Whenever there’s talk of a looming recession or uncertain times ahead, it’s good to know your options in case you need to reduce your workforce. Many times, business owners believe their only or best option is to lay off a portion of their employees. However, we encourage businesses to consider furloughs as an option as well.
What is a layoff?
When a company finds itself struggling and unable to support their workforce, layoffs are a common option. A layoff typically includes a severance package of some kind, which may include a few weeks of pay or other benefits to assist the employee in finding their next position. Because the worker was laid off and not fired, they can apply for and receive unemployment, and it will be a strike against the company with their unemployment insurance. While layoffs certainly reduce overhead and can help a company survive a difficult period, they are not without drawbacks or costs.
What is a furlough?
A furlough is another option, and one that should be considered more often than it is. A furlough involves a mandatory leave of absence for specific employees, but one that comes with the expectation of returning to the position. Generally, there is a defined period of time for the furlough, which gives the company time to see what the market looks like, secure more business, or generally shore up finances. Because people who are furloughed remain active employees of the company, they retain their insurance and benefits.
When is a furlough a better option than a layoff?
There are situations in which a furlough is both better for the company and preferred by the employee. From the company side, furlough offers a chance to have immediate relief from salaries without the cost of a severance package. There’s a lesser chance of your best employees working for your competition, and your unemployment insurance will not have to pay out either. When it’s time to bring employees back, you won’t have the overhead of hiring and training new team members. At that time, you can work out the terms of any insurance premiums the employee needs to repay for the furlough period, or you can opt to pay them in appreciation for those employees sticking with the company.
Often, employees are laid off or furloughed during times of recession, when many companies are downsizing. In that economy, forgoing salary but having a job to return to after the furlough period may be easier than beginning a job search. For many laid-off employees, the loss of benefits is as big of a hardship as loss of income. Rather than paying COBRA or going on the marketplace for insurance, they are still covered during the furlough. Any benefits that are determined by tenure, like 401(k) contributions and PTO accumulation, are also preserved.
Presenting an employee the option of a furlough also signals to them that they are wanted in the company, even if times are tight at the present moment. The knowledge that they are a valuable part of the team can make the difference between an employee staying or moving on to the competition.
If your company is crunching the numbers and concerned about your current workforce size in comparison to projected revenue, be sure to weigh the pros and cons of a layoff versus furlough.
Need help analyzing where your company stands and making a decision of layoff versus furlough? The WhyHR team can help you develop a plan and communicate it to employees.