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Furloughs: One Way to Cut Costs

March 28, 2013

One of the biggest expenses all employers have is payroll, whether a public of private employer. With continuous budget cuts, employers, including the government, are looking for areas to make up the shortfalls. There are several options available including reducing expenses; eliminating bonuses and benefit matches; delaying promotions; instituting hiring freezes; staff lay-offs; and implementing furloughs.

What is a furlough? A furlough is essentially a temporary unpaid leave of absence from employment. The unpaid leave can be as short as one day, or for longer periods. Unlike a layoff, a furlough doesn’t allow an employee to receive unemployment benefits, as the employment relationship has not been severed. Other than wages, during a furlough, an employee normally maintains other benefits such as health insurance and vacation time.

While the use of furloughs has become increasingly popular over the years, there are both advantages and disadvantages. One of the advantages of a furlough is an employer can reduce labor costs for a period of time without increasing the costs for any severance packages, outsourcing or increased early retirement benefits. It can allow business operations to continue and still meet demands, particularly when only selected parts of the workforce are affected. Employees retain their benefits coverage and don’t face the need to find new employment in a down market. Finally, the most important advantage of a furlough is that the employer retains the employees with the experience and skills necessary to do the job.

Furloughs are not a win-win for everyone. There are drawbacks. During a furlough the only costs shed are the salaries and any incentive payments of the employees. The employer still must pay benefits for the employees, information technology costs, rent/mortgage and other employment expenses. Just like layoffs, furlough effect the employer’s costs including future unemployment taxes. To make sure important work does not slow down, there are administrative costs necessary to manage schedules of which employees are on furlough at any given time. The employer must research the employee’s eligibility to collect unemployment benefits and communicate that information to the employee. Further, the employer must share information regarding the status of the employee’s benefits, including but limited to health care insurance.

Because the work does not stop during a furlough, employees returning to work after the furlough may feel overloaded affecting the quality of the workers’ performance. There may be delays or other issues with service that can lead to unhappy customers. The culture of the workplace changes when coworkers are not present. The employees both on furlough and those working during that time may feel stress. Fearing the furlough will not resolve the budget problems and that layoffs will come next, many of the best employees may begin updating resume’s and searching for new jobs. Some argue it also penalizes top performers while benefiting mediocre workers.

Furloughs are not the right answer every time a financial crisis arises. A furlough can be an option to avoid layoffs, but it is certainly not a permanent solution to the financial problems of an employer. An employer should consider implementing a furlough only if it expects the setback to last a short time. To institute a furlough when the setback is indefinite, or at least expected to last for a longer period of time, only prolongs the inevitable job loss or layoffs. The decision to institute a furlough should be made only after thinking long and hard about the future demand the employer will face, the skills and capabilities of the workers necessary to meet that demand, the availability of the types of workers needed, the costs associated with hiring and training new employees, and the affect experienced workers bring to the job.

Furloughs tend to work the best when the employer can make the distinction between employees that are essential and those that are not. If all are seen as essential then the better option would be reducing the number of hours that employees work, rather than a furlough. Experts suggest that a furlough is appropriate when the decline in sales is only temporary – the business needs to conserve cash and needs to employ hard-to-find skilled workers. Layoffs may be preferred if the downturn is more prolonged or permanent, the job entails less-skilled workers and the company needs deeper cost cuts.

If after reviewing the options it appears a furlough may be the right choice for to avoid legal pitfalls, keep the following in mind. First, choose the workers for a furlough based upon their position. Choosing employees person by person instead of by positions can raise discrimination issues. Next consider whether the position is salaried or hourly. Salaried employees are exempt whereas hourly employees are nonexempt. Selecting a salaried worker may result in paying full pay or more in certain circumstances, even though the employee was chosen for the furlough.

Hourly employees can be just as tricky because an employer must pay at least minimum wage and overtime if working more than forty hours per week. If a furlough puts an hourly worker under a set number of hour, which is set forth in the employer’s benefit plans, then the employee may lose eligibility for benefits such as health insurance. The hourly employee may also transition to part time status, instead of full time causing changes in how the employer is billed for insurance coverage and the level of coverage provided.

All of these concerns do not mean that an employer should never consider a furlough in troubled times. A well implemented furlough can allow an employer to continue operating, while meeting the demands of the employer, and emerge from the financial crisis stronger than before. 

For more information on furloughs and other reductions in pay see the FAQ’s page on the U.S. Department of Labor website at: http://lawyersusaonline.com/wp-files/pdfs/furlough.pdf.

Resources:

  1. Forbes.com, Do Furloughs Make Sense? The Pros and Cons by Julie Gebauer, http://www.forbes.com/2009/04/08/furloughs-layoffs-cuts-leadership-managing-policy.html
  2. Bizjournals.com, Businesses should know the pros and cons of furloughs by Lisa R. Schoolcraft, http://www.bizjournals.com/washington/stories/2009/05/25/smallb1.html?page=all
  3. Humanresources.about.com, What are the Advantages and Disadvantages of Furloughs? by Susan M. Heathfield, http://humanresources.about.com/od/layoffsanddownsizing/f/furloughs.htm