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Furloughs, Layoffs, Terminations: What's the Difference?

Client Alert

Authors: Tracey E. Diamond, Susan K. Lessack, Lee E. Tankle, Mark Payne and Kristalyn Lee

3/23/2020
Furloughs, Layoffs, Terminations: What's the Difference?

Businesses have begun to feel the pinch as state orders related to the COVID-19 pandemic have resulted in the shutdown of facilities across the country. As a result, many companies are being forced to make difficult decisions about their workforces to ensure that their business remain operable in the future.

We have received numerous questions over the past week regarding whether clients should furlough, lay off or terminate their employees and what the differences are between these three choices. As an initial matter, the terms “furlough,” “layoff” and “termination” are not legal terms and are often used interchangeably to mean that a portion of a workforce is being terminated from employment for a temporary period of time. Generally, employers refer to employees as being furloughed if the employees are remaining on the employee roster but have been placed on an unpaid leave of absence. Companies sometimes use the term “furlough” to describe a system of pay reductions and reduced hours. Others use the term to apply to a separation that they hope will be temporary. If permitted by applicable health plans, employers will sometimes permit employees to continue health care coverage during a period of furlough. If being on furlough results in an employee losing health care coverage, employers may, but are not required to, contribute to an employee’s COBRA continuation coverage costs.

Employers often refer to “layoffs” to mean that the employment relationship has ended, not for cause, and with eligibility for rehire. The term “termination” is used to describe any type of employment separation, including voluntary and involuntary terminations. Generally, employees who are terminated do not have an expectation of rehire.

Regardless of the terminology used, there are several key factors to consider when contemplating a reduction in hours, reduction in pay or reduction in force:

  • Review and follow existing policies, collective bargaining agreements, and any employment agreements or promises regarding leaves of absence and employment terminations to the extent applicable.

  • Determine what employment benefits may be available under existing company policies, such as accrued vacation/paid time off, paid sick leave, etc.

  • For nonexempt employees, employers may implement wage reductions on a prospective basis, so long as the employees receive at least the minimum wage. Certain state and local laws may require some advance notice before reducing wages.

  • Reductions to the salaries of exempt employees generally are not permissible because they must be paid the same salary for any workweek in which they perform work, regardless of the number of hours worked that workweek. There is a limited exception, however, permitting employers to reduce salaries because of a bona fide reduction in the amount of work due to an economic slowdown where the reduction is for a substantial period of time and not subject to fluctuation. In addition, exempt employees must be paid in full-week increments. Therefore, when reducing an exempt employee’s pay, be sure to do so prospectively before the beginning of a workweek. As an alternative cost-savings measure for exempt employees, employers can consider sporadic weeklong furloughs during which the exempt employee performs no work and is not paid any salary.

  • Employees who are placed on a temporary unpaid leave of absence due to business needs may become eligible for paid sick leave (for themselves or to care for a family member) or leave to care for a child whose school or place of care has closed or whose childcare provider is unavailable, if they meet the criteria under the Families First Coronavirus Response Act after its effective date of April 1, 2020. Employees on temporary unpaid leave also may be eligible for paid leave under various state and local laws governing the accrual and use of paid sick leave.

  • It is important to ensure that the company has a legitimate business reason for selecting those employees who are subject to a reduction in hours or pay or who are being let go, and that the reduction does not have a disparate impact on a protected category of individuals.

  • A plant closing or mass layoff may require advance notice under federal and/or state WARN laws, depending on the number of employees impacted and the duration of the expected layoff. There is an exception to the federal WARN Act 60-day notice requirement for “unforeseeable business circumstances.” However, notice must still be provided in such an instance as soon as the plant closing or mass layoff is reasonably foreseeable.

  • If employees will be receiving severance, consider having employees sign a severance agreement and release of claims. For employees age 40 and over, specific information must be included in the agreement to ensure proper waiver of age discrimination claims under the Older Workers Benefit Protection Act.

  • Employees who lose their jobs may be eligible for unemployment benefits. Some states also have workshare programs that provide unemployment benefits to employees who are working reduced hours.

  • Employers should timely provide all wages accrued through the employment end date, including accrued, but unused, vacation benefits (in California) immediately upon termination.

  • Companies should ensure protection of company property and information assets during leaves of absence or upon termination, including return of company property and records and terminated access to company computers or communications systems.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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