earn their full salary for any week in which they work. The FLSA specifically requires exempt employees receive pay for any week in which they perform work — regardless of the number of hours they’ve put in during that week. The only way to furlough exempt employees is to do so for entire weeks at a time.

PTO for furloughed employees

Because furloughed workers are still technically employed, there is currently no requirement to pay out any accumulated time off they’ve earned when they are furloughed. Employers may allow staff to use their PTO during a furlough, but that likely defeats the cost-saving measures the furlough intends to address.

Layoff

A layoff can be temporary or permanent, with employees frequently uncertain whether or not they will be returning to work. The construction industry, for example, often lays off workers in the winter due to weather conditions with the hopes, but not guarantee, of rehire in the spring.

PTO for laid off employees

Because there is the potential these employees will not be rehired, workers who are laid off are required to be paid any accumulated paid time off they have earned in their final paycheck. While there are no federal requirements to pay accumulated time off, almost every state mandates employers give these employees any time they’ve earned in a lump sum in their last paycheck.

Can you collect unemployment if you are furloughed?

Under new federal legislation (the CARES Act), any employee impacted by the COVID-19 outbreak may be eligible for unemployment compensation. Individuals will receive $600 per week in addition to their regular unemployment compensation under state law, through July 2020. If workers are still unemployed after their state unemployment benefits end, the federal government will fund up to 13 weeks of additional unemployment benefits. Guidance from the Department of Labor allow states to expand eligibility to collect unemployment benefits for any employee affected by the pandemic, including when their company or their child’s school closes. Most states have expanded eligibility in response to the federal guidelines. For laid off employees, states typically require people collecting unemployment benefits prove they are actively looking for work during the layoff. Specific states may relax these guidelines during the COVID-19 outbreak. Furloughed staff typically do not have to prove they are actively looking for work, since they are technically still employees.

How long can a company furlough an employee?

Employers exclusively determine the terms and length of the furlough. They can set reduced hours, days, or weeks based on the needs of the company. When organizations decide to furlough, they consider many factors.

The furlough plan, generally, aims to distribute hardship as evenly as possible, maintaining staff and benefits to the best ability of the employer.

One may be the expected length of the downturn; with that in mind, they may look at how much reserved funds they hold or how they can maintain operations with little or no revenue. From here, they may be able to calculate how many employees will need to be furloughed, under what terms (hours, days, weeks), and how long the furlough will last. The furlough plan, generally, aims to distribute hardship as evenly as possible, maintaining staff and benefits to the best ability of the employer.

Healthcare benefit continuation: furloughed vs. laid off

Of major concern to workers is healthcare coverage in the wake of COVID-19. Organizational decisions to lay off employees or furlough them can have far-reaching effects that impact healthcare coverage.

Healthcare benefits: furlough

Furloughed is not a legally recognized category of employee. Generally, furlough does not fall under a Consolidated Omnibus Budget Reconciliation Act (COBRA) qualifying event: the employee is still employed by the company and has not technically lost access to group coverage. Many organizations furloughing staff members will continue to cover them under group plans: some are paying the employee contribution, others are asking workers to make their contributions outside the payroll process. Still others will be asking employees to repay company-made portions of the contribution when the staff member returns to work. However, many plan documents clearly disqualify employees with reduced hours from coverage. For these employers, it will be crucially important to discuss the terms of their policy with the plan provider and amend the plan, if possible. If coverage is not able to continue during the furlough because of definitions under the healthcare plan, employers must designate the furlough as a reduction in hours, therefore making it a COBRA qualifying event. While businesses may pay all or part of an employee’s contributions, they must notify providers of the employee’s reduced hour status, and that they will be COBRA eligible. COBRA notifications must go out to staffers. Employers should provide detailed information on how much, if any, the organization will contribute to premium payments. Federal or state governments may have to intervene to expand the definition of eligibility for furloughed employees during the outbreak under COBRA law, but no such guidance has yet been provided.

ACA impact: furlough

Employers with 50 or more staff members have a requirement under the Affordable Care Act to offer coverage to 95% of their full-time or full-time equivalent staff members. Furloughs may impact FTE status for many employees, moving them to part-time temporarily. But reduced hours should probably not trigger ineligibility under the mandate since the IRS has only approved 2 methods of measurement to determine an employee’s FTE status: the monthly measurement or the look-back measurement methods. For a short-term furlough, FTE status would probably not change the employee to part-time under these requirements. Therefore, they would be ineligible. However, furlough or mandatory leave could trigger an ACA employer penalty. Under the legislation, terminating group health coverage may cause an employer to go below the threshold of providing affordable coverage to 95% of FTEs. COBRA coverage must remain affordable to avoid an ACA penalty, which may require an organization to subsidize part or all of the employee portion of the coverage.

Healthcare benefits: layoff

Laid off employees are no longer considered staff members and are ineligible for coverage under a businesses’ group health plan. Employers must notify these employees of their rights to continue coverage under COBRA. Under COBRA, workers must pay for any healthcare benefits previously covered by the employer.

The fine print on furloughs

Furloughed employees can’t work in any capacity while they are off. These zero tolerance rules include everything from simply checking email to performing any type of work on behalf of their employer. Even a 5-minute phone call will violate the terms of the furlough. For salaried employees, this could require full pay for a week; for hourly employees, it could require pay for the time worked. To assure compliance — even for the most well-meaning employees — it’s important to temporarily lock them out of work accounts they can access remotely to avoid violation of their status and any payroll obligation. For employers who provide access to online learning for staff members, the downtime of a furlough or layoff could mean time to access these modules. However, if the employee typically accessed these accounts on paid time, even these accounts should probably be temporarily suspended. As small and medium-sized businesses continue to try to cope with the COVID-19 outbreak, it’s important to consider all the implications of layoffs versus furloughs. Rules, protections, and regulations still apply, even amid the pandemic.

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.

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