As a result of the coronavirus disease 2019 (“COVID-19”) pandemic, many employers are finding themselves taking difficult cost-saving measures, including making decisions about their workforce. Many cities and states have implemented “shelter in place” executive orders, which have had a devastating impact on small and large businesses alike. With significantly less revenue coming in the door, employers are making the tough decision on whether to lay off or furlough their employees. In connection with these decisions, many employers are asking “what is the difference between a furlough and a layoff?”
While “furlough” has no precise legal definition, for all intents and purposes, furloughs are time off from work without pay, such as a temporary reduction in an employee’s days or hours of work. During a furlough, employees are not paid, but they are technically still employed and sometimes work a reduced schedule. A layoff, on the other hand, is a separation of employment for either an indefinite or permanent period-of-time. While layoffs can also be temporary, an employee who is laid off is never guaranteed to be rehired. Employers who decide to furlough their employees generally do not have the funds to currently pay their employees but intend to recall them after the economic crisis is over or improves. Reducing employees’ hours may also be the best decision for employers who need to reduce costs during this time. Some employers are using a combination of these options. When determining whether to layoff or furlough employees, or deciding which furlough method to employ, employers need to be mindful that these employment decisions come with legal and financial risks. Employers need to be sure they are complying with all applicable wage and hour laws, anti-discrimination requirements, notice requirements and are not in breach of any of their contractual obligations to their employees.
Comply with Wage and Hour Requirements
Employers can furlough both exempt and nonexempt employees, although furloughs are simpler for nonexempt employees who are paid hourly. The Fair Labor Standards Act (“FLSA”) provides that if an employee works at all, they are entitled to be paid for it. Generally, if an employer reduces the hours of a nonexempt employee, the employee must be paid only for the hours the employee actually worked. If a nonexempt employee is furloughed, they generally do not need to be paid. On the other hand, exempt employees must be paid their full salary for each week in which they perform any work. This is the case even if the employee performs work absent the instruction of the employee’s supervisor or manager (although employers can discipline or terminate employees for unauthorized work under the FLSA). If an exempt employee works at all while on furlough, they are entitled to their full salary for that week. Therefore, employers should advise exempt employees they are not authorized to perform any work during furlough unless they receive prior approval. This includes answering emails and taking phone calls. Additionally, if an employer decides to reduce employees’ pay rates, the employer should confirm whether state law requires notice of the reduction. For example, the Illinois Wage Payment and Collection Act requires employers to provide advance written notice to their employees and reduction in pay cannot be retroactive. It is also recommended to secure written acknowledgment from the employee acknowledging the reduction in pay.
Review Benefit Plans
Employers should also review their employee benefit plans to determine if furloughed employees are still eligible for group health coverage. Often, especially with larger companies, furloughed workers maintain health insurance. However, some plans provide that if an employee does not meet certain eligibility requirements (e.g. a minimum number of hours worked), the employee may not be eligible for group insurance benefits. Additionally, furloughed employees who are still working a reduced schedule should continue to accrue PTO or vacation time and other benefits during any period-of-time in which the furlough is in place, in accordance with the employer’s benefits and policies.
Evaluate Unemployment Insurance Benefit Options
Employees that are furloughed may also be eligible to receive unemployment benefits and many employers are implementing furloughs to maximize their employees’ unemployment benefits. Some states allow employees to receive unemployment benefits even if they are working reduced hours. For example, the Illinois Unemployment Insurance Act (“IUIA”) allows employees to receive benefits based on a loss of income versus a termination of employment. Therefore, if an employee’s hours are reduced, but not eliminated, the employee may still be entitled to unemployment benefits. To be eligible for partial week benefits under the IUIA, the employee’s earnings for the week must be less than the weekly unemployment benefit amount the employee would receive if the employee was completely unemployed for the week.
Comply with Applicable Notice Requirements
An employer considering a furlough or layoff should also consider the notice requirements under the Federal Worker Adjustment and Retraining Notification Act (“WARN”) and other similar state laws (often called “mini-WARN” statutes). Whether a furlough or layoff is subject to the Federal WARN Act depends on the employer’s size, the nature of the action the employer takes, the duration of the action, and the number of affected employees. If the Federal WARN Act or any mini-WARN statute applies, employers may be required to provide advance notice to their employees (generally 30-90 days depending on whether a mini-WARN statute applies). The Federal WARN Act generally covers employers of 100 or more full-time employees and layoffs of 50 or more employees at a single site of employment over a 90-day lookback period. The Federal WARN Act requires advance notice (generally 60 days) in the event of a mass layoff or plant closing that results in employment loss of a requisite amount of people. According to the Federal WARN Act, an “employment loss” means (a) an employment termination, other than a discharge for cause, voluntary departure or retirement, (b) a layoff exceeding six months, or (c) a reduction in hours of work of more than 50% during each month of any six-month period. The Federal WARN notice obligation is not triggered if employees will be furloughed for fewer than six months, since those employees have not suffered an “employment loss.” However, the big question surrounding the COVID-19 pandemic is that employers do not know how long the pandemic and the government’s regulations will last (more on that below).
Many employers are asking whether the advance notice requirements provided for under the WARN Act still apply if the employment loss is a result of COVID-19. The WARN Act contains two exceptions to the 60-Day notice requirement that could potentially apply as a result of the COVID-19 pandemic: (1) the natural disaster exception; and (2) the unforeseeable business circumstances exception. The unforeseeable business circumstance exception is more likely to apply; however, whether it is applicable depends on the facts and circumstances of each employer and still requires the employer to provide “as much as notice as possible.” The longer an employer waits to layoff or furlough their employees, the less likely the layoff or furlough will be considered “unforeseeable.” Additionally, if an employer originally implements a short-term furlough that ends up being extended longer than 6 months, an employee could claim that the extension was reasonably foreseeable at the time of initial furlough, and therefore the employee should have been provided with 60 days’ notice. Employers also need to be mindful that some mini-WARN statutes do not contain the “unforeseeable business circumstances” exception and state requirements may be broader than the Federal WARN Act.
The situation surrounding the COVID-19 pandemic is constantly evolving, often daily. An employer considering a layoff, furlough or reduction in pay/hours should consult with an attorney to discuss what requirements are applicable and the potential legal implications.
The information in this article is for informational purposes only and does not constitute formal, legal advice. If you have any questions regarding the information contained in this article, please consult with Danielle McKinley at (312) 251-2292 or any attorney at RM Partners Law LLC for advice about your particular circumstance.