Realizing you don’t have enough cash flow to cover payroll is one of the most difficult situations a company owner can face. Unfortunately, it has been a major issue in recent months, with businesses being forced to lock their doors and cut their hours in order to comply with stay-at-home orders.
With the coronavirus pandemic pushing employer finances to the breaking point, businesses of all sizes are considering job furloughs and layoffs to stay afloat.
The majority of people are more familiar with layoffs. Layoffs occur when an organization terminates an employee for reasons other than poor results. Layoffs may be either permanent or temporary in nature.
Furloughs are better outlined in general. Employees who have been furloughed ought to return to work and keep their perks. Employees that have been furloughed are still legally working. Marriott has announced that it will furlough tens of thousands of employees, excluding them from the payroll while allowing them to keep their healthcare benefits.
Furloughs may impact only a subset of the workforce. Furloughs, for example, may affect corporate-level employees while critical staff members remain on the job.
The Furlough vs layoff Option
The words ‘furlough’ and ‘layoff’ are both used to define a reduction in the workforce that is mostly due to financial difficulties rather than poor performance.
Layoffs are a formal break in a company’s relationship with an employee. The break is normally accompanied by the expectation that it is a lifelong step with no rehire date attached.
Furloughs, on the other hand, preserve the relationship between the employer and the employee. That is a job stoppage for a brief, fixed period of time with the intention that the employee will return to work at some specified date. Furloughed employees are still classified as company employees for record-keeping purposes.
Furloughs, in contrast to layoffs, mean either a total or partial reduction in hours, such as going from five days of work per week to three. Both furloughs and layoffs result in the employer ceasing to pay employees and the employees being eligible for unemployment benefits. Furthermore, each has its own set of legal standards that are normally regulated by the state in which your company is based. While both options will help businesses get through difficult financial times, each has advantages and disadvantages. We’ll get to these first.
Pros of Furlough
If you would choose between furloughs and layoffs, furloughs are usually the better choice for both the business and the employee for a variety of reasons.
One of the key advantages of furlough is that you have your entire talent base. Since you are not terminating the working partnership, it would be much easier to restore full productivity when the time comes.
Since it is not a termination, you do not need to complete any of the paperwork as you would if you were terminating an employee and then rehiring them. Furthermore, you do not need to go through the onboarding process or allocate training time in getting new hires up to speed if you can get back furloughed employees who are already up to speed.
Furloughs usually encourage employers to retain their health care and retirement plans, in addition to the hope that they will be rehired in the future (note that this will vary depending on the number of employees and the duration of the furlough—check with your coverage providers to clarify the arrangements of your particular case).
Employers are not required to shell out accrued sick leave or grant a “last paycheck” after a furlough, which will help you keep much-needed cash on hand.
Furloughs are also a safer choice in terms of public relations. Though the connotation associated with forced furloughs is not favorable, it does imply that what you are experiencing is a temporary setback rather than a lasting loss. This can potentially work in your favor whether you’re trying to restore client trust or obtain venture capital to help get your business back on track. Furloughs are also more widely embraced by employees.
Cons of Furlough
Furloughs have the major drawback of putting the ball in the employee’s court in many respects. Although workers can stay and wait to return to work, not all of them will (or, for that matter, will be in a financial position too). This will create confusion over the future staffing condition and the plan to restore normal operations after the furlough time is over.
Furloughs may also have a negative effect on your company. Reduced staffing and operating hours will result in clogged customer support networks, longer order delivery times, and a lack of client morale. Similarly, as employees return to work, their productivity and efficiency can suffer.
Finally, there are adverse consequences on employee benefits that may occur as a result of furloughs. If you have employer-sponsored health care, the insurer may specify the number of hours an employee must perform in order to be eligible for the coverage. Employees that fell below this level due to a decrease in hours can be unexpectedly taken off their coverage. When developing your furlough plans, it is a smart idea to meet with your insurance agent so that you can inform staff of what to expect.
Pros of Layoffs
The key advantage of unemployment is the direct cost savings from reduced payroll, pensions, and welfare. If the company is in deep financial distress, this cash infusion will be a lifeline to hold it alive and thriving; being able to keep a part of your employees is arguably more beneficial than having to fold and lay off your whole workforce.
Another financial benefit of layoffs is that they free up money for projects that will revitalize the company, such as consulting with a business consultant, conducting ambitious media strategies, or bringing in talented new people to the leadership team.
Layoffs do not necessarily indicate that a corporation is on the verge of bankruptcy. In other cases, they are merely the product of a market shift—perhaps emerging technology has rendered a certain position redundant, or you have opted to phase out a less lucrative vertical in favor of a more profitable one. In these situations, layoffs provide an incentive to restructure the corporate process in a manner that streamlines processes and increases margins, which would help the company in the long term.
Cons of Layoffs
Layoffs are never a good choice since they have a number of disadvantages. To begin with, while layoffs can help you extend your financial runway, they can also result in additional costs such as changes in your unemployment benefit premiums now and in the future. There are also severance costs to remember, such as paying out unused vacation hours if the employer has a scheme in place. Then there are the expenses involved with missing talent, such as lagging income if you were to lay off a portion of your salespeople or leadership gaps as core members of management leave.
Layoffs will create a lot of confusion and distrust in the people you retain. Your top talent may decide to search elsewhere for more secure opportunities, which may lead to an increase in resignations. Employees record lower engagement and on-the-job results after layoffs that impact their co-workers.
Layoffs often come with certain basic conditions that must be met in order to stay on the right side of the rules. Employers performing layoffs are liable to follow certain criteria, for example, are allowed by the WARN Act to provide staff with 60 days’ notice of the forthcoming changes, and that notice must be given in a specific manner.
Finally, there are certain legitimate public perception issues involved with layoffs. Investors, for example, see layoffs as an indication that an organization isn’t as good as they once thought, which may hurt stock prices even more. Customers’ confidence in the company can dwindle, and recruiting departments may face potential difficulties in hiring new talent.
How do I choose?
With the economic uncertainty, the tough decision to lay off or furlough employees is a lot more complicated right now. However, when it comes to cost-cutting measures, it is critical to consider the disparities between them and when one alternative can be better for your company.
A furlough could be preferable for businesses that:
- Are willing to postpone layoffs
- Are considering a temporary suspension
- Want to stop employees from applying for a new job.
Layoffs could be more appropriate for companies that:
- Want to save money on health insurance
- Are uncertain of how much they would need to cut costs
The bottom line is that both furloughs and layoffs have their own sets of merits and demerits that may or may not balance out the other. Choosing the right course of action requires careful consideration and professional expertise based on your organizational circumstances.