Organizations have many tools they can use to balance their budgets through staffing changes. One of the most talked about is layoffs, a temporary reduction in force that often times becomes permanent after a recall period elapses. However, there is another way that might suit your business needs better: holding a furlough.
In this guide, we will be covering what a furlough is, how they are used, their impact on your business internally and externally, and how to know if holding one is the right choice for you.
Let’s dive right in.
What Is a Furlough?
In short, a furlough is an involuntary, unpaid leave of absence from work for a specific period of time.
Furloughs are most commonly seen in businesses that are seasonal, such as ice cream shops, landscaping companies, and others. During their off months, these companies can furlough their staff, allowing them to close business during their off seasons.
For example, if Bob’s Ice Cream Shop does most of its business in the summer months because that is when people are ready and willing to buy ice cream, it doesn't make logical business sense to stay open throughout the cold winter months.
So, the ice cream shop closes for the off season and those who work there go on a furlough for that period of time. When business resumes normal operation, those workers still have their jobs and can return.
In the corporate world, furloughs can be used as a cost-saving measure instead of holding a more permanent event like a layoff.
For instance, if a company hits a rocky patch and needs to re-balance their books, they often look at staffing as a way to make cuts because payroll is one of the most expensive things a company pays for.
Some companies in this situation may hold a layoff, but others might want to fully retain their staff as much as possible. This is where a brief furlough can come in handy. Instead of laying people off or holding a RIF, the company can furlough employees for a few weeks or even a few days to allow the budget to balance.
How furloughs can work outside of seasonal companies largely depends on the organization planning on using them. A company may, for example, decide to have a furlough every Monday, meaning that staff members have a shorter week, allowing the company to save money week-after-week until the business is stable. Another company may decide to do this in a lump of days or weeks.
If you are planning on holding a furlough, always make sure you work closely with your legal team to ensure that you are complying with all local, state, and federal laws.
The Difference Between a Furlough and a Layoff
Despite how we use the term in everyday conversation, a layoff is meant to be a temporary reduction in force. That means that, once finances have settled down or new work in available, those let go during a layoff will have the chance to be ‘recalled.’
In other words, a layoff is very much like a RIF (which is always permanent) in that people end up leaving your organization and may well wind up working elsewhere because there is no guarantee that they will be recalled.
When it comes to furloughs, employees are given leave from work (typically unpaid leave) for a specific amount of time. This can be caused by a business need, such as to save costs, re-balance a budget, etc, or because the work is seasonal.
Employees are not terminated during a furlough. Sure, they can find new work elsewhere during the event, but they know they will have a job - if they want it - when business resumes normal operation.
In summary, a layoff is meant to be a temporary reduction event where employees are let go from the company and are not guaranteed that they will get recalled. After a certain period of time, the layoff becomes permanent and those let go will need to find work elsewhere.
For a furlough, employees still have their jobs but are on unpaid leave, meaning that - when the business resumes operation at full strength - those who took the furlough are welcomed back.
Another key difference is how benefits may work. Those who are laid off may be able to receive unemployment compensation and sometimes may continue to receive other benefits like healthcare (usually to help keep folks on the recall list). More permanent events also typically include severance packages and outplacement services. These things are typically not offered during a furlough because they aren’t long enough, but always make sure to consult your legal team to make sure your furlough is being handled properly (you'll hear us say this a lot, but it's super important).
You can read all about the different types of reductions here.
How Do Furloughs Impact Your Organization?
Any reduction event that makes your company look a bit shaky (even if your business isn't) can be received poorly internally and externally.
Internally, your employees may start to look for work elsewhere because they, obviously, do not want to lose money every week or go unpaid for a long time. Some may find part-time work to fill the employment gap that the furlough has made.
Externally, clients and shareholders may look at the move as a signal that the business isn’t on steady ground. Or, they could look at the move as a way to stave off layoffs, which would shine a better light on the event.
Either way, how the event is viewed is largely based on the individual, but always know that - unless you are a seasonal business that holds furloughs every year or a company that has been using furloughs often - any sudden reduction or cost-cutting measure has the chance to impact your business on a reputation level.
Should that stop you from holding a furlough? It really depends. We do not know your specific situation so offering a ‘golden rule’ isn’t helpful. Instead, you need to take a look at your staff and decide for yourself if a furlough, RIF, layoff, or other event is the right move.
Sometimes, a layoff is the right way to go. For example, if you need to make a permanent reduction, a layoff is great because it allows you to make the move and recall those who you can fit in elsewhere. Again, RIFs (the permanent version of a layoff) can work, too, if you have a plant closing, are making a pivot to a new product line, etc.
