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Furlough

Updated on April 15, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Furlough Meaning

Furlough is a temporary situation where employees stop working for a certain time, usually during economic recessions, downturns, or periods of reduced demand for products or services in particular businesses. Companies often communicate planned furloughs in advance, allowing employees to prepare for the temporary disruption in their employment.

Furlough

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In contemporary business practices, furloughs serve as temporary workforce management solutions designed to address situations where economic challenges or disruptions are expected to be short-lived. Unlike permanent layoffs, furloughs allow companies to reduce labor costs while maintaining their employees’ connection to the organization. During furloughs, employees often retain fringe benefits such as healthcare coverage, providing a degree of financial security.

Key Takeaways

  • Furlough is a temporary leave of absence granted to employees by an organization, usually due to special circumstances or economic challenges.
  • Employers use it as a cost-saving strategy to manage labor expenses during challenging times. In some cases, furloughed employees may retain certain benefits like healthcare coverage.
  • They are temporary cost-saving measures employers use to weather economic challenges while retaining their workforce. On the other hand, termination is a permanent separation used when employers no longer require an employee’s services due to various reasons, including economic downturns, restructuring, or performance issues.

Furlough Explained

Furlough is a period during which employees are granted leave from work by their employer, often involving a pause in regular pay. The emotional impact of furloughs can be significant, as workers may grapple with uncertainty, anxiety, and a sense of exclusion due to the disruption in their regular routines and working relationships. Long-term productivity concerns can also arise, as returning employees may experience challenges in readjusting to their roles. Overall, furloughs are vital for businesses to navigate economic downturns or unexpected disruptions while preserving their workforce and minimizing permanent job losses.

The term “furlough” finds its origins in German military terminology, borrowed from the Dutch language in the 17th century, spelled as “vorloffe” or “fore-loofe.” Initially referring to a soldier’s authorized leave of absence, it later evolved to signify any time off. In employment, a furlough traditionally denotes a specific period of absence with continued salary payments. However, furloughs may involve mandatory unpaid leave in certain cases, such as the 2013 public-sector shutdown in the United States. The term’s historical roots add depth to its modern usage, highlighting its evolution from a military concept to a broader application in various sectors.

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Notice Requirements

The Federal Worker Adjustment and Retraining Notification (WARN) Act requires employers to supply written advance notice in cases of either a plant closure or a mass layoff, and the Act precisely defines these events. A plant closure, for instance, refers to the permanent or temporary cessation of operations at a single employment site or multiple facilities/units within a single site, resulting in the loss of employment for 50 or more employees within 30 days.

Nevertheless, certain circumstances warrant exceptions to the 60-day notice requirement. During the furlough COVID-19 pandemic, for instance, it rendered it impractical for employers to provide nearly two months’ notice. The WARN Act accommodates such exceptions for scenarios involving natural disasters and “unforeseeable business circumstances.”

While the COVID-19 pandemic might not align with the specific criteria of a “natural disaster” delineated in the Act, it unquestionably falls under the “unforeseeable business circumstances” exception. This exception allows employers to issue notice in less than 60 days, provided they can demonstrate that the circumstances leading to layoffs were genuinely unforeseeable.

Examples

Let us look at the furlough examples to understand the concept better- 

Example #1

Let’s consider an example of a small retail business facing a temporary slowdown in sales due to unexpected circumstances, such as a natural disaster affecting the local community. During reduced customer activity, the business owner implemented a furlough for some part-time staff members. Instead of terminating their employment, the employees are placed on a temporary leave of absence, allowing the business to save costs on wages while maintaining a connection with the skilled workforce.

This furlough arrangement provides financial relief for the business without resorting to permanent job cuts, and when conditions improve, the employees can return to their roles.

Example #2

Amidst the significant impact of the global travel downturn caused by the COVID-19 pandemic, in 2020, Cathay Pacific Airways announced plans to lay off 286 cabin crew members in the United States and furlough 201 pilots in Australia and Britain. The airline, grappling with plummeting demand, has grounded most of its planes and operates only a minimal network to key destinations.

Cathay Pacific is taking measures to communicate with affected cabin crew members in New York, and San Francisco and Los Angeles in California while also considering various strategies for its pilots, including encouraging Australian-based pilots to take leave or opt for a reduced salary scheme. The airline is actively exploring options to navigate these challenges and preserve cash amid a stark decline in passenger numbers, with the recent closure of its Vancouver cabin crew base marking another strategic move in response to the crisis.

Furlough Benefits

The benefits of furlough differ from employee to employer – 

Benefits For Employers

  • Cost Savings: Furloughs allow employers to temporarily reduce labor costs without resorting to permanent layoffs. This can help companies navigate challenging economic periods while avoiding severance pay and recruitment costs when the situation improves.
  • Retaining Skilled Workforce: Furloughs enable employers to retain skilled and experienced employees. When business conditions improve, they can easily recall and retrain these workers, avoiding the time and expense of hiring and training new staff.
  • Maintaining Employee Relations: Furloughs can help maintain positive relations with employees when handled transparently and fairly. Unlike layoffs, furloughed employees often retain a connection to the company and may return to work when conditions improve.
  • Flexibility: Furloughs provide flexibility in managing staffing levels. Employers can adjust the duration and terms of furloughs based on evolving business needs.

Benefits For Employees

  • Job Preservation: Furloughs allow employees to keep their jobs during economic uncertainty. This can provide a sense of job security that layoffs do not offer.
  • Retention of Benefits: In many cases, furloughed employees continue to receive certain benefits, such as healthcare coverage, which provides financial security and peace of mind during the furlough period.
  • Potential Return to Work: Furloughed employees typically have a clear path to returning when business conditions improve, avoiding the uncertainty of job hunting in a competitive job market.
  • Continuity: Employees on furlough maintain a connection to their workplace, colleagues, and company culture, making it easier to reintegrate into the workforce when the furlough ends.

Furlough vs Layoff

The differences between furlough and termination are as follows:

BasisFurloughLayoff
MeaningDuring a furlough, employees remain employed by the company but are temporarily placed on unpaid leave or reduced work hours.Layoff, also known as a termination or dismissal, involves the permanent separation of an employee from the company, ending their employment relationship.
Pay Benefits Furloughed employees may receive reduced pay or no pay during the furlough period but may retain certain benefits, such as healthcare coverage.Terminated employees receive their final paychecks, and their benefits, such as healthcare coverage, often end immediately or after a specified notice period.

Frequently Asked Questions (FAQs)

1. What is the relevance of furlough?

It is relevant as a short-term solution for businesses facing economic challenges. It allows companies to temporarily reduce labor costs without resorting to permanent layoffs, providing flexibility and helping retain skilled employees. The practice is crucial during economic uncertainty, allowing businesses to navigate downturns while preserving their workforce.

2. What are the risks of furlough?

While furlough offers cost-saving benefits, it comes with risks such as potential negative impacts on employee morale, uncertainty about the future, and challenges in maintaining productivity. Transparent communication and fair handling are crucial to mitigate these risks and maintain positive relations with furloughed employees.

3. What is furlough vs. a reduction in force?

Furlough differs from a reduction in force as it is a temporary measure involving unpaid leave or reduced work hours, allowing companies to retain a skilled workforce during challenging times. In contrast, a reduction in force implies permanent employee separation, often due to economic constraints or restructuring, leading to a decrease in the overall size of the workforce.

This article has been a guide to Furlough and its meaning. We explain its benefits, notice requirements, examples, and comparison with termination. You may also find some useful articles here –

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