A furlough is a temporary solution employers use to manage costs during periods of reduced business activity, such as an economic slowdown or a temporary operational closure. It is a strategic measure designed to avoid the permanent separation of employees, allowing a company to retain its trained talent pool until conditions improve. The process involves placing employees on a mandatory leave of absence with the expectation that they will return to their roles, which helps businesses quickly scale operations back up when demand returns.
What Exactly is Furlough?
A furlough is defined as a mandatory leave of absence or a temporary reduction in working hours and pay, where the employee retains their employment status. The employment relationship is maintained, and the employee is expected to return to their full duties once the specified period ends. This temporary nature is a defining characteristic, often implemented with a tentative return date or a condition that must be met for the return to occur.
This differs substantially from a permanent layoff, which is the termination of the employment contract due to business needs. A furloughed worker remains on the company’s payroll, maintaining an active, though unpaid, status, whereas a laid-off employee is removed from the company roster. This continued employment status benefits the employer, who avoids the costs and time associated with rehiring and training new staff.
Legal Requirements for Implementing Furlough
Implementing a furlough requires employers to navigate specific legal obligations, starting with clear and timely communication to affected staff. Providing adequate notice is a requirement, though specific timelines vary based on state laws or existing employment contracts. For at-will employees, the employer offers a unilateral change in the terms of employment, which the employee accepts by continuing the employment relationship.
For any reduction in pay or work hours, particularly for non-exempt (hourly) workers, the change must be prospective, meaning it cannot apply to hours already worked. When an employer plans a large-scale workforce reduction, the federal Worker Adjustment and Retraining Notification (WARN) Act may be triggered. The WARN Act generally requires 60 days’ notice for reductions expected to last longer than six months or result in a reduction of work hours by more than 50% for a six-month period. Many states also have “mini-WARN” laws that can impose stricter thresholds or shorter timeframes.
Compensation and Continuation of Employee Benefits
The financial implications of a furlough are significant for employees, as pay is often reduced to zero or substantially lowered. Furloughed employees may be eligible to apply for unemployment insurance benefits, since the reduction in hours or pay often meets the state criteria for involuntary separation from work. Eligibility and the amount of benefits are determined by the individual state’s unemployment program, and some states may waive the typical work-search requirement for furloughed individuals.
The continuation of health insurance is a complex aspect of a furlough. Employers often continue to pay their portion of the premium to maintain the group health plan. The employee is responsible for paying their share of the premium, either directly or by having payments accumulate and be withheld from their pay upon return. If the reduction in hours causes the employee to lose eligibility under the plan’s terms, it generally triggers the availability of COBRA continuation coverage.
Furloughs also impact retirement and paid time off (PTO) accrual. Since employees are not receiving a paycheck during an unpaid furlough, they cannot make elective contributions to a 401(k) plan, and employer matching contributions are paused. For plans that base vesting or accrual on hours of service, the time spent on furlough will not count toward service requirements. State laws govern whether accrued PTO or vacation time must be paid out at the beginning of a furlough.
Work Restrictions While on Furlough
A key legal requirement involves the absolute restriction on performing work during an unpaid furlough. For a furlough to be legally compliant under federal wage and hour laws, the employee must not perform any work-related tasks. This restriction applies even to minor activities, such as checking work email, answering a work phone call, or engaging in business-related planning.
If an employee performs any measurable work, they must be compensated for that time. If an exempt (salaried) employee performs any work during a workweek, the employer may be required to pay them their full weekly salary, which defeats the purpose of the furlough. To prevent wage and hour violations, many employers proactively restrict a furloughed employee’s access to company systems, including email accounts and remote network access.
Returning to Work After Furlough
The procedural end of the furlough involves the employer recalling employees to resume their full work schedule and duties. Although there is no federal legal mandate for a specific timeframe, employers commonly provide at least one week of advance notice. This allows the employee time to prepare for their return, arranging for childcare or transportation as needed. The recall notice should clearly state the return-to-work date, the employee’s title, compensation, and any changes to their terms of employment.
If an employee is offered their job back under the same or reasonably similar terms and refuses to return, this refusal can be treated as a voluntary resignation. This decision may impact their eligibility for continued unemployment benefits, which require an individual to be ready, willing, and able to accept suitable work. Employers should maintain documentation of the recall offer and the employee’s response to establish a clear procedural record.