“Furlough.” “Layoff.” “Reduction in force.” Workers know when they hear these terms that all or some of their regular earnings will be lost because their employer had to take action to cut costs with a payroll deduction. Yet even though these terms are used interchangeably, their meanings are quite different.
What is a Furlough?
Many people may hear the term furlough but what does furlough mean? A furlough is a temporary leave from work that is unpaid, but only for a certain length of time. For example, an employer may furlough its nonexempt employees one day a week for the remainder of the year and pay them 32 hours a week instead of 40, or require all employees to take a week or two of unpaid leave, according to SHRM. The idea is to spread the hardship around by asking the staff to sacrifice a small portion of their paycheck (by working fewer hours or taking unpaid time off) so everyone can keep their jobs.
How is a furlough different from a layoff?
A furlough is commonly seen as the alternative to a company layoff. Where a layoff removes selected employees from the payroll for an undetermined length of time, employees who are furloughed take unpaid time, knowing exactly when they are returning to work.
Why would a company choose to furlough?
A company might choose to furlough, instead of a layoff, in times when work can’t be performed because of outside influences, i.e. COVID-19, government shutdowns, seasonal work, a strike, or the like. These times of uncertainty are usually short-term.
What is the No-Work Rule?
If an employee is furloughed from work, then they absolutely cannot work for the company during the furlough. For example, the employee can’t answer an email about work or take a quick phone call. If an exempt employee does even five minutes of work while furloughed, he or she must be paid for the entire day; non-exempt employees must be paid for time worked.
How is a furlough impacted by FLSA?
The Fair Labor Standards Act (FLSA) makes it clear that as long as a company doesn’t go below minimum wage, it can cut pay and/or hours from its non-exempt employees. As far as exempt employees go, if the company makes salary reductions, that usually means exempt employees are no longer exempt. There are exceptions to this rule; for example, an employer can reduce salaries during a business or economic slowdown, provided that change isn’t used as a way to evade the salary basis requirements. SHRM recommends exempt employees be furloughed for a full workweek to keep their exempt status intact.
What is a layoff?
A layoff is one term that most workers fear. But what does layoff mean? It means a company stops paying one or more of its employees because there is not enough work for them to do or it can’t afford to pay them. Employees who are laid off may be eligible for unemployment benefits. One defining feature of a layoff is that when an employer lays off an employee, there’s an intention those employees will be recalled back to work.
What’s the difference between being fired and being laid off?
When a company fires or terminates an employee, it is due to the employee’s unsatisfactory performance, actions that didn’t align with the company’s policies or a failure to meet the terms of his or her employment contract. With a termination, there’s no expectation the employee will be hired back. On the other hand, when an employee is laid off, it is usually due to the company’s financial stability or restructuring, not employee performance. Another distinction: Usually employees who are fired aren’t entitled to unemployment benefits.
How to decide whether to lay off an employee
Layoffs usually occur when the economy is in a downturn or in a recession, when a business needs to downsize, or upon the closing of an office or plant, according to SHRM. It is always difficult for companies to decide who to layoff. Typically, a company chooses which employees to lay off based on their hire date (first in, first out), their performance and the opinions of managers. Take measures to ensure there is no discrimination involved in the choicein order to lay off the employee legally.
Are laid off workers entitled to unemployment benefits?
Yes. Each state has its own guidelines for unemployment benefits (see here). However, due to the recent COVID-19 virus, the federal government has extended unemployment insurance to:
- An employer that had to close due to COVID-19, preventing employees from coming to work.
- An individual who is quarantined but expects to return to work once quarantine is over.
- An individual who leaves work due to a risk of exposure or to care for a family member.
Check with your local unemployment office to determine which benefits your employees are eligible for.
Does severance pay affect unemployment benefits?
Yes. If employees are laid off and receive severance packages, it could affect their unemployment benefits. Depending on your state, severance could impact both the amount and how quickly your employees receive unemployment. Employees must both claim and pay taxes on any severance payments.
What is a Reduction in Force?
Unlike a furlough, which spreads the hardship around, or a layoff, which indicates the employees may be asked back to work, a reduction in force or RIF is permanent. It involves eliminating a position entirely with no intention of re-filling it, thereby permanently reducing workers and payroll. A RIF can be accomplished by terminating employees or by means of attrition.
What’s the difference between a layoff and RIF?
A layoff is often confused with a RIF, and both employers and employees inaccurately use the term layoff when a RIF has occurred. If an employer intends to call back its workers, it is a layoff. If the position is eliminated and the employer has no intention of calling back the worker, it is a RIF. According to SHRM, a layoff may turn into a RIF or the employer may choose to immediately reduce their workforce. A RIF can be accomplished by terminating employees or by means of attrition.
Are there potential legal issues with a RIF?
You could be setting yourself up for legal issues if discrimination factors aren’t considered before implementing a RIF. The U.S. Equal Employment Opportunity Commission (EEOC) suggests listing the employees to be terminated and then determining whether certain groups are affected more than others, like older employees, employees with disabilities or any other group protected by federal employment discrimination laws.
What else do I need to do to stay compliant during a RIF?
Review the Federal and State Worker Adjustment and Retraining Notification (WARN) Act before conducting a RIF. According to SHRM, the WARN Act requires those employers conducting a large-scale layoff to provide 60 days’ notice to affected employees. The employer must also state if the layoff is permanent or temporary and outline the process for recalls or applying for future positions. SHRM states there are also mini-WARN Acts for small businesses, and that companies should review state laws carefully as they may have some additional requirements.
Are unemployment benefits available to employees affected by a RIF?
Yes. Since unemployment benefits are available to workers who lose their jobs through no fault of their own, they’re available to employees affected by a RIF. SHRM does note that RIF employees must meet the normal eligibility requirements. Advise employees to contact their local unemployment officer to file a claim.
It may be difficult to know what to say to an employee after a layoff. Be sure to let the employee know what type of payroll separation it is: furlough, layoff or RIF. If you plan on asking the employee back, make sure they know that and try to maintain benefits as an incentive.
Arcoro is here for you during the up times and downtimes. Contact us about our HR and payroll solutions that can help you increase efficiency and do more with less.