Furloughs vs. Layoffs: What Are the Practical and Legal Differences?

In 2023, layoffs hit the tech sector hard. The year's first two months alone saw more than 120,000 job losses at major companies including Amazon, Google, and Microsoft.

It's a stark reminder that, unfortunately, no company is immune to financial hardship. An economic downturn or something completely out of left field—like the COVID-19 pandemic—can put HR professionals in the difficult position of guiding employees through furloughs or layoffs.

But before you find yourself in that situation, it’s important to understand the differences between furloughs and layoffs so you can make the right decision when the time comes.

No matter what your business is going through, BambooHR is here to support your team. If you’re facing the difficult prospect of saying goodbye to employees, our employee offboarding software can help you give employees a dignified and respectful exit.

Key Takeaways: Furloughs and Layoffs Aren’t the Same

Furlough:

• Temporary pause on working for a certain time.
• Employees can’t legally work when on furlough, not even to answer an email.
• Being laid off is at no fault of the employee.

Layoffs:

• When an employee leaves a business permanently as the result of a company decision.
• Laying off staff is usually done when the business is closing, for cost reduction, or when the employee’s role is no longer needed.
• Being fired, however, is usually done when the employee is at fault, such as in cases of poor performance.

Can Someone Be Laid Off Without Pay?

Yes, there’s no requirement for severance pay. It’s an agreement between employer and employee. If the business does give severance pay, the amount will usually be based on how long an employee has been with the company.

Furlough vs Layoff: What’s the Difference?

Let’s be clear: a furlough isn’t the same as a layoff.

• A furlough allows employees to keep their jobs during a period of change.
• A layoff is the termination of an employee's contract due to matters affecting the business.

Whether you have to put people on a furlough or lay them off, both situations can be extremely difficult for the employee—especially if they are living paycheck to paycheck. But when your company is in a bind, you sometimes have to make hard choices.

Let’s look at both options more closely.

What Is a Furlough?

A furlough is a temporary, unpaid leave of absence, reduction in hours, or pay cut. It can be used as an initiative to retain employees while protecting the company’s bottom line.

The purpose of a furlough is to reduce business costs while keeping your employees in a job. This is done either to divert funds elsewhere or to avoid critical spending during a period of closure.

While employees don’t receive pay during a furlough, they do often get to keep their benefits—such as health and life insurance. Usually, they can apply for unemployment support, too.

Laws for furloughing employees can vary by state, so you should work with your company’s legal counsel to ensure you are handling the situation appropriately.

Both exempt and non-exempt employees can be furloughed, but the process varies for each group.

How Long Can a Company Furlough an Employee?

The amount of time for which you can furlough an employee varies and can depend on the final situation of your business. However, bear in mind that furloughs are supposed to be a temporary solution and shouldn’t last longer than a year.

If you feel like the furlough period may exceed 12 months, a layoff and reduction in the workforce may be a more suitable option.

Furloughs for Non-Exempt or Hourly Employees

Non-exempt employees are most often hourly workers. If someone is paid hourly, their employer can reduce their hours to put them on furlough without terminating them.

For example, an employee who regularly works 20 hours a week could temporarily have their working schedule cut to only 10 hours. Alternatively, they could be given no hours, also known as a zero-hour schedule. If an employee is on a zero-hour schedule, they are still considered an employee but aren’t given any shifts or pay.

This zero-hour schedule was a commonly used tactic by many businesses, like restaurants and retail stores, during the pandemic. Rather than going through the painful process of laying off their staff and rehiring them when things reopened, businesses could keep people on and start reassigning hours as soon as restrictions were lifted.

Furloughs for Exempt or Salaried Employees

Exempt employees are your salaried workers. Reducing hours doesn’t make sense for salaried employees because they’re paid the same amount no matter how much they work.

Instead, when salaried employees are furloughed, you can temporarily reduce their pay or give them a zero-hour schedule for a set amount of time. This can range from as long as several months to one week a month, or even a few days.

