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Common Furlough Questions Answered for Small Business Owners

Whether your business is facing a difficult financial situation or hit a slow season, it may seem like layoffs are your only option. However, there is another way that you can reduce payroll costs without completely cutting jobs: furloughs. 

Furloughs are a cost-saving measure that can provide employers with financial flexibility without completely severing ties with employees. Of course, you’ll need to ask yourself a few questions to figure out if furloughs make sense for your business. 

An empty workplace after a business furloughed its employees. 

What is a Furlough and How is it Different Than Laying Someone Off?

In short, a furlough is time off without pay. Unlike an employee who is laid off, people who are furloughed are still technically employed by your company. Instead of completely severing ties with employees, furloughs allow you to temporarily part with workers and send them home without pay. Once the furlough is over, the affected employees can return to work and resume their normal duties.

During this time, furloughed employees cannot do any work on behalf of their employer – even a short phone call or a half-hour of work is considered a violation of the no-work rule. As such, even small tasks can result in you having to pay furloughed employees for their time (or the whole day for exempt workers).

How Long Do Furloughs Last?

The length of the furlough can be as short or long as you need. That means that furloughs could range anywhere from a week to several months. Indefinite furloughs are also an option if you’re unsure of how long you’ll need to maintain a lower payroll. If you plan to furlough employees, you’ll want to find a balance between the needs of your business and an amount of time that won’t drive your valued employees to find employment elsewhere.

How Do Furloughs Affect Hourly vs. Salaried Employees?

Employers have the right to impose furloughs on both exempt and nonexempt employees, although there are some key differences in terms of cost savings. With hourly employees, you can calculate the total number of hours saved with a furlough and evaluate savings. You can also furlough salaried employees, as these workers are only entitled to pay during weeks in which they work. As such, a long-term furlough won’t change their exemption status. 

How Do Furloughs Impact Employee Benefits?

While your employees won’t be paid during a furlough, they are still technically employed by your company. As such, there is some expectation that these employers are entitled to group health coverage, retirement plans, and other such benefits offered by your business. 

Despite this expectation, you still may have the option to discontinue or reduce the benefits of furloughed employees. However, you’ll want to communicate this with your employees ahead of this decision. Of course, you’ll also need to check your state’s employment laws to see if there are any stipulations about the treatment of employee benefits during furloughs. The Society for Human Resource Management (SHRM) suggests considering the following points:

  • Your group health plan may dictate if coverage continues or ends during a furlough. Certain plans extend active coverage during short-term leaves of absence, while others set minimum hour requirements.
  • You typically must offer affordable COBRA continuation coverage for all group health plans if coverage ends because of termination or a reduction in hours. Also, an increase in the employee's share of the premium because of the furlough is a loss of coverage for this purpose.
  • Terminating group health plan coverage for furloughed employees may lead to ACA penalties.
  • Covered employees must still pay monthly premiums/contributions to maintain coverage during a furlough. Make arrangements with employees in advance of the furlough to avoid lapses in coverage or invalidated plans. Payment arrangements for allowable coverage should be made in advance with employees and can include payments via mail, ACH, or a COBRA vendor.
  • Evaluate 401(k) and other retirement plan implications. For example, a furlough may trigger a "partial termination" clause, which may lead to 100 percent vesting for affected participants.

Can Furloughed Employees Get Unemployment?

While furloughed employees are still technically employed by your company, they will still typically qualify for unemployment benefits. In fact, the CARES Act expanded unemployment benefits for furloughed employees. According to CNBC, these employees are now “eligible to receive their state-administered benefit, based on previous earnings, for up to 39 weeks.”

Can Furloughed Employees Work Elsewhere?

Yes, furloughed employees can find alternative employment. In addition, certain states allow furloughed workers to pick up part-time jobs and stay eligible for partial unemployment.

Determine the Right Path for Your Business

Furloughs or layoffs are never an easy decision, but it’s important to decide the right route for your business. Need an HR partner to help you plan ahead and stay compliant with local, state, and federal regulations? Contact GMS today to talk to one of our experts about the future of your business.

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