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Editorial Team
22 Apr 2020



Why furloughs could be great for workforce management!


More employee-friendly than retrenchment, furloughing is very useful all for companies to manage lean periods without losing their most valuable resource – their people.

Running a business is never smooth sailing. There are of course the peaks, where sales are climbing fast, profits faster, and all is well with the world. But then there are times when sales and profitability are not in line with goals and projections. Cost-cutting and streamlined operations across the company do not seem to be of much help. There have been discussions and planning for continuous improvement in all departments, yet expenses are growing out of line with current business needs.

The arrival of COVID-19 has further complicated matters, if not thrown them completely out of gear. Some companies have been able to continue operations through remote work, but others face unavoidable interruptions. Tax holidays, waivers, and other incentives could pull the economy up, though they could also result in forced savings instead of higher spending, with the latter taking time to manifest on the ground.

This means businesses now need to consider taking action about their most important and expensive asset: their people. The spotlight but naturally comes on those deemed to be ‘surplus’. Retrenchment is the most frequent answer, but this could prove to be counter-productive given the panic signals that go to allied sectors and an adverse ripple effect that happens on investment and spending.

There is indeed a softer, more ‘humane’ approach… and it is called furloughing. Essentially, a company works out the number of actively engaged employees required at different times of the year basis demand seasonality. Then, it prepares a roster for a chunk of employees who are sent on furlough – or unpaid leave – to cover the lean period for the company. This could take the form of:

  • Closing the business for a few days or weeks
  • Modification of normal working hours without pay, for a specified duration
  • Asking employees to take a specified number of days off per month without pay

Indeed, many companies have taken to furloughing in an attempt to fight the deadly coronavirus scourge. How this beats retrenchment or permanent layoffs is that workers have the hope and chance of returning to their jobs once the crisis eases off. Furloughs also allow employers to realize immediate cost savings while retaining employees over the longer term, along with winning additional loyalty points and positioning them better for recovery.

Furloughs could be of the following types:

  • Short- or long-term furloughs (as explained previously)
  • Seasonal furloughs: when companies close down during particular seasons
  • Furloughs during material shortages
  • Shutdown furloughs: when government agencies need to cease activities because of not receiving funds to pay their employees

Not everyone is eligible for furloughs. The employer may initiate a company-wide furlough, or it may select particular employees or groups of employees for the same. No such decision should be made basis considerations of race, religion, gender, age, or other protected class.

Furloughs have many advantages. They avoid layoffs, affording the assurance of jobs being available in the future even without paychecks in the interim. They reduce the need to rehire, as most – if not all – experienced workers are likely to return as soon as the doors reopen for business. Seasonal furloughs also let employees plan and budget accordingly, avoiding trauma. And of course, non-working employees are not paid, hence improving the profitability of the business.

There are downsides, though, as closing shop and telling employees there is no work is not positive. Top performers might find other jobs during the furlough, or at least will up the pace of their job searches. Upper management earns the highest salaries, but it is unlikely to be furloughed. And lower salaries of those not so high up the ladder mean the savings from letting them go will be limited. Reopening is not a matter of flicking a switch on, as operations and people take time to be up and running at top efficiency levels, and non-returners compel others to be retrained or new hires to be brought in. Innovation and momentum take a hit, as does employee morale due to heightened insecurity about the future of the company.

And the call is not very simply taken, because:

  • A broad range of industries in a disruptive environment cannot easily predict downtime accurately
  • There is no robust and well-evolved legal framework governing the terms and conditions of the disengagement
  • Implications could be ad-hoc and company-specific, with no safeguards for employees given that the renewal of furloughing contracts is unilateral

In countries where the legalities are more evolved, federal or state laws may require a minimum salary for each pay period when it comes to exempt employees. If an exempt employee performs work during any portion of a workweek, the employee could be required to be paid the full salary for that week, failing which the exempt status might be jeopardized.

Employers thus must ensure employees are not working in any capacity when furloughed, even if it is checking business email and voicemail. Expectations must be set clearly with employees, with both exempt and non-exempt employees not authorized during the furlough period without advance wrote approval. Employers also must be mindful of whether or not they are required to put out any notices as per the given rules and regulations or take any other measures accordingly.

Opting for furloughing is not an easy decision to take, given the ramifications of the decision for operations and the workforce. And the current world situation requires these decisions to be taken sooner than in normal circumstances. Only careful consideration of the myriad aspects as well as of alternatives is a wise way ahead!

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