Tuesday, March 31, 2020

Furlough vs. Layoff: What is the Difference and What's Important for Employers?

By Casey Erick

During these uncertain economic times, employers and employees are learning the subtle, but important, differences between what it means to be furloughed and laid off.  Here is what you should know.


Furlough
A furlough is an alternative to layoff. When an employer furloughs its employees, it requires them to work fewer hours or to take a certain amount of unpaid time off. The main difference is that a furlough allows workers to return to their jobs. Some layoffs are temporary, and employers will recall workers to the job, but in cases where management decides the employees will not be recalled, the layoff becomes permanent.


Hourly Employees
Employers generally have the flexibility to offer hourly employees fewer hours and workdays. Furloughs that substantially reduce employee hours may affect the employee’s eligibility for benefits. However, employee hours may drop such that they become part-time employees rather than full-time employees and lose eligibility under certain employer benefit plans. Additionally, where the furlough of an employee reduces his or her hours significantly, it may render the employee partially unemployed and eligible for unemployment benefits.


Salaried Employees
On the other hand, the rules for salaried (exempt) employees are different and involve important wage and hour considerations.  Employers must be careful when furloughing exempt employees so that the employer continues to pay the employee on a salary basis and does not jeopardize the employer’s  exempt status under the Fair Labor Standards Act (FLSA). A furlough that encompasses a full workweek is one way to accomplish this, since the FLSA states that exempt employees do not have to be paid for any week in which they perform no work. 


Texas Employers with Hourly Employees

The Twenty Percent (20%) Rule in Texas
A reduction in earnings of 20 percent or more, whether from a cut in hours or rate of pay, is generally considered good cause for a decision to quit, whereas a cut of less than 20 percent is not  good cause. The rule applies to the entire compensation package, so reductions in the rate of pay, hours, benefits, and perks all contribute toward the 20 percent.

“Partial Unemployment” Claims in Texas
Partial unemployment occurs when a reduction in hours causes the employee’s weekly pay to drop below 125% of the weekly benefit amount that the employee would receive if he or she were totally unemployed. As an example, if the employee’s prior earnings entitle him or her to a potential weekly benefit amount of $392, 125% of that figure is $490, and if his or her pay drops below that amount, he or she is eligible to draw the difference between the lower pay and the 125% figure. Thus, if his or her pay for a particular claim week is $400, he or she would get $90 in partial unemployment benefits.

Health Insurance Benefits Rule in Texas
If an employer has a health insurance plan, Rule 28 T.A.C. § 26.4(15) provides that an "eligible employee" is anyone who usually works at least 30 hours per week. The employer should check with its insurance carrier to determine the employee’s availability for coverage if the employee’s hours are reduced. If the employee is no longer eligible for coverage, the employee would be entitled to COBRA health insurance.

 

Texas Employers with Salaried (Exempt) Employees

Employers cannot reduce weekly hours and correspondingly reduce compensation for salaried employees. Employers must pay exempt employees the same amount for each pay period in which they work, regardless of how many hours they work. Employers can, however, have exempt employees work fewer pay periods while fully paying them for each pay period in which they work.

“Business or Economic Slowdown”
The U.S. Department of Labor explains that employers are allowed to make a bona fide reduction of an exempt employee’s salary "during a business or economic slowdown" if such a reduction is not related to the “quantity or quality of work performed” and is in place for a significant period.

 

See our COVID-19 Quick Reference page for additional articles.

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