Furloughs: An alternative strategy for managing the workforce
As a result of the novel coronavirus (COVID-19) pandemic, employers are facing difficult choices in managing the workforce. They may decide to reduce employee hours or implement a reduction in workforce plan. Alternatively, employers may also consider a furlough.
What is a Furlough?
There is no legal definition of “furlough,” and the term may mean different things for different people. An employee furlough may be thought of as an employer-initiated period of time during which it tells employees their services are not needed. A furlough involves reducing the hours, days, weeks or other periods of time that an employee may work. Some may use the term “temporary layoff” when describing a furlough, although a temporary layoff may also refer to the end of the employment relationship. Historically, furloughs have been associated with periods of slowdowns or shutdowns. For example, some manufacturers elect to institute annual employee furloughs during the December holiday period.
Who is Eligible?
An employer may institute a furlough company-wide, or it may select certain employees or groups of employees for furlough. The decision to furlough some employees should be analyzed in the same manner as any other employment decision; for example, an employer should not make selections based on an employee’s race, religion, gender, age or other protected class.
How Does it Work?
Typically, during a furlough, an employee is not paid wages, as the employee is not performing any work. For non-exempt employees, this is fairly straightforward. For exempt employees, federal and most state laws require a minimum salary for each pay period. If an exempt employee performs work during any portion of a workweek, the employee must be paid their salary for that week. Failure to do so jeopardizes the employee’s exempt status. When an exempt employee provides no services in a workweek, the workweek may be unpaid.
Employers must be vigilant to ensure that, when employees are furloughed, they are not working in any capacity. This includes the employee not checking business email and voicemail. When instituting a furlough, employers should set clear expectations with employees. While this is simpler for some positions (e.g., waitstaff of a restaurant cannot work when the restaurant is closed), it is more complicated for others (e.g., employees who may be able to work from home or have email access on their phone). Employers should therefore inform both exempt and non-exempt employees that work is not authorized during the furlough period without advanced written approval. Employees may also be offered the opportunity to use vacation or other paid time off to receive income during the furlough.
Employers should consider whether an anticipated furlough triggers a notice requirement. The federal Worker Adjustment and Retraining Notification (WARN) Act and many states’ “mini-WARN” statutes contain provisions requiring advance notice (60 days under the WARN Act and different periods under state laws) prior to an employment loss. The furlough may be considered an employment loss under these statutes. These laws also look to the duration of the layoff, size of the layoff and size of the employer to determine whether notice and other provisions apply. There are limited exceptions under the WARN Act and state mini-WARN laws, although it remains an open question as to whether the current COVID-19 pandemic may fit within those exceptions.
How are Benefits Impacted?
Employers often prefer a furlough to a separation from employment because of employee benefit concerns. An employee who is separated from employment may have health-insurance continuation rights under the Consolidated Omnibus Budget Reconciliation Act (COBRA) health-insurance program or a state “mini-COBRA” statute, because termination is a qualifying event. On the other hand, depending on the language of the underlying plan documents, an employee on furlough may or may not remain eligible for health benefits under the employer’s plan. If an employer maintains an employee’s eligibility for healthcare benefits during a furlough (and such is permitted by the underlying plan documents), the employer must also arrange to collect the employee’s portion of the premium to maintain coverage. At this time, health carriers are reviewing their policies on furloughs to determine whether they can be more flexible during the COVID-19 pandemic. Employers should work with their benefit broker to understand the impact of a furlough on their health-insurance plan, as well as other plans, such as life and disability.
Employers should be mindful of state laws that require the payment of accrued, but unused, vacation pay at the termination from employment. The longer a furlough goes on, the more likely it may be deemed a separation of employment, which would trigger the duty to pay accrued, but unused, vacation time in some states (to the extent the employee did not exhaust those benefits during the furlough).
Unemployment benefits are state-run, and states each have different standards, waiting periods and eligibility requirements. In general, state unemployment agencies are modifying their eligibility requirements as a result of the pandemic to allow more individuals to collect unemployment, including those who are on some form of a furlough. Employers should direct employees to contact their local unemployment office or website for updated information on the availability of unemployment benefits for each particular situation.