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Furloughs, Layoffs or Pay Cuts?

This is a confusing time. Businesses that are seeing significant revenue losses due to the coronavirus pandemic are weighing their options. Is a Furlough, a layoff or a pay cut the best way to go? Allen Smith, J.D. recently wrote an article for SHRM that discusses this dilemma from a business owner’s perspective, outlining the pros and cons of each. The full article can be seen here. Below is a summary.

Defining Each Term

  • A furlough is a mandatory, temporary, unpaid leave.
  • A layoff is a full separation from the company. Some layoffs come with an expectation that the worker may return to work. Some layoffs do not.
  • Pay cuts are asking employees to either work less and get paid less or do the same work for less pay.

Understanding the Implication of Each

Furlough Pros

Furloughs help companies weather a financial storm in a number of ways.

  1. Unlike layoffs, furloughs reduce labor costs without adding new costs such as severance packages and outplacement services.
  2. When business improves, employers do not have to pay for recruiting, selecting, socializing and training new employees because the furloughed workers can pick up where they left off.
  3. In general, furloughed employees should be eligible for Unemployment Benefits as long as all other state eligibility factors are met.

Furlough Cons

  1. Unfortunately, furloughs bring financial and psychological hardship to the affected workers.
  2. There could be a time limit to Furloughs, typically one year.
  3. When a furlough is for less than one full workweek and a salaried, exempt worker performs any work during that week, the employer must pay the exempt employee’s full weekly salary.

Layoff Pros

  1. Employees may collect Unemployment Benefits.

Layoff Cons

  1. Layoffs can have more-significant implications for company morale than furloughs.
  2. If a consistent selection process isn’t used, liability increases. Without a set process to follow, it would be impossible to defend the selection decision and a claim of wrongful termination could have merit.
  3. Employers are more likely to permanently lose laid-off employees.

Wage Cut Pros

  1. Employers generally have the flexibility to offer hourly employees fewer hours and workdays.
  2. Employees may be eligible for partial unemployment benefits. This is not guaranteed and could essentially be considered a con instead of a pro.
  3. Employees feel more secure.

Wage Cut Cons

  1. Employers can’t reduce weekly hours and correspondingly reduce compensation for exempt employees.
  2. Employees may only be eligible for partial unemployment benefits.
  3. Employees may no longer be eligible for the employer’s health insurance if their hours are reduced significantly. But, check with your benefits broker and your health insurance carrier as many are offering flexibility during this crisis.

Take Away

Furloughs often are the best option for those that can afford them. But for some, layoffs will be unavoidable. In both cases, businesses should encourage workers to apply for unemployment benefits immediately to ensure the maximum compensation possible.

Any employer considering layoffs or a furlough must carefully consider:

  • All state and local laws.
  • Company policies, such as paying out vacation, sick or PTO. Everything must be consistently maintained – do as you’ve always done.
  • The state emergency declarations and laws issued under the pandemic.
  • Federal law, including any relief package.
  • Notice obligations under the Worker Adjustment and Retraining Notification (WARN) Act.

The WARN Act requires advance notice when a mass layoff or plant closing occurs that results in an employment loss for a requisite number of people. It is important to know the applicable thresholds for WARN Act coverage. The federal WARN Act covers employers of 100 or more full-time employees and layoffs of 500 or more employees. It also covers employers of 50 to 499 employees if those workers constitute at least one-third of the workforce.

Melissa Marsh, SPHR, SHRM-SCP, is a human resources consultant and founder of HRinDemand, a human resources company in Reno, NV, offering expert guidance and easy-to-use tools to help small businesses with employment regulations, compliance, employee relations, and company growth.

Sources:

Smith, Allen, and J.d. “Weathering Coronavirus: Furloughs, Layoffs or Pay Cuts?” SHRM, SHRM, 24 Mar. 2020, www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/coronavirus-furloughs-layoffs-or-pay-cuts.aspx.

Reddy, Chitra, et al. “Laying off Employees Advantages and Disadvantages.” WiseStep, 30 Sept. 2019, content.wisestep.com/advantages-disadvantages-laying-off-employees/.

Doyle, Alison. “Learn About the Eligibility of Partial Unemployment Benefits.” The Balance Careers, The Balance Careers, 27 Mar. 2020, www.thebalancecareers.com/what-are-partial-unemployment-benefits-2062054.

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