A furlough is mandatory, temporary leave without pay where the employer-employee relationship continues, but work ceases. Employers use furloughs to reduce labor costs during economic downturns while avoiding permanent layoffs. For many businesses facing seasonal slowdowns or unexpected revenue drops, furloughs provide flexibility, but they come with legal and operational complications.
Furlough vs. Layoff
Furlough: Temporary. Employment continues. Benefits often maintained. Employee expects to return.
Layoff: Permanent or indefinite. Employment ends. Benefits terminate (except as eligible to continue with COBRA). Employee files unemployment, seeks new work.
Why the distinction matters: Unemployment insurance treatment differs. Legal obligations differ. Employee expectations differ.
How Furloughs Work
Step 1: Business Decision
Restaurant revenue drops 40% in January-February (post-holiday slump). Rather than lay off staff permanently, the owner furloughs 10 of 25 employees for 6 weeks.
Step 2: Employee Notification
Federal WARN Act requires 60 days notice for mass layoffs (50+ employees) at establishments with 100+ employees. Most small restaurants don't meet this threshold, but state laws vary.
Provide clear written notice stating:
- Furlough start date
- Expected duration (or state "indefinite pending business conditions")
- Whether benefits continue
- Unemployment eligibility
- Expected return date or conditions for recall
Step 3: Furlough Period
Employees: File for unemployment benefits. Seek temporary work. Wait for recall.
Exempt employees: FLSA requires exempt employees furloughed for full workweeks remain exempt. Furloughing exempt employees for partial weeks may destroy exemption status.
Non-exempt employees: Can be furloughed for any period (hours, days, weeks) without affecting status.
Step 4: Recall
When business improves, recall furloughed employees. Cannot use furlough as pretext for discrimination (don't recall younger workers but not older workers).
Legal Considerations
Unemployment Benefits
Furloughed employees are unemployed and generally eligible for unemployment insurance. Employer's unemployment insurance premiums may increase based on claims.
Health Insurance
COBRA obligations: If employer discontinues health insurance during furlough, employee has COBRA continuation rights.
ACA considerations: For employers offering health insurance, determine whether furloughed employees remain covered and who pays premiums.
Best practice: Many employers maintain health insurance during short furloughs (under 30 days) and communicate clearly about benefits continuation.
WARN Act
Worker Adjustment and Retraining Notification Act requires 60 days advance notice for:
- Plant closing affecting 50+ employees
- Mass layoff affecting 500+ employees, or 50-499 employees if they comprise 33%+ of workforce
Furloughs lasting more than 6 months may be considered layoffs under WARN.
State-Specific Requirements
Some states require:
- Final paycheck timing for furloughed employees
- Accrued vacation payout
- Notice requirements beyond WARN Act
- Limitations on furlough duration
Check your state labor department website for requirements.
Operational Challenges
Challenge 1: Who to furlough?
Decisions must be objective, non-discriminatory. Common criteria:
- Seniority (last hired, first furloughed)
- Performance ratings
- Critical skills (retain essential staff)
- Position (furlough front-of-house before cooks if kitchen stays open)
Document decision-making rationale to defend against discrimination claims.
Challenge 2: Employee morale
Non-furloughed employees work harder to cover operations with fewer staff. Resentment builds. Some feel survivor's guilt. Others fear they're next.
Mitigation: Communicate transparently about the business situation. Provide end date when possible. Show appreciation for those working.
Challenge 3: Furloughed employees find other jobs
Six-week furlough becomes permanent when half your furloughed staff finds other employment. When you try to recall them, they're unavailable.
Reality: Furloughs carry this risk. The longer the furlough, the more likely your employees won't return.
Challenge 4: Skills erosion
You reopen the restaurant after a 2-month furlough. Staff returning after this extended break have to relearn systems, timing, and coordination. The first weeks back are rough.
Mitigation: Plan for re-training period. Make the schedule lighter for the first week, building in that buffer time.
Alternatives to Furloughs
Reduced hours: Cut all employees to 30 hours/week instead of furloughing some entirely. Spreads pain more evenly but reduces individual unemployment eligibility.
Voluntary unpaid leave: Offer employees the option to take unpaid leave. Some may prefer time off; others need the hours.
Shift modifications: Close on slower days, such as Mondays and Tuesdays, instead of furloughing staff. Concentrates business on busy days.
Pay reductions: Reduce wages for all staff temporarily. Requires clear communication and employee agreement for exempt employees (wage reductions may affect exempt status).
Communication Best Practices
Be honest: Explain the financial situation necessitating furlough. Employees respect transparency.
Be specific when possible: "We're furloughing 10 employees for 6 weeks while we're slow, then bringing everyone back March 1" is better than "indefinite furlough pending business improvement."
Stay in touch: Send occasional updates about business status. Keeps furloughed employees engaged and more likely to return.
Show appreciation: "This isn't a reflection on your performance. You're valued employees we want back when business recovers."
The Bottom Line
Furloughs are temporary, cost-saving measures that preserve employer-employee relationships while reducing labor costs. They're complex, legally regulated, and operationally challenging, but they provide the flexibility needed to ride out economic downturns that permanent layoffs don't offer.
The key is clear communication, legal compliance, and realistic assessment of whether furloughed employees will be available when you're ready to recall them.
