Layoff or Furlough? Workforce Considerations During the COVID-19 Crisis

By Sierra J. Gray and Robert S. Ellerbrock, III

I. Introduction

Companies, both large and small, are having to make a lot of decisions regarding how best to operate and remain viable due to the economic instability resulting from COVID-19. Employers are facing tough decisions on how to preserve their business and weighing the option of layoffs and furloughs for their employees.

This article will explore the differences between layoffs and furloughs and identify the various considerations when determining which may be the best response to COVID-19.  

It is important to distinguish layoffs from furloughs. Generally, the term layoff is used to describe the termination of an employee based on no fault of the employee. A layoff is considered a loss of employment. Whereas, a furlough is a mandatory temporary unpaid leave of absence. It is important to note that simply reducing an employee’s salary or rate of pay without an accompanying reduction in hours would not be considered a furlough.

While the aforementioned definitions apply to most states, there are states that consider furloughs to be a termination in certain circumstances. Employers should defer to the definition used by their state.

II. Considerations When Determining Whether to Layoff or Furlough

There are company and employee considerations that aid when determining whether a layoff or furlough is appropriate.

Company Considerations

• Managing Employer Needs – Employers must consider how to best manage their needs. Employers must conduct a cost-benefit analysis prior to deciding how to proceed in these uncertain times. Wages and benefits are a large portion of the analysis. In addition to cost factors, employers in many industries must factor in the need for flexibility in their ability to manage their workforce. In addition, some employers must consider how to ensure that the affected employees return to work when the time comes.

• Paid Time Off – One potential cost associated with laying off employees is having to pay employees for any accumulated paid time off in their final paycheck. While there are no federal laws requiring payment of accrued time off, many states mandate this payment. On the other hand, there is no requirement to pay out any accumulated time off for furloughed workers because they are still employed.

• Unionized vs. Non-Unionized Workforce – A decision to layoff or furlough employees could trigger an employer’s obligation to bargain. If the collective bargaining agreement has procedures regarding layoffs and/or furloughs the employer is required to follow them.

Employee Considerations

• Unemployment – Generally, laid off workers will be eligible for unemployment benefits and depending on state law, furloughed workers may be eligible for unemployment benefits as well. At the time of this writing, nearly all 50 states have waived any required waiting periods, which allows affected employees to apply for benefits immediately. In addition, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act expanding unemployment benefits was signed into law. While unemployment insurance is a joint state-federal program, it is mainly managed at the state level; however, as of April 1, 2020, all 50 states have signed a written agreement with the US Department of Labor to administer the CARES Act unemployment benefits in their respective states. The CARES Act extends all states’ unemployment benefits (26 weeks) by an additional 13 weeks (or until December 31, 2020) and adds an additional $600 to the amount received through state systems for 16 weeks, or through July 31, 2020, whichever comes first. While these additional benefits will be paid through the state, the benefits will be federally funded.

• Health Insurance – Generally, health insurance is a major concern for employees. This is especially true during the pandemic. Plan documents contain provisions that address the eligibility of employees during a variety of circumstances. As a result of such provisions, there is a chance that an employee could lose eligibility for health benefits as a result of a furlough or layoff. However, if the current documentation does require a loss of coverage for those individuals, there is a chance that the current policy could be amended to allow for coverage for an extended period. Employers are advised to review the term of their current policy or plan and consult with their applicable insurance carrier or stop-loss provider before making any offers of extended benefits. If a laid off or furloughed employee does lose coverage, they should be eligible to continue coverage by making a  COBRA election.

III. Implementation of Layoff/ Furlough

When conducting reductions in force through layoffs or furloughs, employers should keep in mind applicable federal and state notice requirements, the selection process, and what they communicate to their employees.

Federal and State WARN Notice

The Workers Adjustment and Retraining Notification (WARN) Act requires “qualifying” employers to provide 60 days’ notice of plant closing or mass layoffs lasting six months. A qualifying employer is an employer that either has 100 or more employees, excluding part-time or 100 or more employees who work at least 4000 hours/week (not including overtime).

Generally, layoffs or furloughs lasting less than six months would not trigger a WARN notice. However, due to the uncertainty caused by COVID-19, employers should carefully analyze whether a layoff or furlough could last longer than intended when determining whether to provide notice.

In addition, there are several WARN-like obligations created through state and municipal laws (mini-WARN) that must be analyzed. Mini-WARN Acts can have different definitions that can trigger a notice requirement where the federal notice does not. For example, the mini-WARN acts of four jurisdictions (California, Tennessee, Vermont and the City of Philadelphia) have triggering periods of less than six months.

Selection for Layoff or Furlough

When selecting employees for layoff or furlough, it is essential to identify the decision maker and to develop an objective selection criteria which could include:

• performance ratings;

•  job functions;

• past merit bonuses

• job criticality; and

• education/certifications.

While objective criteria is preferred, subjective criteria such as performance potential, communication skills and leadership ability can also be helpful factors to consider. Applying subjective criteria should be done as objectively as possible. It is recommended that employers keep a record of the selection criteria and how the criteria was applied.

Structure of Furlough

It is critical to be mindful of employees’ job classification (exempt or non-exempt). Employers normally have greater flexibility to change work schedules of non-exempt employees. The main concern is ensuring compliance with the Fair Labor Standards Act. Basically, an employer can reduce non-exempt employees’ hours, without liability concerns, provided the minimum wage requirements are satisfied. This flexibility is not extended to exempt workers. Exempt employees must be compensated their full salary for any week in which they perform an hour of work.

Employee Communication

Communications will vary depending on if it is a layoff or a furlough. In the case of a layoff, the employer should communicate:

• the layoff was a result of COVID-19;

• information regarding any severance pay; and

• unemployment compensation.

In the case of a furlough, the employer should communicate:

• the furlough was a result of COVID-19;

• expected duration of the furlough; and

• explicit instruction that unauthorized work is not permitted during the furlough.

In both situations, paid time off and benefit eligibility should be addressed. Communications should indicate whether affected employees will have access to paid time off and if so, the procedures to be followed. If the furlough will affect employee benefits, employees must be informed of any changes to their benefits. In addition, they should be notified of any continuation options such as COBRA.

IV. Conclusion

COVID-19 has caused critical changes to business and supply chains which is requiring companies to make difficult decisions to maintain their operations. During this time, it is essential for companies to conduct a thorough cost benefits analysis and weigh the best response to this unprecedented time.