With that in mind, let’s briefly look at the advantages and disadvantages of furloughs.
Furloughs: Advantages and Disadvantages
The biggest advantage to a furlough is that it may save your company from holding a RIF or layoff - both of which are arguably looked at worse than furloughs - and still allow you to get back on track.
By guaranteeing your staff members that they will still have jobs after the furlough, you can help retain your talent and show that you are doing everything in your power to protect them from having to find a new role.
Of course, the biggest benefit is the costs you save by reducing work hours. This is the core reason, after all, for any of these moves (unless you are making a pivot or something along those lines).
“Employees who are not working don't need to be paid. There are a few cautions in this. For non-exempt employees, they must be paid for all work done, so if an employee comes in for an hour, he needs to be paid for that hour,” reports Susan M. Heathfield for The Balance.
“An exempt employee must receive a full day's pay if they do any work at all. So, for instance, if you call an exempt furloughed employee for a quick question, that counts as working. You lose the advantages you hoped to receive by doing the employee furloughs.”
Heathfield continues by saying that seasonal furloughs are a great way to handle these reductions even if you are not in a traditionally seasonal environment. For example, if you set the expectation that your plant will close every August and reopen every October, your staff members will know that they will have to fill that gap with other work or save up to get through it.
However, if you haven’t made that expectation, the furlough can be looked at as a negative and may prompt some of your staff to find other roles where their employment is more stable.
The last big benefit is that you will not have to - for the most part - hire new staff members back after the furlough. If you layoff staff members and then your business rebounds, you now have to spend more time and money finding talent to fill the roles that were laid off (unless you are able to recall them).
Those are the biggest and most impactful reasons to hold a furlough over a traditional layoff event. However, there are definitely disadvantages, too.
One of the biggest disadvantages - not actually saving any costs - can be completely negated if you put a proper plan on paper before launching into the event in the first place.
But how will you not save costs if you are holding a furlough where employees do not work? Well, you have to seriously consider what benefits will continue during the furlough and if they are going to wind up costing you about the same as not holding one.
“Employers save money, but not as much as they think they will, because so many of an employer’s costs for benefits continue during furloughs,” Heathfield continues.
“Salary is only a portion of what it costs to keep an employee employed. Your employees may be eligible for unemployment for the furlough period, which can increase your costs.”
In other words, make sure that you are actually going to cut costs when it comes to your furlough, which brings us to our next point: workload.
If the work continues on pace, your returning employees may not be able handle the increased load, causing you to not be able to fulfill orders, which can make for angry customers, which can lead to loss of business.
All of this can lead to more internal stress that can negatively impact your business because workers will feel unfulfilled, overworked, and stressed out. Teams may start to crack because projects are taking longer than before to get done, and many employees may start looking for jobs.
A recent study found that employees who start looking for new work also stop helping their coworkers with their tasks. This means that you need to make sure that you help your teams as much as possible so that you don’t wind up with a talent shortage. After all, it’s very costly to hire and train new staff members and one of the biggest benefits of a furlough is that you will be able to retain staff instead of hiring.
In order to do that, HR has to play a key role in making the move go over smoothly. However, if the budget isn’t fully and carefully thought out, the increased work and stress levels may cause future problems.
As you can see, furloughs - like any cost saving measure that impacts your staff - has its ups and downs. It largely depends on if your company will benefit from the move or if it will make things worse. You need to work closely with upper management, your accounting team, and stakeholders to go over every possibility because you don’t want to go into a furlough without a fully thought out plan in place.
How Furloughs Can Impact Your Corporate Brand
While many HR professionals may never consider corporate branding (also known as employer branding), thinking that it's more of a marketing initiative, in today’s world it’s very important.
In order to retain talent, find new talent, and make sure customers want to work with you, how a company is perceived online and through word-of-mouth is becoming increasingly an HR concern.
With sites like Glassdoor and LinkedIn, future talent is more equipped than ever to gauge how employees are treated at your company, meaning that if you hold a poorly planned layoff event, treat your staff members poorly, or anything else that has a negative impact, people will know.
Also, consider the fact that employees are more incensed to write a bad review over a positive one. Why would someone feel the need to report something great about their work experience? The same can be said for any review online.
If you order a product and the product works the way a company said it would, you mostly likely will not go on Amazon or wherever you got it from and tell the world. However, if that product ends up disappointing you, you want to tell everyone so they don’t make the same mistake.
This can be directly applied to how the job market works in today’s overly-connected internet landscape.
When you hold a furlough - especially a sudden one - you open yourself up this risk, even though a furlough is generally looked upon in a better light than a layoff or RIF.
