As non-essential businesses remain closed and customers stay at home, many employers are facing tough decisions as they struggle to make payroll. If you are a business owner or manager who is trying to reduce your workforce during the coronavirus pandemic, it is critical to understand the key legal differences between furloughing and laying off employees. Here are several common questions from employers:
What is a furlough?
A furlough is a mandatory suspension of work—without pay—with the expectation of a return to work at some point.
When you furlough an employee, you typically provide a date on which you anticipate they will return to work or a condition that must be satisfied before work will resume. In the case of the COVID-19 pandemic, for example, you might furlough employees with the expectation that they will return to work when non-essential businesses are allowed to open once again.
Furloughed employees typically retain their employment benefits, including health and life insurance, because they are legally still employed by the company.
What is a layoff?
When you lay off employees, it also means a suspension of work but without the expectation of a return to work. That does not mean that you can’t call a laid-off employee back to work, just that the employee should not count on being called back to work.
Unlike a furloughed employee, an employee who has been laid off does not usually get to keep their benefits. The employer may provide severance pay (and may be required if it’s in a contract), but is otherwise severing the employment relationship entirely through a layoff.
What does a reduction in force mean?
A reduction in force is defined as a separation from employment due to lack of funds, lack of work, redesign or elimination of position(s), or reorganization, with no likelihood or expectation that the employee will be recalled. A RIF may occur when a business is restructured, resulting in the elimination of positions or when it appears that there is redundancy in the responsibilities assigned to two or more positions.
What is the primary difference between laying off and firing an employee?
The distinction between being laid off and being fired is important. The primary difference is that when an employee is laid off, it is considered to be the fault of the employer (even if it’s due to conditions beyond their control), whereas an employee is considered to be at fault when they’re fired.
That distinction matters when an employee seeks future employment opportunities. More immediately, it matters if the employee applies for unemployment insurance (UI) benefits. In most states, a worker only qualifies for UI benefits if they’re out of work through no fault of their own. Therefore, unemployment benefits are typically available to laid-off and furloughed workers. If the worker was fired, those benefits will likely be denied.
How do I know which option is best for my business?
When deciding which option is best for your situation, you should ask yourself the following questions:
- Is it realistic to expect that you will need workers back in the near future? If you see the situation as temporary and hope to call your employees back soon, a furlough is probably your best option. However, during a furlough, there is a very strict No Work Rule that must not be violated. If a salaried employee answers a single email or signs a single document while furloughed, you must pay their salary for the entire week.
- How much paperwork is involved? As a general rule, the larger the company, the more involved the process is when you lay off employees. There are typically steps that must be taken and documents that must be filled out. Conversely, a furlough may require nothing more than an employer announcing the decision, often through a Furlough Letter.
- Do you want employees to retain benefits? Losing employer-sponsored health insurance is never good for employees, but losing it during a global health crisis could be devastating. If you want your employees to maintain health insurance coverage (and other benefits), a furlough may be the better option.
- Are you eligible for government relief? A majority of small businesses with employees qualify for the Paycheck Protection Program, which is designed to help companies retain their staff over the course of the COVID-19 crisis. PPP loans have a maximum limit of $10 million per business. Find out what relief you may be eligible for.
These are trying times for businesses, as well as families and individuals, so you’ll want to carefully review your options if you need to sharply cut expenses through layoffs, furloughs, or a reduction in force. The Rocket Lawyer Coronavirus Legal Center provides free legal documents, legal advice, and other resources to help you protect your business during this difficult time.