COVID-19 Guidance: Is it Better to Furlough or Lay Off Staff?

The effects of the Coronavirus outbreak have been unprecedented as millions of jobs are lost to quarentine orders or the loss of customers.

As the CARES Act and other stimulus packages are being created, many employers are still wondering what their options or plan should be regarding protecting their teams with such losses in revenue or the inability to work. The most ideal option is paid leave, but that’s unfeasible in some cases. Furloughs, on the other hand, allow employers to cut labor costs without letting your staff go entirely. And it’s through furloughs that the government has set up programs to support businesses and employees.

What is a furlough?

A furlough is suspending your employee from work without pay for a finite period of time. It can be mandatory or voluntary.

Public and private institutions can both furlough employees, but most people are familiar with them at the federal level when workers are furloughed to save costs during a government shutdown. Organizations do this when they don’t want to lay off staff but temporarily can’t afford to pay them.

For private businesses, furloughs are often cyclical or seasonal, allowing the business owner to pause staff pay without terminating them.

What’s the difference between a furlough vs. layoff?

The terms “layoff” and “furlough” are both used to describe situations that involve a number of workers, and usually they apply to job losses where finances—not performance—are the triggering factor. (A single poor performer who is let go, on the other hand, is generally “terminated” or “fired.”)

While laid-off workers are sometimes rehired, the term usually refers to an indefinite—often permanent—break in the employment relationship.

However a furlough is for a shorter, fixed period. Organizations will tells staff to stop coming in to work or that their hours will be cut back. While laid-off employees are officially separated from employment, furloughed workers remain on your books as current employees.

Pay and benefits

Laid-off workers are essentially fired, triggering final pay requirements. However furloughed workers are still employed and generally do not receive an official final paycheck or vacation payout. (Although in some states a furlough can trigger final pay requirements, so review your state laws.)

IMPORTANT: Depending on how long the furlough is and how many hours are cut, it may trigger an event for COBRA purposes if the employee is dropped from a group health plan due to a loss of work hours. When and whether this happens is governed by the terms of your particular health plan and the requirements in your state.

Contact your health insurance company directly to find out what timeline applies to your plan and team.

If you terminate all your employees, they may not get COBRA or other continuation coverage because the policy will usually get terminated by the carrier. Depending on your state and whether or not COBRA applies to you though, your employees may still be eligible for state continuation coverage that could persist even after your plan is cancelled. That’s because in some states it’s handled directly between the former employee and the insurer. Regardless, be sure to contact your insurance carrier before deciding how to proceed.

Similarly, an employer can get into trouble under the Affordable Care Act (ACA) if a furloughed employee is prematurely dropped from group coverage.

Before implementing either a layoff or a furlough, make sure you understand the implications from a benefits perspective—consult your plan administrator if you have any questions. 

Exempt workers

Employers generally cannot dock the pay of exempt employees without jeopardizing their exempt status. If an exempt employee performs work in any week, they generally must still be paid their salary.

But there’s an exception for furloughs during financial slowdowns. For any workweek in which no work is performed, an employer is not obligated to pay the exempt employee’s salary for that workweek. This is why you should not implement a furlough that starts mid-week.

Unemployment insurance

The unemployment insurance rules vary from state to state, but in general, both laid-off workers and temporarily furloughed workers are eligible for unemployment benefits if they have earned a sufficient amount in wages over the previous year to qualify. 

While there is often a waiting period between when the work ends (either permanently or temporarily, in the case of a furlough) and when a worker may start to collect unemployment benefits, many states have waived these waiting periods for the duration of the COVID-19 crisis.

Is it Preferable to Lay Off or Furlough Staff and Send Them to Unemployment or Keep Them on the Payroll and Get a 7(a) Loan?

There are two viable approaches that you can take. The first is more conservative and less disruptive and the second more aggressive but probably better for most.

Approach #1
If you have not already let your staff go and think that doing so will be difficult in terms of employee morale, then consider taking the 7(a) loan at the beginning of the loan application process, as early as April 3rd, 2020. The benefit of this loan is a tax-free gift, via loan forgiveness, to pay 8 weeks worth of your payroll costs, rent, interest on your debt service and utility bills.

$349 billion has been allocated to this program, and it’s conceivable that this money will be depleted before the last day these loans are authorized to be made. If that happens, Congress will likely authorize another round of funding, but that is never guaranteed.

Approach #2
The best way to handle this for most practices will be a two-part approach that takes advantage of unemployment benefits and the 7(a) loans. This is more disruptive to the practice as it requires furloughing or laying off the employees. However, if you’ve already done this, then that is a non-issue:

1. If your organization is shut down or largely shut down, then furlough staff and have them apply for unemployment. Thanks to the CARES ACT, they will get traditional unemployment benefits plus a $600 kicker.  This will replace all or most of their normal pay, and in some cases give them a raise.
2. When you are ready to reopen, rehire your staff then, and obtain the 7(a) loan then. Just do this by the June 30 deadline — better yet, a couple weeks before then in order to give yourself a cushion.  You will use the loan proceeds to pay your overhead when the practice reopens.  You should get the benefit of loan forgiveness for the 8 weeks following the date you take your loan (so into July and August).  And, so long as the employees are rehired by June 30, the loan forgiveness will not be reduced.  In this way, you are taking advantage of unemployment insurance to cover your employees’ wages during the shutdown period and also getting the tax benefits of the 7(a) loan once your organization reopens.

Consider all options

While layoffs and furloughs are similar, the main difference is that layoffs tend to be permanent and furloughs tend to be temporary. Depending on your business needs, either may be an appropriate response to the novel coronavirus crisis. Here are three things to consider:

1. Furloughs are generally used for fixed periods of time. So whether it’s better to implement a furlough or layoff may depend on how long your business operations will be affected, or how severely.
2. The federal government and many states are offering various forms of relief for small businesses during the COVID-19 crisis. If you qualify, you may be able to keep paying your workers for longer and avoid the difficult furlough vs. layoff choice.
3. Consider your team’s preferences. Depending on your particular workplace, it may make sense for you to speak frankly with your workers about all the options on the table before making any final decisions. Ordinarily, a business owner would make a firm decision before speaking to the team, but these are not ordinary times.   

Consult with legal counsel, a trusted HR advisor, and your benefits administrators as needed to weigh all of your options and make the best choice during this uncertain time.  

If you have any questions or need assistance with requirements outlined in the bill, please contact Darren Wendroff at darren@wendroffcpa.com.