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Tough Decisions for Small Businesses During the COVID-19 Crisis!

Workforce/Payroll Reductions?

Should Workforce/Payroll Reductions Be Considered?...

Well - maybe. The significant economic impact and uncertainty caused by the coronavirus pandemic is forcing many small business employers to make tough workforce decisions concerning whether to make reductions (permanent or temporary) in their workforce to survive. However, business owners might be unclear about the types of workforce reduction/payroll reduction strategies their small businesses can use.

The following is basic information about the use of furloughs and layoffs small business owners can use as potential strategies to keep the business running.

What is a Furlough?

A furlough does not have a precise legal definition but generally refers to a mandatory period of time off work without pay. Sometimes the term “temporary layoff” is used. A furlough is similar to an unpaid leave of absence except that it is initiated by the employer, whereas most leaves of absence are initiated by the employee. Generally, during a furlough the employee remains on payroll and remains eligible for benefits, including health insurance coverage, and has an expectation of reinstatement. Furloughs are used in periods of significant economic downturn and during seasonal business cycles.
An employer may furlough employees rather than permanently laying-off and terminating employees because the business downturn is expected to be temporary. A furlough helps an employer reduce its compensation costs. It can also help reduce the cost of hiring because there would be no need to hire and train replacements since furloughed employees will return back to work.

Permanent Layoff vs. Furlough?

A permanent layoff generally refers to when an employer terminates an employee’s employment without any right to be recalled and reinstated. This is the case even if business conditions improve. Unlike a furlough, when an employee is laid off, benefits typically are terminated, including health benefits (subject to the employee’s right to continue that coverage pursuant to COBRA).
An employer may permanently lay off employees when the employer is less certain that business conditions are such that the employer will need to reemploy the employee. The employer also saves the costs of benefits during any layoff period. Unless otherwise dictated by an employer policy or collective bargaining agreement, layoffs typically involve a technical termination of employment and the employee is removed from the payroll.

What Should Employers Consider Before Making a Decision between a Furlough or Layoff?

Whether the decision is to furlough, layoff or implement any combination thereof, the following are some choices employers should consider before taking any action:

  • Will any of the time off be paid or unpaid?
  • Will it be voluntarily or involuntary?
  • Who is eligible for the layoff/furlough (e.g., all employees, particular departments, or particular levels of employees)?
  •  If it is voluntary, is there a limit to how many employees can elect to be furloughed/laid off and does the employer retain discretion to refuse to  allow  someone to take a voluntary layoff/furlough?
  • If the employer can refuse to allow someone to leave, are the criteria for that decision identified in advance?
  • If involuntarily, will objective criteria be used to select candidates (e.g.,  seniority)? If  not, are the criteria identified in advance, who is making the  individual decisions and  does the evidence support the manager’s decisions based on the criteria selected?
  • Can the employer anticipate how long the furlough/lay off will last? 

Non Exempt or Exempt Status?

When considering the choices above an employer should also consider wage/hour laws as applicable to the status of each employee:

Nonexempt Employees

  • a nonexempt employee only need to be paid for hours that are actually worked under the FLSA. Accordingly, if a nonexempt employee is furloughed, they generally do not need to be paid for those hours absent a contractual obligation.
  • a nonexempt employee's hours can be reduced subject to any contractual limitations, minimum wage laws, and state law.

Exempt Employees

  •  An exempt employee, under the FLSA’s “white collar” exemptions (e.g.; executive, administrative and professional), must be paid on a “salary basis,” which means that they generally must be paid their full salary for each week in which they perform any work. Accordingly, subject to limited exceptions: if an exempt employee performs any work for that week, the employee needs to be paid his or her full weekly salary; if an exempt employee works all or part of Monday, and then is furloughed, the employee must be paid the employee’s full salary for the entire week.; if an exempt employee performs work while on furlough or shutdown (including checking email from home or performing other work), the employer needs to pay the employee for the full week; if an exempt employee works one or two days out of a workweek, they must be paid the same weekly salary. If an employer fails to comply with the FLSA in this respect, the exempt status of all exempt employees can be jeopardized.
  • Exempt employees do not have to be paid for any workweek in which they perform no work, including weeks for which they have been furloughed or temporarily laid off.
  • Exempt employee's salary can be reduced consistent with the FLSA if certain requirements are met. The reduction must be on a prospective basis and notice should be communicated to the employees ahead of time.

Must Employees Use PTO Benefits During a Furlough?

Generally, subject to the terms of the employer’s policy and any contractual limitation, an employer may require its employees to take paid leave during any period of shutdown or furlough, or it may allow its employees to choose whether or not to use their available paid time off.

Additionally, there is no general legal requirement that paid time off benefits provided under an employer policy continue to accrue during a furlough period.

Can Furloughed Employees Receive Unemployment?

Employers can let concerned employees know that entitlement to unemployment insurance benefits is governed by state law. The fact that the cessation of work is treated as a layoff or furlough generally should not affect the employee’s eligibility for unemployment insurance benefits. For example; in Illinois under the Illinois Unemployment Insurance Act, an employee's right to unemployment is based on loss of income rather than loss of employment.

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