What's the Difference Between Furloughs and Layoffs in Business

Businesswoman wearing a black suit leans near a window and considers the differences between furloughs and layoffs.

With revenues dropping—or coming to an abrupt stop—many business owners face difficult decisions regarding their employees. The unknown duration of the current COVID-19 crisis makes long-term planning for staff nearly impossible. It’s hard to know when business will return to normal or what that new normal may look like.

Many business owners have already cut down on their workforce. It’s a hard choice to make, but also one that requires a thoughtful approach. Whether you furlough or lay off employees makes a big difference in your continued costs, whether your employees retain their benefits, and how fast you can ramp back up.

If you’re facing these tough choices, spend some time considering which makes the most sense for your company and people.

Furloughs Versus Layoffs

Millions of workers are now unemployed—victims of the economic implosion that has accompanied the global pandemic. However, whether a company lays off or furloughs its workers (many large corporations are doing a variety of both) impacts what happens going forward. Let’s start with furloughs.

Furloughs are considered temporary work reductions or stoppages. Employees may be asked to not work for a period of weeks or a month, or employers may need them to decrease their hours by half or more. They’re not paid for the time they’re not working, which is how companies use furloughs to cut costs.

However, furloughed workers are still considered employees and, in many cases, retain their benefits. For example, Yelp announced that it furloughed 1,100 people and laid off 1,000. The furloughed workers are on unpaid leave for an undetermined amount of time and keep their benefits.

Layoffs, meanwhile, are generally viewed as a permanent ending to employment. Employers don’t anticipate re-hiring the workers, and laid-off individuals may begin looking for new jobs. Under the expanded federal economic assistance program, furloughed and laid-off workers are both eligible for unemployment benefits.

Determining the Smart Route

Whether you’re laying people off or furloughing them, the choice is difficult. But it’s one that many business owners need to make as they strive to keep their companies afloat during the crisis—and in a position to recover after.

For business owners considering staff reductions, furloughs make sense under the following conditions:

  • You believe that your revenue dip or demand for products or services is relatively temporary. You’ll need some—if not all—of your employees back and ready to work as soon as social distancing restrictions lift. 
  • Having to hire and train brand new employees once business resumes would make it more challenging to get back to business. It could potentially lengthen the economic impact of your current situation.
  • Your company has enough operating capital to fund employee benefits or partial benefits while your employees are not working. This isn’t required, but it does encourage employees to hang in there in hopes of returning to work as soon as possible.

If you do opt for furloughing employees, be aware of different requirements for exempt and non-exempt employees. The latter are hourly employees, which means they fall under the Federal Labor Standards Act. Exempt employees are salaried employees who don’t work hourly. They are exempt from FLSA regulations regarding minimum hourly wages and overtime pay. That said, you can't reduce salaried employees' work by the hour. Instead, to remain in compliance with federal laws, you need to reduce their work by full weeks.

Lastly, it’s important to note that furloughs don’t provide any sort of guarantee that you’ll bring an employee back. Instead, they kind of serve as a stop-gap between fully letting go of staff and keeping essential people who know the company and can quickly get the business rolling again.

When Layoffs Make Sense

Given how hard the pandemic has hit some industries and individual companies, many business owners do need to lay people off. Layoffs may make sense for your organization, if:

  • You’ve sustained—or anticipate sustaining—significant revenue loss. You need to make dramatic cuts to maintain the viability of your organization.
  • You have a smaller cash cushion or reduced access to working capital. Maintaining benefits for furloughed employees isn’t financially feasible.
  • You’re adapting to a new work environment, and specific roles have become unnecessary. You recognize that you may not need those positions going forward, even as the economy recovers.

These are not easy times for business owners or employees. But in all cases, hard choices feel better when you have all the information. Spend some time to understand the impacts of furloughs and layoffs to your company—then you can make the decision that works best for your circumstances.

The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, National Association, Member FDIC.