Furlough vs layoff: Key differences and what employers need to know

Workforce decisions shape your company's future. And while no one ever wants to cut back their workforce, sometimes it’s inevitable.

When this happens, you may have two choices. You can lay off employees or you can furlough them. 

Both are cost-saving measures, but they offer different outcomes to employees. Furloughs offer flexibility and may preserve relationships. Layoffs provide immediate relief but may burn bridges with good talent. The choice affects everything from compliance requirements to employee morale and your ability to scale back up.

Smart employers know when to use each approach. This guide breaks down the key differences between furloughs vs. layoffs and how to decide what’s right for your company. 

What is a furlough?

A furlough is a temporary and unpaid leave of absence or reduction of work. It has an expectation that employees will return to work at some point in the future. 

Think of it as hitting pause on someone's employment while keeping the door open for their comeback. Or, an employee who typically works 40 hours a week may temporarily only work 30. 

The keyword here is “temporary.” Furloughs are designed to be reversed when business conditions improve. And while pay may decrease or stop, employees may keep benefits like their health insurance. 

Companies may use furloughs during:

• Short-term financial challenges

• Significant seasonal slowdowns

• Large industry events, like the furlough of federal employees during government shutdowns 

• Crisis events like the COVID-19 pandemic 

How furloughs work

The furlough process involves three key steps. 

1. Select employees based on business needs rather than performance. 

2. Notify affected workers with proper notice. 

3. Communicate the expected duration and return conditions clearly.

Pros and cons of furloughs

Every business decision has trade-offs. Furloughs can save your company money and preserve talent, but they also create uncertainty and complexity. Here's what you need to know.

Advantages of furloughs

The advantages of furloughs include: 

• Cost savings without permanent job cuts. Furloughs cut payroll costs right away without causing permanent job cuts. You avoid the expense of rebuilding your workforce when business bounces back.

• Easier to bring employees back. The employment relationship stays intact. So, bringing furloughed workers back needs minimal paperwork and onboarding. This can streamline processes and help you retain organizational knowledge. 

• Continuation of employee benefits. Many companies keep health insurance and other benefits during furloughs. This helps keep employee loyalty and reduces the risk of losing talent to competitors.

• Maintains team morale. Furloughs signal that job losses are temporary setbacks instead of permanent. This can keep relationships and teams intact for recovery.

Disadvantages of furloughs

The disadvantages of furloughs include:

• Uncertainty for employees. Workers face financial stress and don’t know exactly when they'll return. This uncertainty can drive talent to seek permanent positions elsewhere. This turnover defeats the purpose of the furlough.

• Compliance complexity. Furloughs can trigger multiple labor law requirements around benefits continuation and unemployment eligibility. There are also notification procedure requirements. The rules vary by state and can create administrative burdens.

• May not be sufficient for major downturns. If your business’s financial challenges are severe or long-lasting, furloughs might only delay the need for permanent workforce cuts. This can frustrate employees that may have waited to look for a new job. 

While furloughs offer a temporary solution, sometimes businesses need a more permanent approach to workforce management. That's where layoffs come into play.

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What is a layoff?

A layoff is the permanent or indefinite separation of employees due to business reasons. Unlike termination for cause, layoffs aren't related to employee performance. They're about business necessity.

Common reasons for layoffs include:

• Budget cuts

• Organizational restructuring

• Position redundancy 

Layoffs often end the employment relationship completely. Employees lose their jobs. Their benefits end (though COBRA may apply), and there's no guarantee of rehiring when conditions improve. That said, you may choose to rehire these employees if they apply for open positions in the future. 

How layoffs work

The layoff process involves selecting employees based on business criteria. This often involves accounting for factors like:

• Seniority

• Department needs

• Skills or position redundancy 

You must provide the required notice under laws like the WARN Act. You also handle final paperwork, including severance agreements and benefit terminations.

Companies must navigate complex legal requirements around selection criteria to avoid discrimination claims. Documentation becomes critical to defend the business rationale for specific layoff decisions. The goal is to minimize legal risk while treating departing employees fairly.

Pros and cons of layoffs

Layoffs might seem like a straightforward solution, but they come with hidden costs and long-term consequences. Understanding both sides helps you make the right choice for your situation.

