A furlough is a mandatory, temporary leave of absence or reduction of scheduled work hours initiated by an employer, typically due to financial constraints or economic necessity. This action serves as a cost-saving measure, allowing a company to pause payroll expenses while retaining its trained workforce. Understanding the specifics of a furlough is important because it directly impacts an employee’s income, benefits, and job security. This process is distinct from other forms of employment separation and has complex implications for compensation and eligibility for government assistance.
The Definition and Types of Furlough
A furlough is defined by its temporary and involuntary nature; the employer expects the employee to return to their full role once business conditions improve. The employment relationship remains intact, which separates a furlough from a termination. Employers use this action to navigate short-term financial downturns, seasonal lulls, or unexpected operational disruptions such as supply chain issues. Implementing a furlough allows a company to reduce operating costs without the disruption of permanently laying off and later rehiring staff.
The two main types are a full or a partial reduction in work. A full furlough involves a mandatory, unpaid leave of absence for a set duration, during which the employee performs no work. A partial or reduced-hour furlough requires the employee to work fewer hours or take specified unpaid days off, resulting in a corresponding reduction in pay. In either case, the decision is forced by the business’s economic necessity.
Key Differences Between a Furlough and a Layoff
The distinction between a furlough and a layoff centers on the intent and the worker’s ongoing employment status. A layoff represents a complete termination of the employment relationship, which is often permanent or indefinite with no guarantee of future re-employment. Laid-off employees are entirely removed from the company’s payroll and HR systems.
A furlough, in contrast, is a temporary suspension of work with the intent to recall the employee when the situation stabilizes. Furloughed employees remain on the company’s payroll and retain their employee status, offering greater job assurance. Because the employment relationship continues, furloughed individuals often retain access to certain employer-sponsored benefits, while laid-off employees typically lose all benefits immediately upon separation.
Employee Compensation and Benefits During a Furlough
Employees on furlough experience an immediate and direct impact on their income because the time not worked is unpaid. Hourly employees are simply not paid for hours they are not scheduled to work. For exempt, salaried employees, rules under the Fair Labor Standards Act (FLSA) require careful application. They generally cannot be paid for any work week in which they perform any work, meaning their furlough must usually be implemented in full-week increments to avoid jeopardizing their exempt status.
The continuation of employee benefits, particularly health insurance, is a major consideration. Employers frequently maintain active health plan coverage for furloughed workers. However, the employee may be required to cover the full premium or the portion previously paid by the employer. If the furlough causes work hours to fall below the minimum required for plan eligibility, coverage may terminate. This termination triggers the right to continue coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA, however, is a secondary option, as most employers try to maintain active coverage to ensure a smooth return to work.
Regarding Paid Time Off (PTO), the accrual of new PTO may be frozen or limited during the unpaid period, depending on company policy and state law. Furloughed employees usually keep any outstanding vacation or sick days they had already accrued. For retirement plans, such as a 401(k), employee contributions automatically cease since they are based on payroll deductions. The funds already contributed and vested remain secure in the employee’s account, but the company’s matching contributions will also halt until the employee returns to paid status.
Filing for Unemployment While Furloughed
Furloughed employees are generally eligible to apply for unemployment benefits because they are experiencing a temporary cessation of wages through no fault of their own. Eligibility is determined by state unemployment insurance programs based on a loss of work or a significant reduction in hours and pay. An employee who is fully furloughed is treated as fully unemployed, while an employee on a reduced-hour schedule may be eligible for partial unemployment benefits.
The employee must file a claim with their state’s unemployment agency, providing details about their employer and the reason for the separation. Typically, receiving unemployment requires being available for and actively seeking new work. However, this requirement is often waived for furloughed employees who have a specific date or expectation of being recalled to their job. This “standby” status recognizes the temporary nature of the unemployment and the intent of the employer to rehire the worker. Employees must accurately report any remaining income earned each week for proper benefit calculation.
What Happens When the Furlough Ends
The most common conclusion to a furlough is the “recall” process, where the employer notifies the employee to return to work at their full duties and pay. This process is generally straightforward since the employment relationship was never formally severed. The employer typically sends a recall letter outlining the return date, job title, and expected wage, especially if any of those details have changed. Employees who decline a legitimate recall offer without a legally protected reason may risk losing their eligibility for continued unemployment benefits.
An alternative outcome occurs when the business situation fails to improve, and the employer determines the temporary furlough must become a permanent separation. In this case, the employer formally transitions the employee from a temporary furlough status to a permanent layoff. This transition requires the employer to provide formal notification of termination, and the employee would then be considered a laid-off worker with the associated rights and final pay obligations.