The Covid-19 pandemic has taken a toll on many businesses’ financial performance. Aviation industry, for example, is hit hard as traveling across borders is limited under scrutiny. Brick and mortar businesses are also forced to shut down due to lockdown measures. It goes without saying that retaining a large number of workers during financial hardship is tough. When no other solutions deem fit, business leaders often have to reduce headcounts through layoff and furlough.
Despite serving a similar purpose of cutting down the number of employees in an organization, layoff and furlough shares several differences between each other. When an employee is laid off, this means that they are fully eligible for unemployment. Meanwhile, when an employee is being furloughed, this means that the company still retains them without actually employing them. So, how does furlough work?
Definition and Types of Furlough
A furlough is an unpaid leave of absence, reduction in hours, or pay decrease intended to keep employees on the job while safeguarding the business’ profitability. This retention strategy is used to save expenses while retaining employees, either to redirect resources somewhere else in the company or to minimize vital expenses. Employees are not paid during a furlough, but they generally maintain their job benefits, such as health and life insurance. If the furlough status is prolonged, the employees can also file for unemployment in most circumstances.
There are two types of furloughs:
Nonexempt employee furlough is often translated as reducing hours of work and is typically applied for employees who are paid hourly or per shift. For example, a telemarketer who usually works for 8 hours daily for six days now gets to work 4 hours for five days or 8 hours for three days during a furlough. Some companies opt for furlough rather than direct layoff, especially those who can foresee that their business will recover soon.
While nonexempt furlough still allows employees to work with reduced hours, exempt employee furlough gives zero-hour. This is applied for exempt employees who are usually paid in full, no matter how many hours they work. As there is no chance for cutting hours of work, exempt employees are not eligible for monthly salary, but are still considered to be the company’s employees. As a result, it is illegal for a company to assign any kind of duty to furloughed employees, even something as simple as sending an email.
Advantages of Furloughs
During the economic downturn, many struggling businesses are choosing to furlough their employees in order to reduce operational cost. Given that furlough is not exactly a permanent layoff, employees can keep their benefits. For companies that offer holiday allowance benefits, employees are still eligible for it and accumulate their employment period, even though no monthly salary will be given during a furlough.
Through furlough, the HR department does not need to go through the costly hiring and training process, once the company’s financial state gets better. On the other hand, however, if employees do not see furlough to suit them, they can always file for unemployment or resignation.
Disadvantages of Furloughs
If the reason for furloughs is because there is a massive slowdown of business operation, the company still needs to cover expenses for employee benefits, despite not having to pay the monthly salary. Not getting sufficient revenue while struggling to retain employees through furlough is definitely not easy for the company.
For employees, a furlough can leave them in limbo; even though they are not laid off, it feels a lot like they are unemployed as they do not collect any paycheck. Not to mention, not all companies allow furloughed employees to resign and collect resignation benefits altogether, mostly due to the business’ deteriorating performance. In this case, some employees may have to opt for unpaid resignation if they cannot stand a furlough.
No businesses are pandemic-proof today. In times of uncertainty, companies have to work extremely hard to keep the business running while employees face the threat of being laid off. No leader wants to see their top talents go, either temporarily via furloughs or permanently via layoffs. Whatever decision you make for your employees, like with everything else in HR, should be communicated properly. The best thing a leader can do is express the company’s options to employees and help them understand why the organization has no other choice but to take it.