Considerations for Contemplating Furloughs During COVID-19

March 31, 2020
At BBH, we hope companies can weather the current crisis with employee bases intact. Carson Christus of BBH Corporate Advisory discusses a common question we have been receiving from clients on considerations surrounding workforce furloughs for businesses strained by the COVID-19 pandemic.

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.

 
 

PAY & HOUR REDUCTIONS

FURLOUGH

LAYOFF

Definition

Reduction in hours worked (nonexempt* workers)
or reduction in pay periods (exempt)

Mandatory suspension without pay; worker remain employed
but are unpaid leave of absence

Termination occurring due to company
or business environment
Period Temporary Temporary Permanent
Eligible
for Severance
No No Yes
Eligible
for Unemployment Insurance
No Yes Yes
Covered
By Benefit Plans
Yes Yes No
*Exemption status refers to the Fair Labor Standards (FLSA) overtime rules. Exempt employees are salaried employees making more than $23,600 per year and are not entitled to overtime pay. Nonexempt employees are typically hourly workers who are entitled to overtime pay. 

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.

RATIONALE FOR FURLOUGH
COST
CONTROL
  • Temporary paring down of one of the largest operating
    expenses (labor costs)
  • No severance or outplacement obligations because workers remain employed
FLEXIBLITY
  • Employers dictate and control the length (days,
    weeks or months) and cadence (staggered or block periods) to best meet the
    needs of the company and employee base
  • Reduces time and processing requirements associated with traditional layoffs or terminations
  • Reduces time, processing and cost associated with recruiting, onboarding and training new employee
EMPLOYEE
SUPPORT
  • During a furlough, employees typically qualify
    for financial assistance, such as unemployment benefits, and retain access to corporate
    benefits, such as health and life insurance
  • Continued support is aimed at minimizing disruption and hardship for the employee and increasing the likelihood of the employee returning work once the furlough period ends. 

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.

KEY CONSIDERATIONS FOR FURLOUGH
EMPLOYEE RIGHTS
  • Employees have the right to seek new employment and are not obligated
    to return at the end of the furlough period, posing a potential risk to the
    employer 
  • The federal WARN Act requires employers to provide fair advance notice of an employment loss or suspension to affected employers
  • The Fair Labor Standards Act (FLSA) requires strict adherence to the “no work rule” for exempt (salaried) employees to avoid triggering payment requirements. 
EMPLOYMENT
AGREEMENT TERMS
  • Employers should review employment agreements for leave, suspension
    or termination obligations.
  • For example, contracted or unionized employees may have specific employment agreement terms that prevent furloughing or subject furloughs to certain conditions.
EMPLOYEE
BENEFITS
  • Employers should review group insurance plan terms to assess
    the impact of furloughing employees – for example, how will the definition of
    an “active” or “full-time” employee impact whether or for how long the company must
    continue coverage?
  • Employers should consider whether they are prepared to cover the employee contribution requirements in the absence of the paycheck withdrawals if employees maintain coverage under the company.
  • Employers should consider whether employees who lose coverage are informed about how to obtain continuation of coverage services and should investigate whether the company will be subject to Affordable Care Act (ACA) penalties*
  • Employers should determine if there are implications for 401k plans – for example, does a furlough trigger a termination clause resulting in a vesting event?
*Terminating the group health plan coverage for an employee when a leave or furlough beings may cause an ACA penalty for failing to offer coverage to 95% of full-time employees. COBRA coverage must remain affordable to avoid an ACA penalty, which may require a continued or increased employer subsidy. 

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.

1 For 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.

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