What Is Furlough?
A furlough is a mandatory, temporary leave of absence imposed by an employer, typically without pay or with reduced pay, due as a measure of cost reduction. Within the broader category of human resources management and employment finance, a furlough allows an organization to temporarily halt or reduce payroll expenses without permanently terminating the employment relationship. Unlike a permanent separation, employees who are furloughed are generally expected to return to their positions once business conditions improve or the underlying reason for the furlough is resolved. This mechanism helps employers manage labor costs during periods of financial distress, reduced demand, or unforeseen circumstances like a government shutdown or an economic downturn. Furloughed employees usually retain their employee benefits, such as health insurance, and may be eligible for unemployment benefits.72, 73, 74, 75
History and Origin
The term "furlough" has historical roots, originating in the 17th century from the Dutch word "verlof," meaning "permission" or "leave of absence."71 Initially, it was primarily used in a military context to describe a soldier's authorized temporary absence from duty.69, 70 Over time, its application expanded. By the mid-20th century, particularly around 1946, the term began to refer to temporary layoffs of civilian workers, notably those employed by the U.S. military.68
Its usage became more widespread in the U.S. in the context of government operations, particularly during federal government shutdowns. These events, often stemming from budgetary impasses, necessitated the temporary cessation of "non-essential" government functions and the furloughing of affected employees.66, 67 A more recent surge in the global use of "furlough" occurred during the COVID-19 pandemic, when governments, such as the UK, introduced large-scale "job retention schemes" to subsidize wages for employees who would otherwise have been laid off, explicitly using the term "furlough" to describe this temporary employment suspension.65
Key Takeaways
- Furlough is a temporary, mandatory leave of absence, typically unpaid or with reduced pay, implemented by an employer.63, 64
- Furloughed employees retain their employment status, and often their employee benefits, with the expectation of returning to their jobs.61, 62
- It serves as a cost reduction strategy for businesses or government agencies facing financial constraints or a lack of work.59, 60
- Furloughs differ from layoffs in their temporary nature and the continuation of the employment relationship.57, 58
- Workers on furlough may be eligible for unemployment benefits, which can vary by state and specific circumstances.55, 56
Interpreting the Furlough
A furlough is interpreted as a temporary, rather than permanent, suspension of work. For an organization, implementing a furlough signals an intent to preserve its human capital and avoid the substantial costs associated with mass layoffs, such as severance pay, outplacement services, and the eventual expense of recruiting and training new staff once conditions improve.52, 53, 54 From an employee's perspective, a furlough, while financially challenging due to loss of income, offers a degree of job security compared to a permanent termination. They maintain their status as an employee, often retaining critical employee benefits like health coverage, and anticipate a return to work.49, 50, 51
The duration of a furlough can vary widely, from a few days to several months, and in some cases, up to a year.47, 48 The employer's communication regarding the expected return date or the conditions for recall is crucial for employee morale and financial planning. It indicates the severity and anticipated length of the business disruption. During a furlough period, employees are generally prohibited from performing any work for the employer, even checking emails, as doing so could obligate the employer to pay them for the time worked, particularly for exempt (salaried) employees under labor laws like the Fair Labor Standards Act (FLSA).44, 45, 46
Hypothetical Example
Consider "InnovateTech Solutions," a software development company that primarily contracts with government agencies. Due to an unexpected federal government shutdown, many of its projects are temporarily halted as government funding ceases. To manage this sudden loss of revenue and avoid permanently letting go of its specialized workforce, InnovateTech decides to furlough 70% of its non-essential employees for a projected period of two weeks, aligning with the expected duration of the shutdown.
During this two-week furlough, employees do not receive their regular salary but are informed that their health insurance and other benefits will remain active. InnovateTech's workforce management team also provides guidance on applying for unemployment benefits for the furlough period. The company avoids the long-term costs of rehiring and retraining, and its employees retain their jobs, ready to resume work once the government reopens and contracts are reactivated.
Practical Applications
Furloughs are primarily applied as a strategic tool for operating costs management during periods of economic uncertainty or operational disruption. They are common in several sectors:
- Government Sector: Federal, state, and local governments often implement furloughs during budget impasses or "shutdowns" when funding is not appropriated. This forces agencies to suspend non-essential services and place employees on temporary, unpaid leave until a resolution is reached. The U.S. Office of Personnel Management (OPM) provides specific guidance for federal employee furloughs.42, 43
- Seasonal Industries: Businesses in highly seasonal industries, such as tourism, hospitality, or certain types of retail, may use furloughs during off-peak periods to reduce labor costs when demand is low, with the expectation of recalling staff for busy seasons.41
- Economic Downturns and Crises: During a recession or unexpected crisis (like the COVID-19 pandemic), companies across various industries may resort to furloughs to conserve cash flow and avoid permanent job cuts. This was seen globally with government-backed schemes designed to keep workers employed. As reported by The Guardian in 2020, the UK's Coronavirus Job Retention Scheme was a significant example, funding businesses to pay a portion of furloughed employees' salaries.40
- Corporate Restructuring: In instances of mergers, acquisitions, or significant corporate reorganization, a furlough can allow an organization to reassess its operational structure and staffing needs without immediately laying off employees.
