What Is a Furlough: Meaning, How It Works, and Payroll Impacts

A furlough is a mandatory and temporary absence from work. If you’re put on a furlough as an employee, you retain your employment status and employer-sponsored benefits, but don’t work or receive your salary for a period. Companies typically utilize furlough when navigating challenging financial times.

This article delves into the specifics and meaning of a furlough, explains how it works, and compares it to a layoff and reduced hours. You’ll learn how it affects pay and benefits, and how businesses can decide whether to furlough their employees.

Key Takeaways

• Furlough is a mandatory unpaid suspension of a worker that is typically temporary and meant to help companies save finances and overcome challenging economic conditions.
• Furloughs typically last a few weeks (though they can extend into several months) during which employees don’t perform any work or get paid, but keep receiving employment benefits.
• Non-exempt employees may work reduced hours for which they will be compensated accordingly. Exempt employees must receive full salaries if they do any work during a furlough.
• When deciding between a furlough and a layoff, a company must consider not just the financial aspect but the moral impact on its workforce.

What Is a Furlough?

A furlough is a mandatory temporary leave from work where an employee remains employed but doesn’t go to work and isn’t paid.

The primary reason employers use furloughs is to save money during challenging periods. This can happen due to issues with suppliers and a lack of materials needed for work, with seasonal businesses (akin to seasonal employment) that experience significant fluctuations, during company restructurings, and more.

An example of a furlough includes a manufacturing plant putting its workers on temporary leave when experiencing a material shortage, and then recalling them once the goods arrive. Similarly, government agencies may furlough employees when encountering funding cuts.

Putting employees on furlough is a strategic move that helps companies reduce payroll expenses until their financial situation improves. On the other hand, they keep the workers employed, which further saves money that would have to be spent on finding, hiring, and training new talent once the business gets back on its feet.

A furlough from work can be structured in a few different ways. Two main types include a full furlough and a partial furlough. During the full furlough, an employee completely stops working, while a partial furlough involves doing some work and earning a portion of their regular pay.

How Do Furloughs Work?

When a company decides to implement furlough, it typically notifies employees in advance. They may also provide additional details or point workers to the employer's furlough policy.

In many cases, the furlough’s duration may remain undisclosed. Some furloughs last only a few weeks, while others can extend for several months, and even companies don’t always know when they’ll end a furlough.

During an unpaid furlough, employees are forbidden to work for the employer, including performing seemingly minor tasks, like checking emails. If employees still work with a reduction in their regular hours, they will have to be compensated with furlough pay.

Furlough for Exempt vs. Non-Exempt Employees

There are some critical differences between exempt and non-exempt employees when it comes to furlough.

Non-exempt employees are typically paid by the hour and are eligible for overtime pay. When put on a furlough, they can still work with a reduction in their daily or weekly hours. If they do, they will be paid for these hours.

Exempt employees are salaried employees who aren’t eligible for overtime pay. Since they are paid a fixed salary, they aren’t allowed to work at all while being on furlough. If an exempt employee performs any work during a week, they will have to be paid for that entire week.

Furlough vs. Layoff vs. Reduced Hours

Understanding the differences between a furlough, layoffs, and reduced hours is essential for employers and employees, as they have distinct implications for both.

The primary difference is in the employment status. Workers on a furlough or reduced hours are still employed, while a layoff results in a termination. Even if they aren’t working, employees on a furlough are still expected to return, while those who have been laid off typically aren’t.

When it comes to payment, employees who work reduced hours will receive their pay for the time worked. Employees on a furlough either receive nothing or get lower pay that matches their reduced work hours, while laid-off employees typically don’t receive pay after their final paycheck.

Another difference is in the employer-sponsored benefits. A furlough or reduced hours typically means that employees continue to receive employer-provided benefits, while those who have been laid off usually don’t receive them. There may be some exceptions, such as the Continuation of Healthcare Coverage (COBRA) for laid-off employees.

On the other hand, laid-off employees are typically eligible for unemployment benefits. While there can be unemployment benefits for furloughed employees or those working reduced hours, the requirements vary by state.

Here is a simple table outlining the core differences when comparing furlough vs. layoff vs. reduced hours:

How Furloughs Affect Pay and Benefits

The primary concern of employees put on a furlough is what happens with their salary and benefits, so let’s find out.

What Happens to Paychecks During Furlough

During a furlough, an employee usually stops receiving paychecks. This is the main reason companies implement furlough in the first place, as they want to reduce operational costs. By saving on employee compensation, they want to prevent further financial problems until they can get back on track.

There are some instances in which employees may be required to work fewer hours. In those cases, they will be paid for those hours at regular rates. This is usually not the case with exempt employees, as they’d have to be issued a full salary regardless of the number of hours worked during a furlough.

