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Last updated on 4/6/2020
Due to the financial impact of social distancing and office closures related to COVID-19, many companies are searching for ways to manage their workforce with reduced revenues. Furloughs are topping the list of possible solutions.
According to the Society for Human Resource Management (SHRM), a furlough is considered to be an alternative to layoff. When an employer furloughs employees, it requires them to work fewer hours or to take a certain amount of unpaid time off, usually for a temporary period of time. For example, an employer may furlough its nonexempt employees one day a week for the remainder of the year and pay them for only 32 hours instead of their normal 40 hours each week. Another method could require all employees to take a week or two of unpaid leave sometime during the year.
Though furloughs can be a compelling solution to avoid layoffs, employers should take into account several key factors and seek legal advice prior to taking action. Consider these topics as a starting point in the decision-making process:
When considering which employees to furlough, make certain you have clearly-defined criteria for whom you select and document the business reasons for the action.
Just as other employment practices (hiring, promoting, and separating) should be performed without regard to protected class status, determining who to furlough should follow suit. If only select employees are to be furloughed, you may want to consider conducting an adverse impact analysis to make sure that the selection process does not disproportionately affect members of a protected class, such as race, age, national origin, and others as defined by the Equal Employment Opportunity Commission (EEOC). There are additional categories protected by some state and local laws as well.
Many companies are searching for ways to manage their workforce with reduced revenues.
Under the Fair Labors Standards Act (FLSA), employees are generally classified as exempt or nonexempt. Each classification is compensated differently for the work they do and FLSA guidelines should be followed:
The National Labor Relations Act (NLRA) obliges employers to negotiate the terms and conditions of the employee furlough policy with unions. Unions can bargain over all details of the employee furlough policy such as whether or not employees can choose when to take furlough days, the spacing of days, and the distribution of workload among employees.
The employer and union must reach an agreement regarding the employee furlough policy and its pending effects on employees. Employers need to allot time for this negotiation when planning a furlough.
If employment contracts are utilized, they should be reviewed carefully to determine if the terms and conditions limit the implementation of employee furloughs. Contractual limitations can also affect reduced work schedules and pay reductions during a furlough.
Furthermore, some employees may have contractual rights to certain compensation and paid leave benefits. In such cases, employers cannot reduce or take away these benefits from employees when on furlough without express agreement from the furloughed employee.
In general, furloughed employees are entitled to the same benefits they would receive under normal circumstances. Employers should review policies related to benefits, including time off policies, to verify that the furlough policy addresses each impacted area. Usually, furloughed employees are not eligible for severance pay, outplacement, or early retirement benefits as furloughs are temporary measures and employees are still considered active employees. Use of paid time off (PTO) may be an option if not prohibited by COVID-19 related guidelines. Seek legal guidance before taking action related to PTO.
Often, employee benefit plans require an employee to work a minimum number of hours in order to meet eligibility. In circumstances where the furloughed employee’s hours of work fall below the minimum threshold, benefits might cease unless plan documents contain express language otherwise.
Arrangements should be made in advance with employees about how they will keep contributing to any allowable coverage during leave, whether through a COBRA vendor, ACH payment from a personal checking account, or by mail. Upon termination of group health benefits as a result of a reduction in hours, furloughed employees should be given COBRA notice if the plan qualifies for this continuation.
Note: For employers who are subject to Affordable Care Act (ACA), terminating the group health plan coverage for an employee when a leave or furlough begins may cause an ACA penalty. Employers should work with their insurance carrier, adviser, broker, and/or agent to address benefits when furloughs are utilized.
Furloughed employees may be eligible for unemployment depending on the state law and the company’s contribution to the state unemployment fund. Additionally, there may be unemployment assistance through the Disaster Unemployment Act or other temporary acts or laws.
As a best practice, employers will want to provide written notice to employees about the furlough. At a minimum, consider including the following information:
Please contact us if you need assistance crafting a furlough notice.
Employers should take extra caution when implementing an employee furlough policy as it relates to potentially activating the Worker Adjustment and Retraining Notification (WARN) Act. The WARN Act obliges employers to notify employees if a plant shutdown or mass layoff will result in employment loss. The typical notice period defined in the Act is 60 calendar days.
Whether a furlough is subject to the WARN Act depends on the employer’s size, the nature of the action the employer takes, its duration, and the number of affected employees. If the layoff or reduction in hours lasts six months or less, there is likely no WARN event. Under the WARN regulations, however, if an employer announces an anticipated layoff of six months or less but then extends that layoff beyond six months due to unforeseen business circumstances, the employer is required to give notice when it becomes reasonably foreseeable that the extension is required.
Though furloughs can be a viable solution to assist companies struggling with current economic burdens, it is important to maintain compliance throughout implementation, enactment, and conclusion. Failure to do so can result in costly lawsuits, fines, and penalties. Seek qualified legal guidance to help you navigate the interplay with all applicable laws and implement a fair and compliant employee furlough policy.