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Jerry Cohen Law and the Business of Furniture blog.

Furloughs as a Viable Alternative to Layoffs

April 24, 2009

Although the economy is sending mixed signals and we’re all hopeful for an uptick, it’s safe to say that we’re not out of the woods just yet.  Employers are still looking for ways to shore up sales and profits and employees continue to worry about job security.  Labor and benefit costs, a substantial expense of any business, always receive close scrutiny in difficult times.  There may be viable expense cutting options that should be considered before resorting to layoffs or a reduction in force (RIF) such as reducing benefits, freezing salaries, or reassigning employees.  Another creative alternative to layoffs which is gaining support is a furlough, or time off without pay for a temporary period.

Managers often consider furloughs when they foresee a temporary downturn; when they must cut expenses but can’t do without the services of their hard to find talent; if they can’t transfer or reassign employees; if they want to avoid rehiring and retraining costs as the business cycle improves; or if they want to avoid hidden costs of layoffs such as severance pay and plummeting workplace morale.

With drastic layoffs continuing, over three million in the last six months, employees would rather take a temporary leave with benefits including possibly unemployment benefits, than be faced with a permanent termination. Many attempt to make good use of the forced time off with volunteer work or training for additional skills.  There is also a sense that management and employees must work together to out run this recession.

The business benefits of a furlough are both tangible and intangible. In addition to immediately cutting costs, many believe that furloughs win additional loyalty from the workforce because management is showing that it is attempting to reduce and spread the pain across the organization.  At the same time the furloughed employees maintain their relationship with the company and are poised to quickly assist in its growth as the recession eases.

Furloughs are not favored by everyone, especially those that argue layoffs are a necessary evil to safeguard the competiveness and viability of the company.  They argue that furloughs can chase away the best talent from an organization, are not well-suited for work that requires a team, and postpones the difficult but inevitable cost cutting.

There are some pitfalls and factors to consider when implementing furloughs including avoiding a stated return to work date which may create an entitlement; Federal and state mandated rights regarding compensation for exempt employees that work a partial day; whether the employee is entitled to unemployment benefits; the scope of employee benefits; vacation and seniority issues; scheduling work to avoid discriminating a class, and the affect of collective bargaining agreements.  Most of these concerns can be addressed by carefully designing the furlough program with the assistance of an attorney or workplace expert.

Furloughs are a creative cost cutting mechanism that should be considered by management, together with other measures, as an alternative to lay offs.