Advantages of layoffs

The advantages of layoffs include: 

• Immediate cost savings. Layoffs eliminate ongoing salary and benefit costs completely. This provides maximum financial relief when companies need to reduce expenses quickly.

• Clarity for employees. While painful, layoffs give workers definitive closure. They can file for unemployment and receive severance right away. They can also begin searching for new opportunities without uncertainty about their status.

• Permanent solution. Layoffs provide a clean break for companies facing long-term structural changes. 

Disadvantages of layoffs

The disadvantages of layoffs include: 

• Loss of talent. Laid-off employees aren’t coming back. You lose institutional knowledge, relationships, and the investment you made in developing this talent. 

• Severance and rehiring costs. Layoffs often require severance payments and outplacement services. Recruiting and training new employees costs much more than bringing back furloughed workers. Rebuilding later can be expensive. 

• Impact on morale and brand. Layoffs damage remaining employee morale and can hurt your employer brand. Top talent may leave voluntarily. Recruiting becomes harder when your company is known for layoffs.

What is the difference between furlough and layoff?

While layoffs and furloughs may seem similar, they have critical differences that matter to your business and your employees. Let’s discuss what makes them unique. 

Duration and intent to rehire

Furloughs are temporary. There are plans to return employees when conditions improve. During COVID-19, for example, many hospitality companies like hotels and restaurants furloughed employees until social distancing restrictions were lifted. 

Layoffs are permanent separations with no commitment to rehire. Employees will go through the entire termination process, including receiving a termination letter. 

Some companies may consider former employees for future openings in the future, but there are no guarantees. 

Employee status during leave

Furloughed employees typically keep their employee status and remain on company systems. Laid-off employees are terminated and removed from payroll and HR systems completely.

Continuation of benefits

Companies often maintain health insurance and other benefits during furloughs. Employees may pay their portion of premiums. 

Layoffs typically end all benefits immediately. COBRA continuation coverage may be available.

Severance pay requirements

Layoffs may trigger severance obligations based on company policy or employment agreements. 

Furloughs typically don't require severance since the employment relationship continues. However, furloughed staff may be able to collect unemployment benefits based on state regulations.

Legal and compliance considerations

Layoffs involve more complex legal requirements. This includes:

• WARN Act notifications for large reductions

• Anti-discrimination compliance in selection processes

• Final pay obligations

Furloughs have fewer legal hurdles but still require careful handling of benefits and communications.

Impact on employee morale and retention

Furloughs preserve hope and maintain relationships, though uncertainty creates stress. Employees can understandably be frustrated with unclear timelines, or if they’re told they’ll return to work in the future, only to be laid off down the road. 

Layoffs provide closure, but are finite. They can also damage morale among remaining employees who may fear they're next. 

Rehiring process and paperwork

Returning furloughed employees requires minimal administrative work since they're technically still employed. Rehiring laid-off workers involves the full recruitment and onboarding process as if they were new hires. This is expensive and time-consuming, with 31.7% of HR leaders saying they spent significant time onboarding tasks alone. Employees who felt slighted are also unlikely to return.

When should you use a furlough vs a layoff?

Furloughs and layoffs each offer distinct pros and cons. It’s important to understand when to use each. 

Choose furloughs when you're facing short-term financial challenges with a clear path to recovery. They work best for:

• Seasonal businesses

• Companies weathering temporary market downturns

• Organizations dealing with crisis events that will eventually pass

Furloughs make sense when you want to preserve your workforce investment and expect to need the same talent when business rebounds. They're ideal for maintaining team cohesion and avoiding the costs of rebuilding your workforce.

Select layoffs when facing:

• Permanent structural changes

• Long-term financial difficulties

• Fundamental shifts in your business model 

If you're closing departments, eliminating positions permanently, or downsizing for the foreseeable future, layoffs provide the clean break you need.

Layoffs also make sense when uncertainty about recovery timing makes furloughs impractical. If you can't reasonably predict when you'll bring people back, the ongoing uncertainty may be worse for everyone than a clean separation.

