What’s the Difference Between Furloughs and Layoffs?

When an organization needs to reduce labor costs, leaders may consider furloughs or layoffs. Some people use these terms interchangeably, but they have totally different outcomes and compliance requirements for employers

Keep reading to learn the difference between furloughs and layoffs that employers should know before making a workforce decision.

Understanding Furloughs and Layoffs: What’s the Difference?

Furloughs and layoffs are both employer-initiated workforce reductions. Furloughs involve temporary reductions, while layoffs are (usually) permanent.

It’s easy to get the meanings of furloughs and layoffs tangled, but this side-by-side comparison gets the definitions straight.

How Does a Furlough Work?

Furloughs are temporary. Employees may have their hours partially or completely reduced. Either way, they remain employed. Employers typically set an expected end date for when regular hours will resume. 

Being furloughed isn’t a reflection of an employee’s performance or behavior. An organization may decide to furlough staff to reduce labor costs while retaining key talent.

How Does a Layoff Work?

When an organization needs to terminate an employee’s contract, leaders may choose to lay them off. Layoffs are usually permanent, but not always. Temporary layoffs and furloughs are not the same, though. Someone who’s furloughed is technically still employed. But someone who’s laid off is officially terminated—an organization needs to formally rehire them if it wants them to come back to work.

Like furloughs, layoffs aren’t related to an employee’s performance. Businesses lay off employees when they can’t maintain the current workforce over the mid to long-term. Common reasons for layoffs include permanent restructuring and long-lasting economic instability. 

What Should Employers Consider when Deciding Between a Furlough and Layoff?

Employers need to balance business and financial objectives with compliance requirements when deciding to furlough or lay off employees.

Legal Compliance

Employers must comply with applicable laws when determining how to furlough employees. The same goes for layoffs. Both are subject to local, state, and federal law. 

Here are three examples of relevant federal laws:

• WARN Act: The Worker Adjustment and Retraining Notification Act(opens in a new tab) applies to employers with over 100 employees. It requires them to give a minimum of 60 calendar days’ written notice before enacting plant closings or mass layoffs. Smaller businesses may not be subject to federal WARN, but many states have “mini-WARN” laws with different requirements and thresholds that your HR and legal departments should understand.

• FLSA: The Fair Labor Standards Act(opens in a new tab) plays a key role in governing labor standards that apply to furloughed employees. It addresses several areas, from minimum wage requirements to recordkeeping standards. 

• COBRA: The Consolidated Omnibus Budget Reconciliation Act(opens in a new tab) applies to employers with 20-plus employees that sponsor group health plans. It lets eligible laid-off or furloughed employees retain coverage temporarily by paying premiums themselves.

Whether they decide to furlough or lay off employees, organizations should seek legal counsel to make sure they stay compliant.

Business Outlook and Workforce Continuity

Furloughs let employers absorb short-term economic downturns without losing key talent. If you don’t expect financial conditions to improve in the near future, layoffs may be the better option for your organization.

Any workforce reduction can impact how well an organization maintains operations and all the unwritten rules that employees build over time. If you reduce or eliminate too many positions, your remaining employees may have too much on their plates to keep productivity up. They may waste valuable time searching for information about a process that a former coworker used to run. The extra burden may lower morale, which can lead to employees feeling burnt out and making mistakes. And stressed, dissatisfied employees may take their frustrations to company review sites and social media, inflicting reputational damage that’s hard to manage.

Replacing laid-off employees can involve meaningful spend. This includes recruitment and onboarding costs. Furloughs can limit these expenditures, but they still warrant a cost analysis. There may be expenses tied to benefits, administration, and lost productivity. The cost of reducing your workforce could outweigh the benefit of reducing your labor expenditure. That’s why it’s important for employers to do considerable research, including labor utilization analyses and scenario planning, before furloughing or laying off workers.

How Should HR Communicate Furloughs and Layoffs?

Timing: Give employees sufficient advance notice. Some employers may choose to provide extended notice, beyond what’s required by law 

Delivery method: Communicate directly with affected employees. They should not learn of the decision secondhand. 

Terms of action: Clearly state, both verbally and in writing, the terms of the furlough or layoff. Be willing to respond to employees’ questions, too. 

Written documentation: Provide written confirmation of the decision and any relevant details. Employers should retain a copy for their records. 

Transparency: Keep lines of communication open with furloughed employees. Ongoing contact and transparency help build trust in times of uncertainty. 

Support: Let affected employees know how to access support resources. These may include employee assistance programs or career transition services. 

Tone: Consider the decision’s impact on the employee. Don’t make promises the business cannot keep, but remain compassionate and empathetic. 

Retained employees: Address the employees who remain, either directly or via their managers. Explain how their responsibilities may change. 

Furloughing or laying off employees is emotionally difficult for everyone involved. Being thoughtful in your messaging can help ease the transition and manage company morale.

Navigate Workforce Changes with Justworks

Furloughs and layoffs create uncertainty for the affected employees and the teams responsible for overseeing the transition. Justworks PEO makes navigating the complex administrative side of the situation simpler. From offboarding employees to administering benefits, Justworks PEO is an all-in-one HR solution backed by 24/7 expert support.

Our platform streamlines compliance, too. It automates complex operational tasks to help you comply with applicable local, state, and federal law. 

Want to learn more? Discover Justworks PEO or get started today.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.

FAQ

Can an Employer Extend a Furlough if Business Conditions Don't Improve?

Yes, employers can typically extend furloughs. However, laws (such as WARN) may influence the conditions surrounding extensions.

Are Layoffs and Reductions in Force (RIFs) the Same?

They’re closely related. A RIF is a type of layoff. It refers to the permanent termination of employment. There is no expectation, unlike with temporary layoffs, of rehire. 

What Records Should Employers Keep When Furloughing or Laying Off Employees?

Recordkeeping requirements vary by state and local jurisdiction. Commonly required documents include written notices and payroll records. 

Can an Employer Lay Off an Employee Who Is Currently Furloughed?

Yes, employers may lay off furloughed employees if business conditions warrant it. But they should seek legal guidance to make sure they stay compliant with local, state, and federal law.

Can Employers Require Employees To Use PTO During a Furlough?

Yes. Employers can generally require furloughed employees to use PTO, subject to varying state laws and company policies. 

How do furloughs work from a benefits perspective?

Furloughed employees may retain their benefits. Employers must look at each benefit’s eligibility provisions on a case-by-case basis. Laws and plan terms can affect eligibility. 

How Long Can a Company Furlough an Employee?

There’s no federal law that limits how long a company can furlough an employee in the U.S. But some states, such as California, set their own requirements. Organizations are also responsible for maintaining legal and HR compliance when furloughing staff.