How many times have you heard a CEO describe a company’s workforce as its most valuable asset? Despite the challenges employers face today, it is a good time for business leaders to demonstrate that they mean what they say. Nothing will demonstrate this better than maintaining employee health benefits. And in the long run, it will be good for the recovery and sustainability of their businesses.
In recent days the news has been filled with reports about disruption in the labor force. Companies have been forced to close down entirely, and even those in essential business have little or no work available, leaving companies with no choice but to pare down their workforce. Along with the many reports of layoffs, television and internet news sites are filled with stories of companies from iconic retailers such as Macy’s to hospitality giants such as Marriott “furloughing” tens of thousands of workers. The term furlough, though, is one we haven’t heard much in recent years, and many have been questioning the difference between a furlough and a layoff.
Furlough vs Layoff
While sometimes used interchangeably, generally a furlough is a voluntary or involuntary program where employees are forced to take unpaid leave to reduce payroll costs, but are still considered employed and maintain benefits and employment rights when they return to work. In contrast, a layoff is a formal termination of employment, even with the possibility of re-hire in the future.
For most employers and employees, the key distinction – and key cost factor – is the maintenance of health benefits. For employees, the importance of maintaining health benefits during a global medical crisis is obvious. For employers in a stalled economy, though, the already burdensome cost of these benefits can be painful when revenues approach zero.
Weighing the Costs
For companies able to endure the cash crunch and support a furlough rather than layoff, it is an investment that will payoff when things return to our new normal. To be resilient and prepared to quickly resume business when the current crisis abates, companies will need to have their workforce return in tact (or as close as possible). As Boeing CEO David Calhoun observed, “We can’t get back to regular operations again after the crisis if we don’t have the people and skills to make that happen.”
Furloughing instead of terminating employees – and maintaining their health benefits – is an important step companies can take to assure loyalty and continuity in their workforce. Under normal conditions, health benefits are the most personal and important of benefits. That importance is elevated in the current environment, where health insecurity is part of daily life even for those with excellent medical plans.
There are also significant direct and indirect costs associated with terminations. For starters, there are administrative costs incurred when terminating employees, from removal from payroll and other benefit plans to COBRA notification. And assuming a desire to re-hire the same employees after the crisis abates, there are similar onboarding costs lurking down the road.
More significant, however, are the costs that might be incurred if an employee elects to abandon his job, leaving the employer with the need to quickly find a replacement to revive operations. According to a recent SHRM study, the cost of replacing a worker can be as much as 60% of that worker’s annual salary. And this doesn’t account for the cost of the friction experienced in training new employees and lost productivity. All told, replacing an employee may cost as much as twice an annual salary.
What’s the Message?
Companies must also consider the message it sends if they elect to furlough employees and continue health benefits. Odds appear high that at least some employees will experience COVID related illness or be at risk due to exposure to the virus. Given the severity and mortality rates associated with this disease, employees are fearful, for themselves and their family members who may be covered under their plan. Against this backdrop, continuing employees’ health coverage sends a clear message that the CEO means what he says about valuing employees.
It is Not All or Nothing
Companies balancing workforce retention and financial constraints may have other options as well. These might include a reduction of hours or a reduction of pay. Companies exploring these alternatives should take care to consider other factors, including whether the effected employees are exempt or non-exempt.
Other considerations
Be sure that furloughed employees remain eligible for benefits under the terms of their health plans. Currently, many national health insurers have relaxed eligibility requirements, especially those relating to minimum hours worked per week.
Confirm that employees will remain eligible for unemployment benefits under state law. In most states, workers are eligible provided that their employer instructs them not to report for work and does not pay compensation. And as always, employers need to be sure that their actions do not discriminate illegally or violate other laws, including the WARN Act.
What to do
Business must, of course, take stock of the financial condition of their companies. What is the cash burn rate? What are the short-term assets versus the short-term liabilities? What relief is possible, either through negotiation with counterparties or through government programs? And finally, what does the future look like – how deep is the backlog and how dependable is the supply chain?
Once this has been done, if a company must pare its workforce, it should make every effort to furlough rather than terminate employees. Your most valuable assets – your employees – will likely never forget that you stood behind them in the toughest of times.
These observations are general guidance and should not be construed as legal advice. Companies are always advised to consult legal counsel before undertaking any employment actions.