Keep in mind that the choice you make can impact:

• Your company’s reputation. Employees often value companies that avoid layoffs when possible. Strategic, short-term furloughs may help protect your company’s reputation.

• Compliance risks. Both furloughs and layoffs may come with compliance risks. Make sure you’re following all local and federal regulations that impact you. 

• Rehiring costs. Furloughs are more cost-effective if you plan to rehire your workforce down the line. It’s expensive to recruit, acquire, onboard, and train new talent. 

Best practices for communicating furloughs and layoffs

The way you handle these conversations matters as much as the decision itself. Poor communication can damage trust and hurt morale. It may even put you in violation of labor laws. Meanwhile, thoughtful messaging can preserve relationships even during difficult times.

1. Notify employees as early as possible

Give people the most time possible to prepare financially and emotionally. Early communication shows respect for your workforce and helps maintain trust even during difficult decisions.

You should always meet the minimum legal notification requirements, but go beyond minimums when possible. The more notice you provide, the better employees can plan their next steps. This is part of the employee exit checklist. 

2. Be transparent about the reasons and timelines

Explain the business circumstances driving the decision without sharing confidential details. Employees deserve to understand why this is happening and what factors might change the situation.

For furloughs, provide realistic timelines for potential return dates. For layoffs, be clear that the separation is permanent to avoid false hope.

3. Explain pay, benefits, and unemployment eligibility

Detail exactly what happens to final paychecks, accrued vacation time, health insurance, and other benefits. Provide clear information about unemployment filing procedures and eligibility.

4. Provide written documentation and FAQs

Follow up verbal communications with written materials that employees can reference later. Include contact information for HR questions and benefit inquiries.

Anticipate common questions and provide clear answers in writing. This reduces confusion and prevents the spread of misinformation. 

Create easy-to-understand summaries of complex benefit information. Employees are stressed and may not absorb detailed explanations during initial conversations. Giving them something to refer back to can reduce inquiries to HR. 

5. Offer outplacement or reemployment assistance

Help affected employees transition to new opportunities with the following services:

• Resume writing assistance

• Job search assistance

• Networking support

• Making referrals and introductions 

6. Ensure compliance with labor laws

Follow all federal, state, and local requirements for the following:

• Notifications of employment status

• Final pay

• Benefit continuations

• Selection processes

Document your decision-making process and selection criteria to defend against potential discrimination claims. Consult with employment lawyers to avoid costly violations if necessary. Fortunately, workforce management and HR software like Rippling can help you stay compliant with critical laws. You can administer COBRA enrollment, for example, from the platform employees are already familiar with.

Manage furloughs and layoffs smoothly with Rippling

Workforce changes require careful coordination. Rippling's all-in-one HR and workforce management platform streamlines the entire process from initial planning through employee transitions.

Our workforce management tools help you handle employee offboarding efficiently. They also help you maintain compliance with complex federal and state laws. Morning Consult’s Manager, People Operations & Systems, Amanda Perry, shared that her team had “500+ hours saved per year by automating onboarding and offboarding with Rippling.” 

Rippling’s benefits administration features ensure seamless transitions for health insurance and other important coverage. You can administer COBRA enrollment and benefits through our platform.

And when it's time for rehires or to end furloughs, our system makes bringing employees back simple and fast.

Your workforce changes constantly. Market shifts, economic downturns, and growth spurts all demand quick decisions. Rippling adapts with you, whether you're scaling up fast or need to make tough cuts.

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FAQs 

Is it better to be furloughed or laid off?

From an employee perspective, furloughs offer hope of returning to a known job but create financial uncertainty about timing. 

Layoffs provide closure and immediate access to unemployment benefits and severance. They do eliminate the possibility of returning to the same position.

The "better" choice depends on your:

• Individual circumstances 

• Financial reserves

• Job market conditions in your field

Can employees collect unemployment during a furlough?

Yes, furloughed employees can usually collect unemployment benefits. That said, state rules vary. Some complications may arise if employees technically remain employed during the furlough period. Check your state laws for more information. 

How long is a furlough?

Furlough length varies depending on what’s happening with your employer. Some last just a few weeks during temporary slowdowns. Others can extend for months during major crises. Companies should communicate expected timelines but acknowledge if things may change.