As the war against the COVID-19 pandemic wages on, front page headlines regularly report layoffs and furloughs across all sectors. For most business owners, one of their largest and most important assets is their people. Managing a workforce is no small task even in normal business environments. When the going gets tough, management and ownership teams are often faced with the need to rightsize their employee base in order to manage costs and sustain the core business. Perhaps no industry has felt more pain than the consumer service industry, which relies on a large workforce to deliver services like hospitality, dining, events and travel.

For companies that are forced to make the difficult decision to manage or rightsize a workforce to ensure the future of the business, there are three primary strategies: pay or hour reductions, furloughs or layoffs, as outlined in the nearby table. Management teams should factor company size, nature of underlying operations, general health of the business and makeup of the employee base into the decision as to whether and how to approach rightsizing. For any option, it is important to consider implications for the employer and the employee(s) to ensure as smooth a transition as possible and minimize further disruption to daily operations.

Considerations for Contemplating Furloughs During COVID-19

This article focuses on employee furlough, perhaps the least understood option. A furlough is a temporary period of suspension of work, during which employees are unpaid and do not receive severance but often retain coverage under benefit plans, such as life and health insurance. The drivers of the decision to implement a furlough – summarized in the following table – are its flexible and temporary nature, which can give a company the ability to scale an employee base up or down to respond to a fluid and unpredictable environment like today’s.

Considerations for Contemplating Furloughs During COVID-19

When considering an employee furlough, business owners should first review applicable employment agreements, contracts and plans to understand their terms. Additionally, for companies with employees in various states, a review of federal, state and local regulations is necessary. For example, companies should review state-level Worker Adjustment and Retraining Notification (WARN) Act requirements in addition to those of the federal WARN Act. The nearby table summarizes important considerations related to a furlough.

Considerations for Contemplating Furloughs During COVID-19

Specific Considerations for COVID-19

The COVID-19 pandemic has triggered responses from local and federal government agencies, which are coming to the aid of consumers and employers. Below, we highlight a selection of important changes or updates that are pertinent to managing employee bases during this crisis.

  • WARN Act: While it has not been officially confirmed, the COVID-19 pandemic is likely to be interpreted as an “exception” event under the act, which relaxes some standards in the event of unforeseeable business circumstances or natural disasters. Note that employers would still be required and expected to provide as much advance notice as possible to employees affected by potential workforce changes.
  • Paid and Sick Leave: Some states are expanding the reach of their statutory sick time to allow employees who cannot work because of COVID-19-related reasons to elect to use sick time during a period of furlough or office/business closure. In addition, beginning April 2, 2020, employees who are furloughed due to government quarantine or isolation orders and who work for covered employers may be eligible to receive an additional 10 days of paid leave pursuant to the Families First Coronavirus Response Act.
  • Unemployment Benefits: As described in another recent BBH article, the CARES Act contained several changes related to unemployment benefits, including increasing benefit amounts (a federal weekly stipend in addition to that from the state), extending claim periods (by an additional 13 weeks) and broadening eligibility to include gig economy workers, contractors and freelancers. Several states are also waiving waiting periods for unemployment insurance benefits to kick in for employees who are out of work due to COVID-19-related closures or quarantines.
  • Payroll Tax Credit1: The CARES Act also provides payroll tax credits to eligible employers for 50% of “qualified wages” paid to employees. An employer is eligible for the payroll tax credit if, during any calendar quarter of 2020, it has operations fully or partially suspended due to a governmental order related to COVID-19, or it has a decline in gross receipts of more than 50% compared to the same quarter of the prior year.

This article is designed to help business owners think through different strategies to manage or rightsize a workforce. As with any transformational business decision, it is important to consult your advisors to align on the best path forward for management, ownership and employees. Please do not hesitate to reach out to your BBH team as you think through this or other strategic alternatives.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally.  This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented.  This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2020.  All rights reserved. PB-03461-2020-03-31

1For employers with 100 or fewer full-time employees, “qualified wages” covers wages paid to all employees during any applicable quarter in which there was a COVID-19 impact as described. For employers with more than 100 full-time employees, “qualified wages” only covers wages paid to those employees not providing services due to a COVID-19 impact as described. Qualified wages apply to the first $10,000 of compensation paid to an employee. This credit is not available to employers who receive a Paycheck Protection Program loan.