Stores, restaurants, and companies across the US are putting staff on furlough as they shut down during the coronavirus outbreak - here's what it means for employees

Empty Restaurant - New Rochelle, NY

  • COVID-19 is having substantial effects on the US workforce - many people are working at home, businesses are having to shut down, and employers are resorting to layoffs and furloughs.
  • An employee furlough is when staff members are required to take an unpaid leave of absence.
  • Employee furloughs help businesses cut costs and retain talent, but employees receive less or no income and may be tempted to find a new job.
  • Visit Business Insider's homepage for more stories.

COVID-19 (commonly referred to as the coronavirus) is wreaking havoc on the world.

The most pressing concern, of course, is the impact on people's health - over 246,000 people have been infected and over 10,000 have died. And physicians in Hong Kong have discovered that those who recover from COVID-19 may have long-lasting lung damage.

But there are secondary effects, too.

More people than ever are working from home, including Ford's global workforce of more than 50,000 people, NASA's 17,000 employees, and Google's North American team, which is tens of thousands of people (though their 135,000 contractors are still going to the office because they lack remote access).

Several US states and cities - such as Hoboken, NJ, and Washington state - have imposed curfews, and six counties in the San Francisco Bay Area are sheltering in place for three weeks, meaning people should do whatever they can to stay inside.

Though these decisions make sense, as they can (hopefully) help slow the spread and flatten the curve, they're having an incredibly detrimental impact on many businesses.

Because with these curfews comes the closing of bars and nightclubs. And in some states, like Maine, restaurants are no longer allowed to serve people (but they can do curbside takeout), and Governor Janet Mills has strongly encouraged other "non-essential public-facing businesses," like gyms, theaters, and hair salons, to temporarily close.

Even if all of these places were open, business would likely be slow, if not non-existent, as so many people are barely venturing outside, if at all. And the current state of the stock markets surely doesn't help either.

Compass Coffee, a coffee shop chain in Washington, DC, said they've seen their business plummet 90% in the past two weeks. As a result, they shut down all of their locations for the next few weeks and laid off 90% of their 200 employees.

They won't be alone in making tough decisions. Hundreds of thousands of businesses will have to make substantial adjustments in an effort to come out on the other side of all of this, an especially tough undertaking given we have no idea where the tunnel ends or what it'll look like once we emerge.

Layoffs like the one at Compass are steadily increasing across many different industries, but some companies are choosing to furlough their employees instead, such as Marriot.

Which begs the question, what exactly is a furlough, and how does it work?

What is an employee furlough?

To put it simply, an employee furlough is when employers require their staff to take unpaid leaves of absence. In other words, they won't work, they won't get paid, but they'll still technically be employed.

Adam Calli, founder and principal consultant at Arc Human Capital

"The employer does this to drastically cut costs in times of economic difficulty, [whether for] the economy overall, or specific to a particular industry, company, or location," explained Adam Calli, founder and principal consultant at Arc Human Capital, a human resources consulting firm. "For many organizations, labor costs (payroll tax and employee benefits) can be 70% of their operating cost! That's why this is where they look first to save money the fastest."

It's important to note that these are different from layoffs. Furloughs are meant to be temporary - employees are expected to return to work full time when the organization is ready - whereas layoffs are permanent.

Many people might associate furloughs with government shutdowns, like the 35-day one that started in late 2018 and extended through early 2019, but private companies can furlough employees, too. Like manufacturing giant Honeywell, which furloughed employees in response to the 2008 recession.

And some businesses, like landscaping and construction companies, practice regular furloughs during seasons when business is typically lower (it's hard to break ground in freezing temperatures). These, of course, are easier for employees to prepare for because they know they're coming up every year.

How do employee furloughs work?

When facing tough financial times, leadership will identify which jobs they can temporarily eliminate and when the mandated unpaid time off should begin.

"Sometimes, it's for a set period and the staff will know when they're expected to return to [their normal work schedule]," Calli shared. "Sometimes, it's open-ended." In a case such as COVID-19, where there's still so much unknown, the latter is more likely.

J.R. Skrabanek, a partner at Thompson & Skrabanek, PLLC

The main purpose of furloughs is for businesses to be able to save money by reducing staff and labor costs. This means they could put employees off work "until further notice," or they could just cut back in certain ways. For example, they could require employees to take unpaid leave one day per week or one full week per month.

