Career Advice

Furlough vs. Layoff – What You Need To Know

By: Emily Totura
Jun 13, 2021 • 6 min read

Furlough vs. Layoff – What You Need To Know

When a company is at a point where they need to reduce costs, they might consider employee furlough or layoffs. Most people are familiar with the term layoff, which is when an employee is terminated for reasons that don’t relate to their performance at work. Employees who are furloughed are expected to come back to work after some time. They’re technically still considered employees as they are often able to retain their benefits and expected back at work. In this article, we’ll share with you everything you need to know about layoffs and furloughs.

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What is a layoff?

A layoff occurs when there are problems within the company as they are not receiving enough revenue to maintain their normal business operations. This could mean either a temporary or permanent termination of an employee. If a company chooses to do this, they might just lay off one employee or a group of them. It’s important to understand that a layoff doesn’t happen because of an employee’s work performance. Rather, it’s usually because the company is trying to downsize or is experiencing other problems within management. So, what are the reasons for layoffs?

1. To reduce costs

The most common reason why a company will lay off its employees is because they are trying to reduce costs in any way that they can. Many times, an organization will experience debt and need to find a way to pay it off, or they are not earning enough profit to pay for their expenses.

2. Redundancies in staffing

Another reason why a layoff could happen is when a company has to eliminate workers because of overstaffing, outsourcing, or changes in roles. With this, an organization might want to let go of employees that have redundant roles so they can run more smoothly and cost-effectively. For example, new management might cause a shift in different departments.

3. Relocation

If a company decides to relocate its operations to another area, it can result in needing to let go of some workers. If this happens, it can greatly affect an entire area and its economy. Because of this, organizations should show genuine respect for the community.

4. Merger or acquisition 

If a company is bought out by a company, or if they merge with another, this will likely result in a shift in the company’s direction. For example, if there is new management, there will most likely be a change in goals and planning. This can result in layoffs. If this happens, the new management will look at all employees and analyze their performance and the amount of time that they spent with the company. This will determine who is laid off first.

furlough versus layoff

Are there any alternatives to layoffs?

Not only are layoffs difficult for employees, HR departments and companies as a whole are also affected. This is because layoffs can affect a company’s reputation. There are a few alternatives to employee layoffs:

1. Encourage voluntary retirement

Before laying off people who want to continue working, a company can reduce its workforce by asking those who want to retire. For example, experienced workers who have been with the company for years can be offered retirement packages. Those that choose to do this are granted a smooth transition into their retirement. This primarily helps businesses in two ways. First, it achieves the goal of reducing the workforce. Secondly, it saves money as those who step down voluntarily tend to have higher salaries.

2. Cut back

Not only will companies look at ways they can reduce costs, but they will also look for ways to save money. For example, HR can pause hiring, traveling, bonuses, and raises. They might also choose to wait before updating anything like unnecessary equipment.

3. Go virtual

One way that companies can reduce their costs is by only sending vital employees to a physical office or site and have the rest of the employees work remotely.

4. Offer more unpaid time off to employees

Another way for a company to save money is by offering more unpaid time off. In times where organizations are stretching their resources, they don’t want to lose their workers. This option, along with the others, allows for companies to reduce layoffs.

furlough versus layoff

What does furlough mean?

A furlough is a mandatory unpaid, or reduced pay, leave of absence from a job for a while. Like layoffs, a furlough usually happens during stressful economic times. Employers will furlough their employees so that they don’t have to terminate anyone. Usually, this saves jobs while allowing the company to stay competitive once the market starts up again. Those who are furloughed might be eligible for unemployment and some benefits as well.

The main difference between a furlough and a layoff is that a furlough is a leave of absence, whereas a layoff means that an employee is terminated. It’s expected that furloughed employees will return to their original job once the furlough is over. Employee benefits for furloughed workers depend on the company’s benefit plans. Sometimes, health insurance benefits will continue. It’s important to talk with HR or a manager for more information on your coverage.

How does a furlough affect employees?

The main point to consider when you could be potentially furloughed is that you will be losing money. Because of this, it’s important to make changes to your budget to accommodate for the loss of income. It’s also important to understand that furloughs can happen in different forms. For example, your employer might ask you to just take one or two unpaid days off a week, or they might have you take one or two unpaid weeks off.

The furlough might be happening to everyone at the company, so they might rotate the furlough through different employees. If your furlough is going to be a longer period, you might need to look into an additional source of income like a part-time job. If it’s only for a week or two, plan accordingly in advance so that you have money saved. Keep in mind that some companies have an employment agreement that does not allow you to get another job.

How can you prepare for a furlough?

Overall, be sure that you are living well within your means, regardless of a possible furlough or layoff, and it’s never a bad idea to have an emergency fund ready for times like this. However, if all of a sudden you hear in the office that there are rumors of a furlough, it’s not a bad idea to start setting some money aside to get you through the potential furlough.