When you put salaried employees on furlough, don’t expect them to still work or take the occasional call—it’s illegal. Employees cannot work at all while they are furloughed. Even something as small as sending an email could require you to pay that employee for the full day.

What Is a Layoff?

A layoff is a termination of employment based on a lack of available work or funds. Employees who are laid off are let go through no fault of their own and are typically eligible for unemployment payments.

Getting laid off means employees no longer receive any benefits from the company—however, they can continue to use group health benefits from your company health plan. This can happen if the individual agrees to cover the entire premium under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

If you are able, you may choose to offer your laid-off employees a severance package. This can help them transition to a new job, but you aren’t legally required to do so.

How Should HR Handle a Furlough vs Layoff?

As with all things in HR, you should clearly communicate whatever decision you make with your employees when deciding between them being furloughed or laid off.

3 Tips to Handle a Furlough

1. Help Employees Plan Ahead

If you’re able, give your employees a timeline for when things are likely to return to normal.

2. Clarify Work Restrictions

Be sure to confirm that employees fully understand that they can’t work at all while they are furloughed—not even to respond to a quick message. Any hours a non-exempt employee works will have to be paid, and if an exempt employee works at all, they’ll have to be paid the full day’s wage.

3. Consider Turning Off System Access

If a furlough is in place for an extended period, you may want to turn off employee access to their business email and accounts to be sure they follow the no-work.

6 Tips to Handle Layoffs

If you have to make the difficult choice of laying off employees, here are the steps you should take.

1. Review all Pertinent Federal and State Laws

In particular, you should review the Worker Adjustment and Retraining Notification (WARN) Act regulations, the Older Workers Benefit Protection Act (OWBPA) regulations, and any state laws to be sure you’re compliant.

It’s wise to work with your legal counsel so you don’t miss any federal or state requirements.

2. Provide a Severance Package (If You Can)

This can significantly ease employees’ financial burden as they search for new opportunities. It can also leave former employees with a more positive view of your organization. However, as previously stated, it isn’t federally required.

Your severance package may include things like:

• Salary continuation
• Vacation pay
• Continued benefits for a period of time
• Placement service
• Counseling and resume workshops

3. Conduct Layoff Sessions with Clear Communication

This will likely be uncomfortable for both you and the employee, so come prepared. If you can, provide them with information about why this is happening and reassure them that it is through no fault of their own. Providing your employee with as many resources as possible can help keep things positive and professional.

Aim to give employees information about:

• How they can apply for unemployment benefits
• How they can access COBRA benefits
• Their severance package, if it is being provided
• The company’s employee assistance program, if you have one

4. Inform Your Remaining Staff

Rumors can travel quickly in the workplace. It’s best to get ahead of them by explaining the company’s situation to your remaining staff, why you had to make this decision, and what your action plan is for financial recovery.

5. Assist Laid-Off Workers

Losing a job is particularly challenging during a recession or periods of high inflation, compounded by other uncertainties. HR can support laid-off employees by showing empathy and respect, listening to their concerns, and helping them feel confident about finding new employment.

Be transparent and provide as much notice as possible. Offer support such as resume and interview coaching, letters of recommendation, and networking opportunities.

Address common questions proactively, including details about their last day, final paycheck, unused PTO, severance packages, and healthcare coverage. Kindness and assurance that their situation isn’t performance-related can also help soften the blow.

6. Provide Ongoing Support for Remaining Employees

Remaining employees may feel shocked, overwhelmed, and worried about future layoffs. Maintaining open, two-way communication is crucial. Listen to their concerns and gather feedback to foster trust, compassion, stability, and hope.

Employees need honest information about the current situation and future expectations. HR can facilitate this by helping leaders communicate directly with employees through various meetings and platforms, ensuring that all employees, whether in-person, remote, or hybrid, are included.