What’s the Difference Between Furlough and Layoff?
Although in many cases the two terms are used interchangeably, ‘furloughed’ doesn’t mean ‘laid off’.
There are intrinsic differences for an employee between the two circumstances.
This guide will help to explain both the differences and the similarities between the two terms, and what they mean for you.
Furlough is a term used to describe a situation where an employee is not able to work for a company, but they remain employed.
A furlough lasts for a finite amount of time which is usually known before the period begins, although this is not always the case. Furlough can lead to layoff further down the line, but the idea is that a furloughed employee will come back to work at the designated time (or when the company's financial situation improves).
During the furlough period, the employee cannot work for the company and they will receive no pay, although in most cases, they will still have access to company benefits like health insurance.
Hourly paid staff can be furloughed through a reduction in hours (if they usually work a 40-hour week, this may be cut to 15, for example) or by going onto a zero-hour contract.
They remain a contracted employee but there are no set hours for them to work – such as a server in a restaurant that is temporarily not offering dine-in options.
For salaried staff, it is more likely they will be expected to take unpaid leave for a specified amount of time.
Furlough can be voluntary or mandatory, and you might be used to hearing the term ‘furlough’ used for federal employees during government shutdowns. Seasonal employees are often furloughed between work periods, like summer staff at theme parks and construction workers during the winter. Employers in both public and private sectors can furlough staff.
Employees who are furloughed remain employed by the company, but they can seek alternative permanent employment during the furlough period as they could normally. Some companies will not allow additional temporary work during furlough as it is seen as ‘outside employment’ and may violate the work agreement or contract.
Although furloughed employees cannot draw wages, they can claim unemployment benefits, so there is less financial hardship during the furlough period.
In addition to finding other work (if their contract permits), benefits can allow an employee to remain employed by their original company and still get paid from other sources.
Furlough is often used as an alternative to a layoff and can be an efficient way for a business to cut costs.
Much like furlough, a layoff is a quick way for a business to cut costs, as payroll and benefits are often the biggest expenses for any company.
Although a layoff is considered a complete separation of the employee and the employer, it is not the same as being fired or a reduction in force.
A reduction in force describes a situation where the position itself is terminated and will not be filled again. A reduction in force is a permanent separation of the employee from their position and usually comes with severance pay and other stipulations for the employer.
Layoffs are almost always for economic reasons rather than performance or behavior issues (unlike being fired) and they are planned to be temporary. This means that there may be a ‘recall list’ – an idea of when and if an employee will be rehired for the job – although there are no guarantees.
An employee who is laid off may be offered a severance package. This might include a lump sum of money and/or COBRA payments to help pay for health insurance until the employee finds a new job or gets their own life and health insurance.
Some companies may offer laid-off employees an opportunity to apply for roles in the company that are still available or help them find another role elsewhere.
When an employee is laid off, they should be looking for other work. Claiming unemployment benefits can help the employee financially, but since there are no guarantees of a recall to work, it is always best to look for different work elsewhere.
We have some specific ideas about how to explain layoffs when applying for other work which might help.
Depending on the state, the federal Worker Adjustment and Retraining Notification (WARN) Act stipulates that employers need to give their employees 30–60 days’ notice of impending layoffs if they employ more than 100 people who have been employed for more than six months, or if they work more than 4,000 hours combined in a week (in the private sector).
If it is likely there will be a mass layoff (more than 50 employees), then the WARN Act requires more notice.
If there are business circumstances that are not ‘reasonably foreseeable’, like a sudden, dramatic downturn in the economy, businesses do not have to give 60 days’ notice, but they should give as much as possible.
The key differences between being furloughed and laid off center around the relationship between the employer and the employee.
Furloughed staff remain employed whereas laid-off staff are effectively separated from their employer.
In both circumstances, employees may be able to return to work in their original positions after the layoff or furlough is over, although for laid-off staff this is not a guarantee.
Layoffs tend to be for an indefinite period, whereas a furlough is designed to be finite – although the length of time an employee is to be furloughed may not be known.
Both furloughed and laid-off staff can file for unemployment benefits, but as furloughed employees are technically still employed, they do not have to prove they are job searching and can apply as soon as they stop receiving pay.
Laid-off staff may receive a severance package, but this is not the case with a furloughed member of staff.
Although the WARN Act is in place for layoffs, there are requirements for what is known as ‘mini-WARNs’ regarding furloughs, including:
- Keeping staff up to date about their furlough
- If the furlough is going to be extended
- When their furlough will end
- If there are any changes (if it is likely to become a permanent layoff, for example)
For many people, furlough is the best option in an uncertain financial climate. There are benefits of choosing furlough over layoff for both employers and employees.
Remaining employed gives staff confidence that the situation will soon be over and working life will resume sooner rather than later.
Although furloughed employees cannot work for their company (and therefore can’t get paid), they can look for other permanent work while on furlough.
In terms of unemployment benefits, while both furloughed and laid-off staff can file, a furloughed employee does not have to prove that they are job hunting to receive it.
Furlough is often a cheaper option to reduce staff costs, as there are no severance-package costs and no need to provide outplacement services.
While both furloughs and layoffs offer the employer a quick way to reduce their salary burden immediately, furlough means that there are fewer costs when business gets back to normal.
There is no need to retrain staff, hire extra employees or go through other onboarding procedures if employees are still employed.
As an employer, it might be a good idea to have an honest discussion with staff to find out their preferences.
While employees cannot be fired while on furlough, if the economic situation does not improve (or worsens), then a furlough can become a layoff.
The usual layoff rules would apply, including any relevant WARN Act processes, which means that the employee should have sufficient notice of the change that is coming.
In terms of health and life insurances, furloughed staff usually remain on the company’s policy – this changes when a furlough becomes a layoff. In most cases, COBRA notices will be needed.
For any paid time-off benefits, furloughed employees may not have used them so they will need to be added to any severance pay offered.
For employers, choosing between a furlough and a layoff usually depends on the reason for reducing staff hours.
For seasonal and cyclical employees, furlough is the norm as there is a pre-determined timeframe when employees are not needed.
In uncertain economic situations, the choice may not be as clear-cut. It is usually about whether the reduced need for employees is likely to be short or long-term.
Furlough is a good choice for both employers and staff on a short-term basis, allowing employers to reduce their outgoings quickly while employees can seek unemployment benefits or other employment.
If the staff reduction is likely to be more long term, then a layoff is better for the company and, with a recall list, employees can be asked to come back to their positions when necessary, reducing the need to recruit and train new staff.
However, for employees who are laid off, the assumption is that they will not be coming back, so this might be considered a more permanent solution to an economic issue.