COVID-19: Layoff and Furlough Considerations for Employers

In light of the significant economic impact of the COVID-19 pandemic on businesses, this entry addresses the legal considerations for employers surrounding certain employee protections in connection with reductions of workforce. Because of the COVID-19 pandemic, many employers are considering, or have already begun, reducing their workforce due to the interruption of business operations as a direct or indirect result of quarantines, governmental shutdowns, and a general downturn in business. Although initial reductions may be intended to be temporary, the situation may change.

What is a furlough?

A furlough, sometimes called a “temporary layoff,” generally refers to a mandatory period of time off work without pay. A furlough is similar to an unpaid leave of absence except that it is initiated by the employer, whereas most leaves of absence are initiated by the employee. Furloughs are used in periods of significant economic downturn and during seasonal business cycles. While on furlough, the employee generally remains on payroll and remains eligible for benefits, including health insurance coverage, and has an expectation of reinstatement. If eligibility for health care benefits is maintained during a furlough, the employer can collect the employee’s share of premium to maintain the coverage during a paid or unpaid leave of absence. If the employee fails to pay the required premium, coverage can be terminated by the employer for non-payment. An employer may furlough employees rather than permanently laying off and terminating employees because the business downturn is expected to be temporary. A furlough helps an employer reduce its compensation costs and potentially hiring costs when it brings furloughed employees back to work instead of having to hire and train replacements. Companies that have implemented, or are considering implementing furloughs, will need to consider implications under the federal Fair Labor Standards Act (“FLSA”).

FLSA

Under the federal FLSA, employees are categorized as either exempt or nonexempt. Nonexempt employees are subject to governmental rules regarding wages and hours, including mandatory overtime pay. However, in general, employers are permitted to cut back the working hours for nonexempt employees to fewer hours or days than would otherwise apply on their regular schedule without incurring liability and are not required to pay nonexempt employees for time not actually worked (unless covered by separate contractual arrangements, employer policies, or collective bargaining agreements).

By contrast, exempt employees are not subject to the FLSA wage, hour, and overtime rules. To qualify as an exempt employee, among other things, an employer is generally required to pay the employee the same base salary per week, regardless of the amount of time worked during any given week. If the employer makes deductions from an employee’s predetermined salary, i.e., because of the operating requirements of the business, that employee is not paid on a “salary basis” and may lose the exemption. If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available. Thus, absent a few exceptions, if an exempt employee performs any work for the week, the employer will likely need to compensate the exempt employee for the full week. Deductions from pay are permissible when an exempt employee: (a) is absent from work for one or more full days for personal reasons other than sickness or disability; (b) for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy, or practice of providing compensation for salary lost due to illness; (c) to offset amounts employees receive as jury or witness fees, or for military pay; (d) for penalties imposed in good faith for infractions of safety rules of major significance; or (e) for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions. Also, an employer is not required to pay the full salary in the initial or terminal week of employment, or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. Finally, while employees are on furlough, they are not actively working and therefore they should not be expected to monitor email or voicemail. If a furloughed employee actually does perform work, then the employer may be required to compensate the employee.

How is a permanent layoff different from a furlough or temporary layoff?

A permanent layoff generally refers to when an employer terminates an employee’s employment without any right to be recalled and reinstated if business conditions improve. Unlike a furlough, benefits typically are terminated when an employee is laid off, including health benefits (subject to the employee’s right to continue that coverage pursuant to COBRA). An employer may permanently lay off employees when the employer is less certain that business conditions are going to rebound or that the employer will need to reemploy the employee. The employer also saves the costs of benefits during any layoff period. Unless otherwise dictated by an employer policy or collective bargaining agreement, layoffs typically involve a termination of employment and the employee is removed from the payroll. Given the uncertainty of the economy, for many companies, it may be unclear whether current layoffs will be temporary or permanent, which in turn may impact whether or not the federal Worker Adjustment and Retraining Notification (“WARN”) Act and/or similar state and local laws apply.

WARN

Employers who are typically subject to the federal WARN Act (i.e., those with 100 or more full-time employees, subject to certain caveats) must provide 60 days’ notice of an “employment loss” if there is a “plant closing” or a “mass layoff” impacting 50 or more employees over a 90-day lookback period. Under the federal WARN Act, an “employment loss” is: (a) an employment termination, other than a discharge for cause, voluntary departure, or retirement; (b) a layoff exceeding six consecutive months; or (c) a reduction in hours of more than 50% during each month of any six-month period. For “mass layoffs,” it must impact at least 50 full-time employees and at least 33% of the active full-time employees at a “single site of employment,” unless the layoff impacts 500 or more employees, in which case the one-third requirement does not apply.

There are three general exceptions to the 60-day advance notice requirement: (a) natural disasters, (b) unforeseeable business circumstances, and (c) a faltering company (which only applies in the context of plant closings). COVID-19’s exponential rate of progression across the United States and its significant disruption of business operations across the globe will likely be seen to fall within the unforeseeable business circumstance exception. This exception is especially important for employers that operate in communities subject to government shelter-in-place orders, such as California, Illinois, Indiana, Ohio, and Pennsylvania. The application of any one of the three exceptions, however, does not eliminate an employer’s obligation to notify relevant parties at some point. Instead, employers should give as much written notice as practicable. This is especially important if an employer, after initially believing a layoff would be temporary, did not provide notice and the six-month mark of business interruption is approaching. Further, as time passes, it will be more difficult to argue that the business circumstances resulting from COVID-19 are “unforeseen.”

It is important for employers to be aware that in addition to the federal WARN Act, employers may also be subject to state WARN Acts. Indiana follows the federal WARN Act. However, several states, including New York, New Jersey, and California have state WARN Acts that are significantly more restrictive. Such acts may apply to employers with less than 100 employees, require additional advance notice, or set a lower threshold of employment losses triggering application of the advance notice requirement.

Conclusion

We recommend that employers seek legal advice regarding their particular facts and circumstances prior to implementing any furloughs, layoffs, or reductions in force. Prior to implementing any furlough, layoff, or reduction in force, care should be taken to ensure that compliance with all federal, state, and local laws is observed, including but not limited to antidiscrimination laws, the federal WARN Act, any state WARN Acts, federal COBRA, and any state healthcare continuation coverage requirements, and laws relating to payment of wages and accrued vacation (which may require payment of accrued vacation within specified periods following termination of employment). Employers should also review and abide by the terms of their own separation pay policies, as well as applicable collective bargaining agreements in the case of unionized workforces.

As the situation with the COVID-19 pandemic is rapidly changing, we recommend that companies seek legal advice to stay up-to-date on additional developments. We will continue to monitor developments and keep clients apprised of pertinent information. For additional information on this or any related topic, please contact McNeelyLaw’s labor and employment law attorneys by visiting www.mcneelylaw.com or calling our office at 317-825-5110.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.