Create a budget now, and then if you’re furloughed in the future, it’ll be easier to cut expenses so that you can make all of your payments. If you choose to touch your emergency fund, remember that another layoff could happen in the future, or another circumstance, where you’ll need that money again. So, make sure in the future that you continue to add contributions to the fund.

furlough versus layoff

How long does a furlough last?

The terms of a furlough are up to the employers. They can decide to reduce hours, days, or weeks depending on the company’s situation. The amount of time depends on different factors.

Employers might consider how much reversed funds they have and how long they can maintain their normal operations with decreased or no revenue. After, they might be able to figure out how many employees need to be furloughed, how long they need to be furloughed, and under what terms, like hours, days, or weeks.

What should you do if you’re laid off or furloughed?

First, don’t panic—your career isn’t over! Before you start considering what your next steps are, there are a few things that you should do beforehand.

1. Get a “Laid-Off Latter”

If you’re laid off from your company, you should first request a “Laid-Off Letter” from HR. If you didn’t lose your job due to your work performance, then you should receive a letter that explains the situation for why you were laid off. This will be crucial when you begin to look for a new job. Once you get the letter, read it over, checking for any errors. It might have an important detail wrong, like which division you worked on. If this happens, just politely point it out and ask for a revision.

2. Consider your healthcare options

If you were laid off, you should also ask about any health insurance benefits. Once you’ve been laid off, depending on how far your premiums are paid, it will affect how long you are covered. More often than not, employers will cover one month in advance. If you decide not to get alternative health insurance, it can be risky. What can you do?

  • If you were laid off from a company that has at least 20 employees the previous year, under COBRA (the Consolidated Omnibus Budget Reconciliation Act), you can continue your coverage for you as well as your family for up to 18 months. The only downside is that you might need to pay the entire premium, which can be up to 102% of the cost of the plan.
  • The ACA (Affordable Care Act) allows you to shop for another health care plan on the state or federal exchanges. Since you won’t be making an income for a little bit, you might qualify for a subsidy.

furlough versus layoff

3. Get your last paycheck

You should also make sure to keep tabs on your last paycheck, making sure that it was the correct amount. While you’re doing that, you can also check the employee handbook to see what the company’s policies are on unused vacation and sick days. Each state is different, but some businesses will offer compensation for saved PTO. If you’re part of a mass layoff, you won’t get your final paycheck for a couple of weeks or months. This is because the federal Worker Adjustment and Retraining Notification (WARN) Act requires that employers provide at least 60 days’ notice, and during this period, all wages and benefits must continue.

4. Review all 401(k) and pension plans

If you have a 401(k) with your previous employer, then you have several options.

  • You can leave it with under your former employee’s plan. If there is at least $5,000 in the account, you will most likely be able to leave it there. This should only be a temporary fix.
  • When you find your next job, if that employer offers a 401(k) plan, figure out if you’re able to consolidate the old plan with this new one. If this happens, you’ll get all of your retirement investments back together without tax penalties.
  • If you open a rollover individual retirement account (IRA). With this, you’ll be able to choose from different investment options such as stocks, bonds, and mutual funds. You might also decide to pick a lifestyle fund, which allows you to base your investments on your planned retirement date.
  • Lastly, you can cash out. It’s an option, but not recommended. You’ll hurt your retirement plan, and you’ll also have to have a premium for taking the money early. Federal, and some state, income taxes will be due on this money, and you’ll also have to pay a 10% penalty for cashing out early.

5. Look into severance packages

Most companies will have their severance packages looked over by legal staff. However, you should still carefully review it yourself. You can consult an attorney that specializes in labor law if you think that the package is not up to industry standards. Ask about the reason for the layoffs, and if you know of anyone else getting laid off, does the company seem to be targeting any groups? You should also consider if you’ve ever been singled out. If you have a plausible discrimination claim, then this could help you negotiate. If there doesn’t seem to be anything that you can do, make sure to get the laid-off letter or a letter of recommendation, and ask for a guarantee that they will provide a good reference if someone in the future from a new job reaches out to them.

6. Register for unemployment

As a former employee, you’re eligible for unemployment benefits, and you should sign up for them as soon as you can. Note that your eligibility and how long you’ll be covered for (typically 26 weeks) depends on where you live. So, check with your local branch of your state’s Department of Labor. You can access this information and apply online.

furlough versus layoff

6. Don’t forget to update your LinkedIn and resume

To find a new job, having a solid network of professionals can be very useful. So, make sure that your profile has an introduction, and revise your strengths and skills. Stress your accomplishments and past experiences. Don’t be afraid to reach out to someone with who you’ve connected with in the past. You might not be offered a job right on LinkedIn, but you can inquire about potential jobs.

The bottom line is that a lot of people have experienced a furlough or layoff at one point in their career, so don’t get discouraged if it happens to you. Make sure that you are up-to-date on your company’s policies and have a plan so that you’re fully prepared if it happens to you.

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