Health Insurance and Other Benefits During a Furlough

One of the biggest advantages of a furlough for employees is that their employer-sponsored benefits continue even when they aren’t working. In most cases, employers continue to provide health insurance coverage and similar benefits. Sometimes, arrangements need to be made if payments for benefits are deducted from an employee’s paycheck.

On the other hand, there are benefits that may be impacted if the plans are directly tied to the employee’s work hours. That’s why it’s critical to refer to the employer's furlough policy to clarify the status of benefits during this period.

Eligibility for Unemployment Benefits

Employees on a furlough can be eligible for unemployment benefits. However, the requirements vary by state, which is why you need to consult with your state’s unemployment office. Even if you have your hours significantly reduced but are still working during a furlough, you may still qualify for partial benefits.

How to Decide Whether to Furlough or Lay Off Employees

Deciding whether to furlough or lay off employees requires careful consideration of several factors, including what is the best action for the business and for the workforce.

One of the biggest advantages of a furlough for employers is that they maintain access to skilled and experienced employees. Should the company’s conditions improve, it’ll continue with its operations quickly, without spending time and resources hiring and training new staff.

However, there is no guarantee that the company will continue operating after a furlough, or that it won’t have to lay some of the employees off. As a result, if the financial challenges are significant, long-term projects might show that certain positions may have to be eliminated and employees laid off.

Layoffs provide an immediate reduction in operational costs, though, should the company get back on track, it will have to hire new staff. Plus, there’s the expense of severance packages to consider.

The final point to consider is the morale of the organization and its employees. Layoffs, even partial, can significantly damage workforce morale, while a furlough can be seen in a more positive light, even if employees aren’t receiving paychecks for the duration.

Employer and Employee Obligations During Furlough

Employers and employees need to follow labor laws on furlough, as they mandate specific rights and responsibilities during this period.

Employers must follow the Fair Labor Standards Act (FLSA) when furloughing employees, especially regarding exempt and non-exempt employees. Having an exempt employee perform even a minor task results in them having to receive a whole week’s salary.

Additionally, employers with a substantial number of employees (typically 100 or more) may trigger the Worker Adjustment and Retraining Notification (WARN) Act. This requires employers to warn employees 60 days ahead of a mass layoff. While furloughs don’t necessarily result in layoffs, they may still trigger the act if they last for more than 6 months.

In addition to the federal-level WARN Act, many states have additional requirements referred to as “mini-WARN.” For example, in some states, employers must warn the workforce if they have only 25 employees, and not 100. In others, the notice period may be longer than 60 days, extending up to 90 days.

When it comes to employees, they are not allowed to perform any work for the employer during a furlough unless they receive payment for their hours. In general, they are free to work as freelancers and independent contractors, and even look for other jobs.

If they are looking for another position, they need to be aware of any company policies regarding second jobs, since they are still legally employed.

Manage Your Payroll During Furlough With Paystub.org

If you need professional documentation to manage your payroll during furlough or when the business is back to normal, you can use the software at Paystub.org. We offer the following online document creators:

• Pay stub generator. Create detailed, accurate, and professional pay stubs for your employees.
• W-2 Form generator. Generate year-end tax forms for your employees and the IRS.
• Form 1099 generator. Document payments made to independent contractors.
• Invoice generator. Bill your clients and improve your cash flow with ready-made invoices.

All our generators feature intuitive interfaces, expert-made templates, and built-in autocomplete tools and calculators, which will significantly speed up the creation process.

Final Thoughts

Now that you know what a furlough is, you know what to do during it, whether you’re an employer or an employee. Accepting it as a potential solution to a financial hardship will help you overcome the challenges and potentially get your business up and running, or wait out the no-paycheck period before coming back to work.

Clear policies, transparent communication, and adherence to legal compliance will help both sides through the process. Don’t forget to visit Paystub.org if you need assistance with legal documentation and means to simplify the paperwork, allowing you to focus more on running your business.

What Is a Furlough FAQ

#1. Can an employee quit while on a furlough?

Yes, an employee can quit while on a furlough. However, since they are still employed, they should provide a standard two-week notice to inform their employer, give them time to adjust if needed, and leave on good terms.

#2. How long do furloughs last in the US?

There is no legal limit to how long furloughs can last in the US. They are meant to be temporary, so most furloughs last under a year. In case a furlough lasts more than six months, it can trigger the WARN Act.

#3. Do you still earn paid time off during furlough?

In general, you do not earn paid time off during furlough. Employees put on a furlough are in non-pay status, so they typically don’t accrue paid time off (PTO) even though they retain most of the other employer-sponsored benefits.

#4. Can you be permanently laid off after a furlough?

Yes, you can be permanently laid off after a furlough. The company furloughs its employees, expecting the situation to improve in the future. If that doesn’t happen, it’s possible for a furlough to transition to a permanent layoff.