The good news is that if you follow all of the best practices and hold a successful, well-crafted furlough, you can get out ahead of these reviews and save face. Even holding a layoff can be done in a way that provides the utmost care to employees, leaving them with no hard feelings.
While how you handle a furlough, like we said, depends on your culture, employee expectations, and many other things, you definitely want to start out on the right foot with a proper announcement letter.
Let’s dig in to that now.
How to Announce a Furlough: Writing a Furlough Letter
After you have come to the conclusion that a furlough is definitely the right course of action for your business, it’s time to actually implement it.
And the first thing you will need to do is alert your staff of the upcoming event.
We suggest alerting staff members by using a letter that can be sent via email, provided with paychecks, or sent in the mail. The best way to alert staff members of any important change is to use whatever means they expect news like this to come from. For example, if you have a staff that doesn’t use email regularly (like plant workers) you should provide the letter with checks or by sending it out to their homes.
How you send the letter, again, should be well thought out to make sure that your staff members are 100 percent alerted.
Once you decide the delivery method, you can move on to start writing the letter.
Writing a Furlough Letter: The Introduction
Like any letter, start off by addressing who you are speaking to. We recommend something like this:
Dear [first name],”
From there, you can easily move into the first introductory paragraph that explains what’s happening. Don’t beat around the bush here. Get right into why you are sending the letter. Don’t talk about the weather or try to be clever. Just say what’s happening.
Here’s an example:
“The purpose of this letter is to formally notify you that your position as [insert title] on the [insert department or team name] is being eliminated temporarily due to [insert reason]. Your last official day of work will be [insert last day]. Your salary and benefits will continue at their current level during the notification period. Please be assured that this action in no way reflects dissatisfaction with your job performance.”
Next, you can move to the middle of the letter where more details will be explained so that everyone is on the same page.
Writing a Furlough Letter: The Middle, Part One
Yes, the middle has two parts (surprise!). The first part is about explaining how long the furlough will be (in this example we do not put dates in because they largely depend on your organization). Again, plan, plan, plan before sending the letter out.
Once that’s established, you can go into detail as to what a furlough actually is (if you don’t use them regularly) and how the move will impact the workers benefits, paychecks, and everything else.
Here’s a sample of the first part of the middle section:
“The length of this furlough is unknown at this time. We will do our best to provide current information as our organization moves to have employees come back to work.
Furloughs are a company-initiated short-term temporary unpaid leave of absence. The furlough period and provisions may be changed or terminated at the sole discretion of the Company, and does not create any employment contract, express or implied.
During the furlough period, your health and welfare benefits will continue (if applicable), and will accrue at employee cost during this time. Benefit cost repayments will be required upon potential return to work, if applicable. If you do not return to work, you will not be billed for the benefit premiums accrued. If you have a final paycheck, the Company will deduct any premiums in arrears that it is able to, and anything outstanding beyond that amount will not be billed back.”
As you can see, this letter briefly - but fully - explains the core changes that come with holding a furlough. Always expect there to be a lot of questions, though. With any reduction event, you need to make sure you are available for workers to ask you questions because if you keep them in the dark, rumors may start to spread and you do not want misinformation to run amok in your organization, especially during a time like this.
Writing a Furlough Letter: The Middle, Part Two
The second part of the middle should be about unemployment. You should always alert workers about unemployment and how they can apply for it.
For some furloughs, unemployment may not be an option because the dates are too close together. For example, if you have a furlough every Friday, the workers will not be able to collect unemployment because it’s only one day. However, if the furlough will lasts weeks or months, they may be able to.
In the end, always show how they can apply for it regardless and make sure you talk to your legal counsel to ensure the furlough is compliant with all regulations.
Here’s a brief sample of this section of the letter:
“During the furlough period, you may file for unemployment compensation. Please refer to your state’s guidelines for unemployment compensation regarding specific details and provisions surrounding application, eligibility, and collection of benefits. To assist you in applying for any eligible benefits, please reference the state in which you are employed at www.dol.gov or by calling 1.866.4.USA.DOL.”
Again, short and to the point. Get everything out there for the employee to consider. There is no sense making this more difficult to understand than it needs to be.
Writing a Furlough Letter: Signing Off
After all of those details, it’s time to sign off, which is by far the easiest part of the entire letter. Just offer a brief thank you and provide a way for employees to contact you with further questions.
Here’s how this can look:
“We wish to thank you for your contributions to the [ insert team or department] at [organization name].
If I can offer assistance in any way, please contact me.
And with that, you have a great start to your furlough process. Remember, though, that you will also need other letters on file, too, that can help save you time later.
Furlough Letters: Rescind and Extend
As you go through the furlough process you may need to extend it or cancel it early (rescind).
