From household names like Macy’s and Neiman Marcus to your favorite neighborhood restaurant, grueling choices await business leaders forced to quickly cut costs. The COVID-19 economic shutdown has created an unprecedented leadership challenge for those who have enjoyed a historic decade-spanning bull market and record low unemployment rates.
The learning curve here is steep, with many business leaders struggling to appreciate the difference between furloughs and layoffs and scouring the fine print of insurance policies to determine the benefits they can offer. An improperly executed workforce reduction or furlough can lead to litigation costs that could easily wipe away any cost-savings a business is trying to achieve.
Layoffs vs furloughs: Key considerations
In the rush to stop the payroll bleeding, business leaders must appreciate some fundamental differences between layoffs and furloughs. While they’re both methods to quickly reduce payroll costs, each provides distinctly different strategic benefits and considerations. At the most basic level, furloughs offer an alternative to a layoff. By providing a temporary, unpaid period away from work, they help businesses retain talent, avoid separation costs and in some cases help employers avoid increases in unemployment insurance premiums.
Under the Fair Labor Standards Act, furloughs trigger important oversight decisions for managers, including:
- Some businesses are choosing to pay furloughed workers at a reduced rate. For nonexempt, hourly workers, employers must be careful when adjusting wages to ensure they don’t fall below federal minimum wage for each hour worked.
- These decisions are more challenging for exempt, salaried employees. If a salaried employee performs any work at all while furloughed – even one or two hours – during a given workweek, they must be paid their full salary for that week. For this reason, employers should consider collecting any electronic devices supplied by the business, if possible, to minimize chances that an exempt employee will work off the clock. An alternative is to reduce the exempt employee’s salary while on furlough, but not so low that it falls below $684 per week and jeopardizes the employee’s exempt status.
Furloughed workers and benefits
The fine print in a company’s insurance policies determines many of the employment benefits available to furloughed workers, but the Affordable Care Act provides some uniformity regarding the availability of health insurance. In many cases, furloughed workers remain eligible for insurance coverage as full-time employees under the ACA’s Employer Mandate. Employees must pay their portion of the premiums and can have coverage denied for failing to pay. A business can choose – but is not required – to subsidize a greater share of employee premiums during the stability period.
Furloughed workers and unemployment benefits
Workers furloughed in Texas and many other statesmay be able to collect unemployment benefits during the furlough. And with relaxed waiting periods and work-search requirements adopted by the Texas Workforce Commission in response to federal COVID-19 legislation, employees executing furloughs have a greater chance of qualifying for unemployment benefits. It’s also likely that the employer’s unemployment tax account will not be charged for benefits paid to furloughed workers, although definitive guidance from the TWC remains pending.
These decisions are complicated by provisions in the federal WARN Act, which are triggered by variables, including the number of employees affected and the duration of the layoff or reduction in hours. Employers often get in trouble when a short-term workforce reduction is extended based on unforeseeable circumstances. Because the WARN Act can be a tricky animal, it’s critically important that businesses have a full understanding of how any planned workforce reductions could trigger WARN Act notice obligations.
Alternatives to furloughs and layoffs
There are alternatives, such as shared-work plans facilitated by the TWC or the conversion of full-time positions to part-time hourly jobs. The TWC is working with businesses to streamline the approval process for implementing shared-work plans. A shared work plan allows employers to (a) use partial unemployment benefits to supplement lost wages and (b) reduce typical work hours by 10 to 40%. In these arrangements, workers get partial wages for their work plus shared-work unemployment benefits. Another strategy involves converting full-time positions to part-time hourly work. Under this scenario, hourly workers can be assigned fewer hours, and salaried employees can be offered part-time positions.
These are painful decisions – there’s no way around it – but economists expect even more layoffs and furloughs in the coming weeks. While the measures described represent strategies to control costs, they are just a starting point.
A smart plan requires careful consideration of state and federal laws and contracts. If a business fails to properly plan a workforce reduction, the resulting legal costs could make the medicine far more painful. Employers would be well advised to consult with labor and employment counsel before engaging in such cost-savings measures.
Stewart Hoffer is a partner and Kasi Chadwick is a senior associate at Houston-based Hicks Thomas, where they advise businesses of all sizes in employment law litigation and other areas of the law. Mr. Hoffer can be reached at email@example.com; Ms. Chadwick can be reached at firstname.lastname@example.org.