But, of course, it's not that simple, as employees are classified in different ways. One of the main ways is exempt vs. non-exempt. Exempt employees are salaried - they receive the same pay on a recurring schedule regardless of how many hours they worked. Non-exempt employees are paid hourly.

When it comes to furloughing, "non-exempt employees can simply have their hours reduced and continue to be paid for those reduced hours," explained J.R. Skrabanek, a partner at Thompson & Skrabanek, PLLC, which provides legal services for small businesses, startups, and freelancers.

Mikaela Kiner, founder and CEO of Reverb

For exempt employees, it's different. "The Fair Labor Standards Act (FLSA) requires employees to be paid their full salaries for any week in which any work is performed," Skrabanek explained. If a full week goes by and the furloughed worker hasn't done any work, then the employer doesn't have to pay them their salary for that week. But, even if they just do one or two hours of work, they must receive their full weekly paycheck.

According to Mikaela Kiner, founder and CEO of Reverb, a people operations consulting firm, each company also needs to take into account the following legal considerations:

  • Employees should be selected for furlough based on job responsibilities, without regard for race, gender, age, pregnancy, or other protected classes.
  • Employees with a written contract or unionized employees may have terms that prevent furloughs. "The employer and union must reach an agreement on the conditions of the furlough, and employers must be careful to ensure they meet all terms of the agreement," explained Steven Katz, attorney at Katz, Pryor, and DiCuccio, LLP.

Joey Price, CEO of Jumpstart:HR

  • Companies with a high volume of furloughs or layoffs may be subject to the Worker Adjustment and Retraining Notification (WARN) Act. "The WARN Act is a rule that applies to employers of 100+ and provides guidelines on how to inform and roll off employees in coordination with resources from the government," said Joey Price, CEO of Jumpstart:HR, an HR outsourcing and consulting company for small businesses. This Act can be tricky, though, Katz added, as there are many exceptions. For example, it may not apply in a case such as coronavirus, since it was a circumstance that wasn't "reasonably anticipated 60 days before termination."

The pros and cons of furloughs

There are "many advantages for the employer because the workforce can adjust to the needs of the business," said Kay Van Wey, a medical malpractice attorney at Van Wey, Presby, and Williams Trial Law Firm.

Kay Van Wey, a medical malpractice attorney at Van Wey, Presby, and Williams Trial Law Firm.

These pros for the business are quite obvious. They can save a ton of money by cutting down on labor costs and, hopefully, these measures will lead to them surviving the difficult economic times. And, when conditions improve, they can bring back the same staff without having to recruit, hire, and onboard an entirely new set of employees.

But, one major downside for employers is "business interruption," Van Wey said. "If an employee in an office setting, for example, was furloughed, they left everything right where it was and it will take time for them to catch up and get back on track." Plus, other employees who weren't furloughed will probably have to take on their work, which can be overwhelming and slow things down.

While being temporarily terminated from a job is daunting, the main pro for employees is that, should the business survive, they'll have a job to return to.

And, "a general rule is that [this] does not affect employee benefits," Katz said. "All eligible employees are still entitled to benefits while on furlough." So, that's a big positive when you compare it to a layoff.

Steven Katz, attorney at Katz, Pryor, and DiCuccio, LLP

But, of course, there's a lot of uncertainty here. And, no matter which way you spin it, employees are missing out on pay, though it's possible they can seek alternative sources of income while they're furloughed.

"The terms of the furlough are specific to each employer," Skrabanek explained. "Unless the employee signs a furlough contract that explicitly forbids them from seeking additional work elsewhere, they are free to do so."

Price explained that employees should be upfront with their secondary employer about their furlough status and when their primary organization plans to resume operations (if they know). And, he and Skrabanek both emphasized that all employees should closely review any noncompete policies their employer has.

They also might be able to file for unemployment benefits, though this varies by state. It's also important to note that some states allow people to work part time and receive unemployment benefits simultaneously while others do not, so that's something to pay attention to as well.

Regardless, this uncertainty and the need for income may cause them to completely leave their current full-time job, which is an added downside for the employer.

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