When market conditions shift, business leaders are often faced with difficult decisions. If a reduction in force is necessary, one of the most critical decisions is whether to implement a furlough or a layoff.
While both involve a reduction in force, their implications and outcomes for employees and employers are different.
What is a furlough?
A furlough is defined as a temporary unpaid leave or reduction in hours during which employees remain employed and typically retain their benefits.
Employers often use furloughs to help manage costs during economic downturns or to adhere to financial constraints without permanently losing valued staff members.
What is a layoff?
A layoff is a permanent separation of employment due to business needs. Common reasons for layoffs include economic downturns, restructuring or mergers and acquisitions.
Unlike furloughs, layoffs result in employees being permanently separated from the company.
Legal and Compliance Considerations
Employers must navigate a complex legal landscape when implementing either option. Federal and state laws govern both furloughs and layoffs, and failure to comply could result in costly penalties and reputational harm.
WARN Act and State Mini-WARN Laws
The Worker Adjustment and Retraining Notification (WARN) Act requires certain employers to provide advance notice to employees regarding mass layoffs or plant closures. Generally, businesses with 100+ full-time workers must provide 60 days’ notice if 50 or more employees at a single site will be impacted. This advance notice is crucial as it allows employees time to prepare for the transition and seek new employment opportunities; it may also be legally required.
Some states have mini-WARN laws with their own notice requirements and thresholds. For example, as of 2025, New York requires 90 days’ notice. Compliance is not optional and should be verified with legal counsel before action is taken.
Employment Laws
Furloughs and layoffs may trigger compliance obligations under the Fair Labor Standards Act (FLSA), ERISA and other state or federal employment laws. Employers should assess how furloughs may affect exempt vs. non-exempt status, benefits continuation and accruals such as PTO. Consulting with external human resources and legal professionals can help employers to navigate regulations effectively.
Impact on Benefits and Compensation
The implications for employee benefits and compensation can vary significantly between furloughs and layoffs. Laid-off employees experience complete separation from the company and a potential loss of benefits. In contrast, furloughed employees typically retain their benefits during the furlough period.
- Health Insurance: Furloughed employees usually retain access to group health insurance, while laid-off employees may transition to COBRA coverage at their own expense.
- Unemployment Eligibility: While both groups may qualify for unemployment, eligibility criteria will vary by state and situation.
- Paid Time Off (PTO): Furloughed employees may retain accrued PTO depending on employer policy. In layoffs, unused PTO may be paid out, depending on state law and internal policy.
Best Practices for Managing Furloughs and Layoffs
Making the right decision between furloughs and layoffs requires a thorough evaluation of your company’s financial circumstances, business needs, long-term goals and employee well-being. Because managing a reduction in force can significantly affect morale and company culture, it’s essential to plan and execute carefully.
A few best practices include:
- Develop clear and empathetic communication strategies to ensure transparency and maintain trust with both affected and retained employees.
- Conduct a compliance review to ensure all planned actions meet federal, state and local requirements.
- Document the decision-making process to demonstrate fairness and reduce liability.
- Support affected employees through outplacement services or benefit continuity if feasible.
- Plan for post-reduction operational continuity by identifying critical roles, redistributing responsibilities and supporting team leaders through the transition.
- Proactively address the impact on remaining employees to help sustain culture and morale.
How Higginbotham Can Support Your Organization
Workforce decisions can carry legal, financial and cultural implications. Higginbotham’s HR Services team helps employers navigate these and other HR challenges with strategic guidance. From workforce planning to handbook development, we tailor our support to meet your needs.
