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Understanding Furloughs and Layoffs During COVID
It seems as if the COVID-19 business shutdowns are far from over. With a new strain of COVID-19 appearing in the United States, it’s safe to say that employers should be prepared for potential shutdowns. After all, in December 2020, employers are said to have laid off upwards of 140,000 employees.
With that being said, as an employer, it’s important to understand what direction you should go in terms of furloughs and layoffs regarding your workforce. In some cases, furloughing employees might be more beneficial for both you and your employees.
What is a furlough?
Furloughs reduce the hours, days, or weeks employees are allowed to work. These typically last a finite length of time. Businesses can opt to furlough employees for specific amounts of time and conditional, and they can require employees to use accumulated PTO during their furlough time period. Most companies notify employees that their furlough will consist of unpaid time.
Furloughed employees typically retain their employment status, rights, and benefits. On the other hand, laid-off employees are no longer considered employees, and they lose their benefits and protections.
There are a few differences in the way employers set the terms for hourly (nonexempt) workers furloughs and salaried (exempt) workers furloughs. The Fair Labor Standards Act provides guidance on when exempt vs. non-exempt staff members must receive pay.
For hourly employees, furlough reductions can include fewer hours per day, fewer days per week, and weeks to months on furlough. The terms of the furlough can impact any or all the hours they would normally be paid for.
Salaried employee furloughs require blocks of at least 1 week each. Under the Fair Labor Standards Act, salaried employees receive pay for any week in which they perform work, regardless of the number of hours they’ve put in. Therefore, the only way to furlough these employees is to furlough for blocks of full weeks at a time.
A layoff can be temporary or permanent. Layoffs typically leave employees uncertain whether or not they will be returning to work, therefore they might look for work elsewhere. Their rehire is not guaranteed, and layoffs can lead to low employee morale when and if they return.
Paid Time off
In the case of a furlough, there is no requirement for employers to pay out any accumulated time off they’ve earned while furloughed. Employers are able to allow their employees to use their PTO during a furlough, but that might defeat the cost-saving purpose of the furlough.
A layoff, on the other hand, is required to be paid any accumulated paid time off they have earned in their final paycheck. Because there is a potential these employees will not be rehired, they receive their PTO. Federally, there are no requirements to pay accumulated time off, however many states require employers to give employees any time they’ve earned.
When you are laid off, you are able to collect unemployment as you look for another job. Under the CARES Act, employees who have been impacted by the COVID-19 shutdowns are eligible for unemployment compensation.
Typically, those who have been laid off need to prove that they are actively searching for work, however throughout the ongoing global pandemic, these requirements may be more relaxed. Furloughed employees will likely not have to prove they are looking for work, as they are still technically considered employees.
How long can employees remain furloughed?
Employers are able to determine the terms and length of the furlough for their employees. They are allowed to set reduced hours, days, or weeks based on their specific company needs. Typically employers consider the expected length of the downturn, the reserved funds on hand, and how long they can maintain operations with limited income.
The impact on healthcare benefits for furloughs compared to layoffs is important to understand. With the heightened focus on health and wellbeing in the wake of a global pandemic, it’s important to understand what each implies.
A furlough does not fall under COBRAs qualifying event requirement for an employee to change their healthcare coverage. If an employee is still employed by a company, technically they should not have lost their access to group coverage.
As organizations furloughed employees, they typically continue to cover them under group plans. Some companies are even paying employee contributions to help employees throughout this challenging time.
It’s important to note that many plans clearly disqualify employees with reduced hours from coverage. As an employer, it’s important to discuss the terms of their policy with the provider and work to amend the plan if possible. If that’s not possible, it’s important to designate the furlough as a reduction in hours, so your employee can qualify for COBRA and receive new healthcare.
Another aspect of healthcare to consider deals with ACA compliance. Employers with 50 or more employees are required to offer coverage to 95% of their full-time, or full-time equivalent workforce. Furloughs will likely affect full-time equivalent status for employees, moving them to part-time.
A furlough or mandatory leave could trigger an ACA employer penalty if the employer terminates group health coverage. Terminating group health coverage may cause an employer to go below the threshold of providing affordable coverage to 95% of full-time employees. COBRA coverage must remain affordable in order to avoid an ACA penalty, which may require an organization to subsidize part of or all of the employee portion of coverage.
Laid-off employees are no longer considered employees, therefore they are no longer eligible to receive group benefits. Employers must notify employees who have been laid off of their rights to continue coverage under COBRA.
Understanding the implications of a furlough versus a layoff is essential to the success of your business. While there are many logistical aspects to this decision, you should also consider the morale of your team. When the time is right for employees to return how will you help them through the process?