It is one of the toughest positions you can find yourself in as a business owner: realizing you do not have enough cash flow to make payroll. Unfortunately, it is been a common occurrence in recent months, with businesses forced to close their doors and reduce hours to comply with stay-at-home orders.
For thousands of organizations, the Paycheck Protection Program has helped curb the impact and keep employees on the payroll as a stopgap measure. For some, though, the program was not enough. For others, the benefits will run out before their revenue has had a chance to fully recover.
If you are in this boat, you might be looking at your options and trying to figure out the best move, weighing whether to furlough versus lay off employees. Here, we will explain the key differences between furloughs versus layoffs and share the pros and cons of each so you can make the most informed decision for your business.
Furlough Versus Layoff: What’s the Difference?
The terms ‘furlough’ and ‘layoff’ are both used to describe a reduction in staff that is typically related to financial challenges rather than performance issues.
Layoffs are a formal break in the relationship between a company and an employee. The separation usually comes with the expectation that it is a permanent move—there is no rehire date attached.
In furloughs, on the other hand, the relationship between the company and the employee remains intact. It is a stoppage of work for a shorter, fixed amount of time, with the expectation that the employee will return to work at some specified date in the future. For record-keeping purposes, the furloughed workers remain on the books as employees of the company.
Whereas layoffs involve stopping work entirely, furloughs may involve either a complete or partial reduction in hours, like moving from five days of work per week to three. In both furloughs and layoffs, the company ceases to issue paychecks to employees and employees become eligible for unemployment benefits. Also, both come with their own set of legal requirements that are typically governed by the state where your business is located.
While both avenues can help companies get through periods of financial strain, there are advantages and disadvantages to each solution. We will talk about these next.
Advantages of Furloughs
If you are faced with deciding between furloughs versus layoffs, furloughs will generally be the preferable option for both the company and the employee for a number of reasons.
One of the primary furlough benefits is that you retain your existing talent pool. Since you are not severing the professional relationship, it is much easier to resume full productivity if and when the time comes.
Since it is not a termination, you do not need to complete all the paperwork you would if you were firing a worker then rehiring them at a later date. Furthermore, you do not need to go through the onboarding process and invest the training time in bringing new employees up to speed if you can bring back furloughed workers who already know the ropes.
For workers, in addition to the expectation that they will have their job back in the future, furloughs generally allow them to keep their health insurance and retirement benefits (note that this will depend on the number of employees and the length of the furlough—check with your plan providers to confirm the details in your specific case).
In a furlough, employers do not have to pay out for unused vacation time or issue a “final paycheck” as you would in the event of a layoff, which can help you keep much-needed cash on hand.
Some would argue that furloughs are also a better option from a public relations perspective. Though the connotation associated with mandatory furloughs is not a great one, it implies that what you are going through is a temporary hardship rather than a permanent setback. This can actually work in your favor if you are working to regain footing among clientele or secure investment funding to help get your operations back on track. Furloughs are generally better accepted among employees, as well.
Disadvantages of Furloughs
One main disadvantage of furloughs is that in many ways, they put the ball in the employee’s court. While employees can stick around waiting to come back to work, not all of them will (or, for that matter, will be in a financial position to). This can bring uncertainty about your future staffing situation and your ability to resume business as usual when the furlough period ends.
Furloughs can also bring negative impacts to your operations. Reduced staff numbers and work hours can mean jammed customer service channels, longer order fulfillment times, and a loss of confidence among clients. Similarly, when employees do come back to work, their morale and performance can take a hit.
Finally, there are the unintended implications for employees’ benefits that can sometimes result from furloughs. If you offer employer-sponsored health insurance, for example, your provider will stipulate the number of hours an employee must work to qualify for the plan. If a reduction in hours causes employees to fall beneath this threshold, they may be unexpectedly booted from their coverage. It is a good idea to consult with your insurance provider while formulating your furlough plans so you can let employees know what to expect.
Advantages of Layoffs
The primary advantage of layoffs is the immediate cost savings you will experience from a reduction in payroll, insurance, and benefits. If you’re in dire financial straits, this cash infusion can be a lifeline to keep the struggling business afloat; being able to keep a portion of your workforce is arguably more desirable than if you had to fold and lay off your entire staff.
Another financial upside is that layoffs can free up resources for initiatives that may reinvigorate the business, like working with a business consultant, executing creative marketing campaigns, or bringing innovative new people to your leadership team.
Layoffs do not always mean a company is on the brink of financial disaster. In some cases, they are simply the result of a shift in the business—maybe new technology has made a certain role obsolete or you have decided to phase out an underperforming vertical in favor of more profitable one. In these cases, layoffs present an opportunity to reorganize the structure of the business in a way that streamlines your operations and improves your margins, which will benefit the business in the long run.
Disadvantages of Layoffs
Layoffs are never an ideal option and they come with their fair share of downsides.
First and foremost, while they can help lengthen your financial runway, layoffs can result in new expenses like increases to your unemployment insurance payments now and in the future. There are also severance costs to consider, like paying out unused vacation time if this is part of your company policy. Then there are the costs associated with lost talent, like lagging revenue if you had to lay off part of your sales team or gaps in leadership if you are losing key members of management.
Layoffs can breed major uncertainty and mistrust among the staff you retain. Your top talent may decide to start looking elsewhere for opportunities they view as more secure, which can lead to a spike in resignations. Research has shown that employees report decreased commitment and on-the-job performance after layoffs that affect their colleagues.
Layoffs also come with some specific requirements to keep you on the right side of the law. Under the WARN Act, for example, employers conducting layoffs that fall within certain criteria are required to give employees 60 days’ notice of the upcoming changes, and that notice must be provided in a particular way. If an employee has a valid claim of discrimination, harassment, or unlawful termination, a layoff could open you up to potential litigation.
Finally, there are some very real public image concerns associated with layoffs. Investors, for example, view layoffs as a sign that a company is not as strong as they previously perceived, which can further harm stock prices. Customers may lose confidence in the brand and recruitment teams may face future challenges attracting new talent.
The bottom line is that both furloughs and layoffs come with their own sets of benefits and consequences which may not necessarily balance one another out. Deciding on the best course of action requires careful consideration and expert input.