Furlough leave is a temporary leave or reduction in working hours initiated by the employer. Unlike termination or redundancy, the employee is still considered employed when furloughed.
The duration and structure of furlough leave can vary significantly depending on the employer’s needs and circumstances. Some organizations may reduce employees’ working hours or days per week, while others implement complete work stoppages lasting weeks or months.
A furlough leave may be unpaid or partially paid, depending on local labor laws or government subsidies. During the COVID-19 pandemic, governments across numerous countries introduced large-scale job retention and wage subsidy schemes. The U.K.’s Coronavirus Job Retention Scheme and similar programs in the U.S., Canada, and across Europe helped cover a significant portion of the wages of furloughed employees and prevented mass unemployment.
Why employers use furlough leave
Employers use furlough leaves when confronted with financial hardship, economic downturns, seasonal lulls, or external crises. For example, Disney closed theme parks and furloughed tens of thousands of employees in 2020 in response to the spread of COVID-19. Companies like FedEx have used furloughs in response to reduced demand, temporarily suspending work at some locations with plans to recall employees once conditions improve.
Furloughing is an alternative to permanent layoffs, helping to retain talent while reducing costs. It enables employers to maintain workforce continuity and rehire quickly once conditions allow them to. For example, many Disney theme parks reopened in 2021, and many furloughed “cast members” were rehired.
Key legal considerations
During furlough events, employers must comply with country-specific laws regarding notice periods (the amount of time an employee must be informed in advance of the furlough), pay obligations (whether employees will receive pay during the furlough), and benefits (whether benefits will continue to be provided during the furlough).
In some countries, employers must also consider state, regional, and municipal laws. For instance, in the U.S., California employers must follow Cal-WARN, California’s version of the U.S. Worker Adjustment and Retraining Notification (WARN) Act. It is less favorable to employers than its national counterpart. Also in the U.S., exempt (salaried) employees cannot perform any work while furloughed, as doing so triggers a full day of payment.
Some countries have robust social insurance programs that are triggered by furloughs. These help employers retain talent during periods of furlough and provide employees with continued payment. For example, in Germany, the Kurzarbeit social insurance program grants full pay for the hours worked and pays 60% for unworked hours.
Collective bargaining agreements and employment contracts can impact furlough leave for certain employees. In these cases, employers are often legally required to negotiate the terms and conditions of furloughs with unions representing their employees regarding notice periods, benefits, and pay.
Why furlough leave is challenging
No doubt about it: furlough leave is difficult for both employers and employees, although for different reasons. A “stressful” event that prompts the furlough (such as an economic crisis or pandemic) typically compounds the challenges of furlough leave for both parties.
For employers
Employers that institute furlough leaves must contend with lowered employee morale, as well as the potential for employees to feel less committed to the organization. They must account for the risks of employees leaving the organization or becoming disengaged upon return. Meanwhile, they must comply with the complex webs of labor laws and government relief programs, if any.
For employees
Furlough can be particularly challenging for employees. Many individuals must manage partial or full income loss and associated financial instability, as well as uncertainty about whether they will return to their jobs. Research has shown that periods of furlough are associated with employees’ “emotional exhaustion.”
Furlough vs. layoff vs. reduced hours
Furlough leaves are sometimes confused with layoffs or reduced hours, but there are nuanced differences, as the table below illustrates:
| Term | Employment status | Pay status | Rehire expectation |
|---|---|---|---|
| Furlough | Employed | Often unpaid or partially paid | Yes, temporary leave |
| Layoff | Not employed | Final paycheck | Rehire possible but not guaranteed |
| Reduced hours | Employed | Paid for hours worked | Yes, modified work schedule |
Best practices for employers
Even under the best of circumstances, furloughs are stressful for employees. Employers can take concrete steps to make the process less taxing for employees and, in the process, develop a reputation as an organization that employees can trust.
- Communicate often and clearly. Be transparent about the reason for the furlough and its potential length. Proactively clarify whether job-associated benefits will continue during the furlough. Provide regular updates to employees, even if there are no changes, throughout the furlough leave.
- Support employees. Depending on the company, support can vary but may include providing access to mental health programs, assistance with resume writing, and help filing for unemployment.
- Stay compliant. Follow jurisdictional rules regarding providing employees with notice of an upcoming furlough. Maintain thorough records of all furlough communications and agreements. It is advisable to consult with local experts or legal counsel to address country-specific requirements (consultation with employee representatives or unions, for example) and ensure the continuation or proper handling of benefits.
Stay compliant with Velocity Global
Understanding the nuances of global labor laws around furloughs is complicated. For this reason, businesses may choose to partner with Velocity Global to manage hiring, furloughing, or laying off talent. Our local expertise in over 185 countries means a compliant furlough program and minimized challenges for global employers and employees alike.
Contact us for more information about how we help businesses hire and expand globally.
This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.
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