If your business is struggling to make payroll amidst the coronavirus, you might wonder whether you should furlough or lay off your employees. What’s the difference between furlough vs. layoff?
Furlough vs. laid off
Many businesses are either temporarily closed or operating with a lean staff. If either of these situations applies to you, you may have thought about furloughing or laying off your staff.
A furlough is a mandatory, temporary unpaid leave of absence or hour cut a business might issue to some or all of its employees. Although a furlough can turn into a layoff, employees retain their jobs while furloughed. Employers might furlough employees due to lack of work or funds.
On the other hand, a layoff is a temporary or permanent suspension or termination of employees. Although employees can be rehired after a layoff, it is generally considered a permanent separation.
Think of it like this: a furlough is more like a pause in employment, whereas a layoff is a termination of employment.
So, which is the best choice for your business to cope with the coronavirus?
To make that decision, get a deeper look at the difference between furlough vs. layoff. These differences include:
- Permanency
- Access to benefits
- Employer responsibilities
- Unemployment accessibility
- Return to work
Permanency
Again, a furlough is a temporary leave of absence that takes place over a short-term period. A layoff can be a temporary, indefinite suspension or permanent termination.
Employers generally give employees a timeframe of how long the furlough will last (e.g., one month). On the other hand, a layoff can be indefinite.
In addition to being temporary, a furlough might not be a continuous unpaid leave of absence. It may be a cut in hours rather than a full-blown pause in business operations.
For example, you might decide to furlough employees one week per month for X number of months. So, if you still need help at your business but want to cut back on employee hours, you may consider furloughing your employees.
Employers who need to permanently lay off employees would lay off their staff rather than furlough them.
Access to benefits
Some businesses that furlough employees let them use paid time off (PTO) benefits so they can get paid for some or all of the days they’re not working. And typically, employees who are furloughed continue receiving health insurance coverage.
Laid off employees generally cannot use paid time off. However, employees may be entitled to any accrued paid time off payments, depending on your state’s PTO payout laws. Employees who are laid off typically lose their health insurance benefits. When you lay off employees, you may be required to provide COBRA continuation coverage.
Employer responsibilities
If you furlough employees, stay in contact with them. Give them plenty of advance notice if you have to extend the furlough.
Your employer responsibilities are a bit more involved when you lay off workers. You may need to provide severance pay. And again, you might have to include each employee’s PTO payout with their final paycheck and provide COBRA continuation coverage.
Unemployment accessibility
Can employees who are laid off through no fault of their own receive unemployment benefits? Yes.
What about employees who are furloughed? It depends.
States can create their own rules that determine unemployment eligibility. Ordinarily, some states extend unemployment benefits to furloughed employees while others do not.
And to receive benefits, individuals generally have to go through a waiting period and be actively searching for work (which many furloughed employees don’t do).
However, the coronavirus is a different story. The Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief, and Economic Security (CARES) Act both significantly expanded unemployment benefits. Specifically, the Pandemic Unemployment Assistance (PUA), established under the CARES Act, extends benefits to individuals who previously weren’t eligible at the state level. And, employers’ unemployment tax accounts are unaffected by COVID-19 claims.
Employees who are furloughed or laid off as a result of the coronavirus are eligible to receive unemployment benefits.
Keep in mind that when the furlough is over, your employees cannot stay on unemployment. They must get off unemployment and return to work, according to the Department of Labor.
Return to work
Employees who are furloughed return to work when the furlough ends (unless they are laid off or seek other employment). On the other hand, employees who are laid off likely need to be rehired or replaced.
Although employees can search for other employment during a furlough, many don’t since it’s a temporary leave of absence. Employees who are laid off might apply for and get hired elsewhere.
So, which should you choose during COVID-19 ?
Whether you furlough or lay off employees depends on your business’s situation during the coronavirus.
One survey found that 55% of small businesses have had to lay off some or all of their workforce due to COVID-19.
If you are temporarily closing your business, but you plan on reopening when the government removes stay-at-home orders, you might consider furloughing your staff. You may also consider furloughing workers if you have to reduce hours.
At the same time, because of the expanded unemployment benefits, furloughed employees can get on unemployment during their unpaid leave of absence.
By furloughing employees, you can:
- Avoid layoffs
- Lower your business’s payroll costs
- Avoid severance pay
- Quickly bring employees back (without spending time looking for replacements)
If your business is permanently closed because of the coronavirus, you must lay off your staff. You might also consider laying off employees if you need to cut positions. If you lay off employees and realize you need help later down the line, you can rehire them.
Furloughs, layoffs, and the Paycheck Protection Program
Nearly half of small business owners reported the PPP directly influencing their decision to keep or rehire employees.
Keep in mind that being able to quickly get employees back to work is important if you applied for and received a Paycheck Protection Program forgivable loan.
To maximize your loan forgiveness, you have to use at least 75% of your loan for payroll costs. So, it’s important that you quickly add employees back on payroll when you receive a PPP loan.
Although you can hire new employees, the hiring process takes longer than bringing existing employees back to work.
If you plan on applying for a PPP loan (or already have), you might consider furloughing employees rather than laying them off until you receive your lender’s determination.
This is not intended as legal advice; for more information, please click here.