Furlough or Layoff?

For the past several months, radio, television, and newspaper stories have described worsening economic conditions in the United States and worldwide. Even venerable, well-known companies have suffered in this recession. The slowing real estate market, coupled with declining real estate prices and difficulty in obtaining credit, have all taken their toll. Foreclosures are on the rise, and companies struggling to stay open have curtailed operations or terminated employees. As an employer, you may be wondering what you can do to weather this economic storm.

For many companies the largest overhead budget items are payroll and employee benefits. Some employers simply lay off employees in troubled times and then struggle because they lack skilled workers. But proactive employers are looking for alternatives to the traditional layoff or reduction in force (RIF), in an effort to preserve their trained workforce for that day when the economy turns around. With increasing frequency, proactive employers are considering furlough of employees rather than layoff.

What is the difference between a layoff and a furlough? Generally, a layoff or RIF is defined as a temporary suspension or permanent termination of employment for business reasons, such as a slowdown in business or interruption in work. A furlough originally was a leave of absence from the military or prison. Today, in the business context, a furlough is generally considered a temporary company-planned absence for economic or other reasons. For example, an employee may work three weeks and be off one week. A furlough during Christmas break, spring break, or a plant shutdown is not uncommon. An employer that implements a furlough sends the message to employees that the time off will be only temporary.

Employers see furloughs as an opportunity to stay connected to their employees. Furloughing an employee one day a week enables the employer to have a relationship with the employee for four days and ideally reduces the chance that the employee will look for another job. Furloughs can take a variety of forms. One employer furloughed groups of employees every other month but kept the health insurance in effect for all employees, whether or not furloughed. This employer also required employees to use accrued vacation, thereby reducing the amount of accrued vacation liability carried on the company's books.

While the message is that a furlough is a temporary reduction in hours or days, employers should be careful to not promise too much. Promising a return-to-work date without coupling the message with a reservation to change the date, as well as failing to remind employees that they are "at-will," could result in employees trying to enforce the promise.

Another pitfall for employers is furloughing exempt employees, who generally fall into one of three categories — executive, administrative, or professional. If exempt employees work any portion of a day, i.e., responding to email or a telephone call, they would have to be paid for the full day. Employers may prospectively reduce an exempt employee's weekly salary but only to the extent that the salary does not fall below the salary thresholds set by federal and/or state laws. A reduction in salary can avoid the necessity of tracking hours for exempt employees.

In Oregon, a program administered by the Employment Department encourages employers to furlough employees rather than lay them off. The Work Share Program allows for partial unemployment benefits to be paid to furloughed workers to supplement the reduced wages. The employer selects at least three employees to participate in the program, workers who have had their hours and wages reduced by at least 20 percent but not more than 40 percent. To qualify, employees must have worked full-time for at least six months or part-time for 12 months just prior to the employer's submitting the plan. The employer makes a written application, then submits weekly claims. But while the program does assist employees and employers, it can also affect the employer's tax rates and increase administrative costs in preparing claims.

Finally, while layoffs can result in the remaining employees feeling guilty, resentful, and uncertain about their future, furloughs help people to feel that everyone shares the pain. There is the sense that all parties are doing their part to keep everyone employed.

While employers, in these economically challenging times look for creative ways to keep their businesses viable, creativity can be legally challenging. Employers should consult with their legal counsel to identify potential legal roadblocks to their creative ideas and to gain wise counsel in reaching their goals while staying in compliance with federal and state laws.

Published March 25, 2009

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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