If you are like many of my small business clients
navigating through the COVID-19 crisis, you have likely come to grips with the fact that you need to make some kind of cuts.Your business needs to conserve cash flow, and you recognize that salary and benefits have the largest impact on your budget. Like them, despite your best efforts to remain open and operational, you may be wondering which mechanism – lay-off or furlough – is best for you and you workers when reality hits. Great question.
Assuming these measures will only be temporary, meaning that when the COVID-19 outbreak subsides you will want to resume regular operations as soon as possible, then a more temporary action might be necessary for your business operations. In that case, furloughing some of your workforce would be a good move.
Employees who are furloughed are considered to be on “standby status.” They ought to be ready to come back to full-time work as soon as you call them to action. They can file for unemployment though. However, they need not take part in the stringent unemployment requirements to search for another job in order to collect benefits, unlike those that are filing due to being laid off. This makes them available for whenever you need them – for example, for a few shifts here or there if you are a restaurant owner only serving take out during these months with a very sporadic schedule of needs– until you are ready to call them back permanently.
When you furlough an employee, you give them an anticipated date or timeframe of when you will be calling them back to work. You don’t have to know with certainty, and you can easily extend their furloughed time if need be. This flexibility allows you to take a wait-and-see approach, which is helpful considering no one knows what the immediate or even semi-long term future holds right now.
| FURLOUGH | LAY-OFF |
| Worker remains employed by you | Worker no longer employed by you |
| Quick way to cut costs | Quick way to cut costs |
| Temporary (usually a recall date) | Generally permanent |
| Employer still provides benefits | Employer may (not required to) offer lump sum to subsidize benefit costs (severance) |
| Off your payroll | Off your payroll |
Whatever route you decide to take, I always advise clients to have open and honest communication with employees. After all this is a life altering event for both employer and employee. It’s best to level with them, especially if you feel that this is only a temporary situation and that business will at some point resume at some sort of normal operational levels. Also, if circumstances do change and you are forced to make more of a permanent move, you have the option to change the recall date or even to change their status from furloughed to laid off. While you cannot outright fire someone during the furlough period, you can admit to underestimating your company’s ability to resume your business at expected levels, which then results in the need to lay off.
There are a couple of important things to be mindful of when making the decision between furlough and lay-off. First, no matter what is decided, employers cannot discriminate against protected classes of its workforce. Second, if you have secured PPP loan funds, these funds become “grants” only to the extent your employment numbers remain compliant with the laws and regulations under the 2020 CARES Act.
These conversations and these moves are never easy, but as the business owner, being prepared, forthright and honest with your workforce will pay dividends in the long-run, no matter how long that is. Requirements do vary by state for lay-off and furlough procedures, and some are even changing by the week, so make sure you check with your attorney and state agency to stay up to date on these important regulations.
NE Business Law 