These applications highlight the use of furlough as a flexible response to temporary business challenges, aiming to preserve talent and avoid the more drastic step of permanent job termination.
Limitations and Criticisms
While furloughs offer a temporary solution for companies to manage labor costs and preserve jobs, they come with significant limitations and criticisms. From an employee perspective, the immediate impact is a loss or reduction of income, which can create considerable financial hardship and anxiety.39 Even with the continuation of employee benefits and eligibility for unemployment benefits, the uncertainty surrounding the return to work can lead to decreased morale and productivity.37, 38 Studies suggest that employees affected by government shutdowns experience increased voluntary turnover after a furlough, as highlighted by a Darden Report study.36 This can lead to a loss of valuable human capital for the employer.
For employers, a poorly managed furlough can also have drawbacks. If the furlough is prolonged or not clearly communicated, it can damage employee trust and brand reputation.35 There are also legal complexities, especially concerning non-exempt and exempt employees under the Fair Labor Standards Act (FLSA); exempt employees performing any work during a furlough week may still be entitled to their full salary.33, 34 If a furlough extends beyond six months, it may trigger notice requirements under laws like the Worker Adjustment and Retraining Notification (WARN) Act in the U.S., effectively turning a temporary measure into a situation akin to a layoff.31, 32 Moreover, while intended as a temporary measure, if the underlying economic issues or lack of work persist, furloughs can simply delay inevitable permanent separations.29, 30 The risk management aspect requires careful consideration to balance immediate cost savings against potential long-term impacts on the workforce and organizational stability.
Furlough vs. Layoff
Furlough and layoff are both measures employers take to reduce workforce costs, but they differ significantly in their permanence and implications for the employee relationship.
| Feature | Furlough | Layoff |
|---|---|---|
| Employment Status | Employees remain employed, albeit in a temporary, non-working status. The job itself is preserved.27, 28 | Employment is terminated. The employee's ties to the company are severed.25, 26 |
| Duration | Intended to be temporary, with an expectation or hope of recall. Can range from a few days to several months, typically not exceeding one year.23, 24 | Can be temporary (with an intent to rehire) or permanent. Often, layoffs are permanent, especially if due to structural changes.21, 22 |
| Pay & Benefits | Usually unpaid, but employees often retain health insurance and other employee benefits. Eligible for unemployment benefits.19, 20 | No regular pay; employee benefits typically cease or are continued for a limited period (e.g., via COBRA). Eligible for unemployment benefits.17, 18 |
| Job Security | Higher implied job security, as employees are expected to return to their same role.16 | No assurance of rehire, though rehire is possible in temporary layoffs.15 |
| Cost Savings | Reduces payroll immediately, often without severance costs.14 | Reduces all labor costs, including benefits, but often incurs severance pay and future hiring/training costs.13 |
Confusion often arises because both involve a reduction in work and pay, but the crucial distinction lies in the ongoing employment relationship and the employer's intent. A furlough is a holding pattern, aiming to keep the workforce intact for a future return to normal operations. A layoff, conversely, is a definitive separation, even if the individual might be rehired later.
FAQs
Q: Do furloughed employees still receive their usual compensation?
A: Generally, no. Furloughs typically involve a period of unpaid leave or significantly reduced hours and pay. However, furloughed employees often retain their non-wage employee benefits such as health insurance.11, 12
Q: Can furloughed employees work during a furlough?
A: No. Furloughed employees are generally prohibited from performing any work for their employer during the furlough period, even checking emails or answering calls. Doing so could legally obligate the employer to pay them for the time worked.9, 10
Q: Are furloughed employees eligible for unemployment benefits?
A: In many cases, yes. Furloughed employees may be eligible to apply for state unemployment benefits, as they are considered temporarily unemployed or have had their hours significantly reduced. Eligibility criteria can vary by state.6, 7, 8
Q: How long can a furlough last?
A: The duration of a furlough is typically temporary and can range from a few days to several months. While there's no universal maximum, it's generally considered a short-term measure, ideally not exceeding one year. If it extends beyond six months, it may trigger certain legal obligations, such as advance notice requirements under the WARN Act.3, 4, 5
Q: What is the main reason companies furlough employees?
A: Companies primarily furlough employees as a cost reduction strategy during challenging times like an economic downturn, a decrease in demand for their products or services, or a disruption to operations. The goal is to avoid permanent layoffs and retain valuable human capital until conditions improve.1, 2