For this to go over as smoothly as possible, we highly recommend you keep these letters on file so you do not have to write them ad-hoc.
You can download both here:
Both of the letters are short and to the point. They say whether or not the business was able to gather the funds to cancel the furlough or if more time needs added.
Always be upfront with your staff and tell them of these changes as early as possible so they that they know what to expect.
Furloughs: Other Considerations and Tips
Now that we’ve gone over just about every aspect of furloughs to get you started, we need to go over what to consider outside of the major concerns.
The biggest thing you need to think about is how benefits will work over the course of the furlough. We mentioned this briefly above, but in order for your furlough to do what you want it to, you need to ensure that you are paying out the correct benefits to staff members and that they know what those benefits are.
“As you’re planning a furlough, review the terms of your benefit plan to see what the implications of a furlough might have on each of the benefit plans, and then potentially structure them in a way that would have the least impact on employees and their continued participation in the plan,” Frank Morris Jr., an attorney with Epstein Becker & Green in Washington, told Judy Greenwald at Workforce.
You also have to consider what groups will be impacted by the furlough. While layoffs have stringent rules for employers to follow based on guidelines by the US government, the Older Workers Benefit Protection Act (OWBPA), and state regulations, furloughs mainly have to worry about how union rules work (if union members are going to be impacted by the furlough).
Again, these issues need to be be addressed by your legal team. We will not go into every single law or union guideline that you may need to follow because we are not lawyers. By working closely with your legal counsel, you can ensure that you are following all local, state, and federal laws, allowing your furlough to run smoothly and legally from start to finish.
The last major concern is that you need to be consistent with your communication and messaging during the furlough.
In HR, a lot of the times communication is key. Your staff needs to know what is going on, how it impacts their jobs, and everything else. Be as transparent as possible and also do not do things that do not make sense.
That last part seems like a no-brainer, right? But we often hear about companies who layoff staff members, cut hours, or hold furloughs and then reward executives with bonuses. This doesn’t make sense. If the business is struggling, hold the bonuses. What message does it send to lower level staff - the ones typically doing the actual work - when they are struggling and their bosses are thriving more than ever? That’s how you lose staff and reputation in one move.
“If you're considering implementing a furlough, make sure your communication is clear and consistent with the employees,” Heathfield reports in another article for The Balance.
“Don't talk about the need for cost savings by furloughing your hourly employees while the management team receives bonuses. It's critical that you maintain this as a group effort.”
Furloughs: The Key Takeaways
We’ve covered a ton of information here. Let’s do a quick recap.
Furloughs are involuntary, unpaid leaves of absence from work. Usually, furloughs are used to help reduce costs and stave off the possibility of a layoff or RIF.
For many industries, furloughs are the norm. Consider ice cream shops, landscapers, and other seasonal businesses that close their doors in the off-season and then reopen with the same staff later.
Like the example above, furloughs are not permanent reduction events. In fact, they aren’t truly reductions at all because employees who are furloughed are still employees at the organization even if the organization is not operating at that time.
When a furlough is over, the employee returns to their normal working hours.
Furloughs can impact organizations overall or just small teams. For example, if you have no work for your plant workers because of whatever reason, they can be furloughed while your management team finds new work, etc.
The goal of a furlough is to reduce costs while retaining talent. If done right, furloughs can be super successful in doing both. However, if furloughs are mishandled, go on for too long of a time, or are extended, employees may start to leave the organization.
Here are the benefits of a furlough:
- Cost reduction
- Retaining staff members during financial hardship or business loss
- A better move for your reputation than a layoff (but layoffs also have their place)
- Can reduce training costs
- Reduce stress levels
To make these advantages shine, you need to handle your furlough with the utmost care and preparation. For some companies, furloughs are a normal event, but the trouble can come in when you suddenly implement them.
To learn more about implementing furloughs, especially writing the necessary communications, check out our guides here:
Here are some of the downsides that can come with furloughs:
- Possibly not cutting costs (if you have to pay a ton of benefits and unemployment)
- A hit to company culture
- Too much work when returning from the furlough
- Talent leaving
- Corporate branding issues
Most of these issues can be thwarted with proper planning and implementation. Always make sure that your furlough will save you money without causing a talent shortage or a hit to your image. And, we can’t say it enough, ensure that you follow all legal regulations.
In the end, a furlough can seriously save you cost and reduce the chance that you will have to hold a reduction event in the future. However, without the proper plans in place, it can hinder your overall performance.
Always make sure that your business moves reflect your employee expectations. And, if it doesn’t, always be transparent with your staff. There is no sense in hiding information, especially when that information directly impacts your staff’s livelihoods.
To learn more about other HR policies, check out our resource library: