Furloughs, Reduced Hours, and Layoffs: What's the Difference?

This blog post can also be found on our Coronavirus Resource Center.

The information in this article is current as of April 6, 2020. Please consult additional Woodruff Sawyer articles as we present the most current information available to assist our readers.

Why it's Important to Determine the Difference

Furloughs, reduced hours, and layoffs all have a significant impact on business operations. Employers should consider how these workforce actions will implicate employment/labor laws as well as employee benefits laws (e.g., ACA, COBRA, ERISA, etc.). We understand these are difficult decisions to make in light of employers' concerns about the rules (which may evolve) regarding employee benefits. Each approach will have a different impact on your employee benefit plans and we recommend working with your internal/external counsel, broker, and insurance carrier to determine the best decision for your business.

What is a Furlough?

In short, a furlough means the employee is still on the corporate "books" as an employee, but is not scheduled to work any hours (similar to a reduction of hours down to zero). When the company preserves the employment relationship with the employee through furlough, the company may have more flexibility to offer active coverage through one of two approaches: (1) the official "legal" way; or (2) temporary agreement with insurance carriers.

The first approach is the "official legal path" using the terms of the ERISA plan document. Some employee benefit plans permit employees to take an approved (non-medical) leave of absence for a limited duration (usually 12 weeks to mirror FMLA) during which the employee can stay on the employer's health plan. Carriers will defer to employers to decide which employees may have active coverage in accordance with the terms of the employer's plan document(s). If the plan does not currently permit this non-medical leave of absence, employers can adopt a plan amendment to be effective prospectively, such as on the first day of the next month. After adopting the necessary plan document, employers will also need to either provide employees with a Summary of Material Modifications (SMM) explaining the new plan change by the 210-day deadline, or modify and distribute the amended Summary Plan Description (SPD).

The second approach requires the employer to seek written confirmation from the insurer on whether they would be willing to temporarily extend active coverage to furloughed employees for a certain length of time (e.g., 2-3 months). Woodruff Sawyer has noted that several insurers have been flexible about this approach as long as premiums continue to be paid. This approach may run contrary to the terms of the employer's plan document, but it is intended as an emergency stopgap measure to at least eliminate the risk of the insurance carrier denying a furloughed employee's claim that's incurred/filed during the furlough period.

(COBRA continuation coverage is also a viable third option for employees to maintain their health coverage.)

Employer Advantage: A furlough may provide less disruption and administrative burden when employers are ready to have employees resume their work load. There's no need to sign "new" hire paperwork or send out "new" employee disclosures. Employees do not have to satisfy a new waiting period before enrolling in the health plan once they return to work. But note that there may be other legal issues to consider from an employment law (rather than an ERISA) perspective that may tip the scale against the furlough approach.

Employee Advantage: Furloughed employees would be able to receive active coverage and still be able to seek unemployment benefits.

What are Reduced Hours?

A Reduced Hours Schedule approach occurs when employees have their scheduled work hours reduced to a level that falls below the health plan's minimum eligibility threshold (e.g., only scheduled to work 15 hours/week). The approach for offering continued active coverage to such employees would be similar to fully furloughed employees by providing coverage through the official legal way or via an agreement with the insurance carrier.

Employer Advantage: A reduced hours approach, similar to a furlough, provides less disruption and administrative burden when employers are ready to have employees resume their work load. There's no need to sign "new" hire paperwork or send out "new" employee disclosures. Employees do not have to satisfy a new waiting period before enrolling in the health plan once they return to work.

Employee Advantage: Employees would still be able to seek unemployment benefits.

What is a Layoff?

In a layoff, the employment relationship is completely severed, even if only intended for a temporary/short duration.

There is less flexibility with benefit coverage for layoffs because there is no longer an employment relationship. Active coverage should switch to COBRA continuation coverage at the beginning of the next month. However, we are noting that some insurance carriers are remaining flexible and permitting extended active coverage, under the theory that the layoff is probably a furlough rather than a termination. Even if carriers are permitting active coverage, we suggest employers follow the government sanctioned approach of offering COBRA.

When making a decision between a layoff and a furlough, it is critical to understand that the employment relationship is terminated, and therefore the related benefits should be terminated as well because employee benefits are meant to cover employees. Covering non-employees might raise issues with employment/labor laws and tax laws, e.g., proper tax withholding, imputed income, etc.

In addition, layoffs may trigger a federal and/or state WARN Act if certain criteria are met. Layoffs are a more disruptive employment event, therefore, unless the employees are rehired within 91 days* of the layoff, they will generally need to go through the new hire process, including meeting the waiting period criteria for health plans.

*Under the ACA, an employee who is hired within 91 days must be treated as a continuing employee rather than a new hire, and would not need to satisfy the plan’s waiting period.

Employer Advantage: One of the primary advantages of a layoff is the potential cost savings with respect to both wages and benefit premiums. Additionally, with a complete termination of employment, there is a clear delineation where the employer’s responsibilities/liabilities end. However, a layoff is more disruptive to business operations when workers are rehired. This approach is usually used if rehiring is not expected to be temporary/short term. If employees are rehired after a long layoff, they must sign "new" hire paperwork and receive "new" employee disclosures. Employees must satisfy a new waiting period before enrolling in the health plan once they return to work.

Employee Advantage: Employees would be able to seek unemployment benefits and potentially subsidized health insurance coverage in the ACA Marketplace.

Stay Informed with Insights

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Coronavirus: Your Business and People Risks for up-to-date information. If you are in need of a broker to assist you with these emerging issues, please contact us at 844.972.6326.