Furlough: What it means and how it works

Ever heard the term “furlough” and wondered what it means or how it’s different from a layoff? Essentially, a furlough is a temporary leave of absence that a company requires an employee to take, often as a cost-cutting measure. On the other hand, a layoff is permanent.

This guide will explain furloughs, how they differ from layoffs and what options might be available for furloughed employees. 

Key takeaways

• A furlough is a mandatory temporary leave of absence from a public or private employer. It’s different from a layoff, which is more permanent.
• Employers may use furloughs in a variety of situations, including to reduce costs.
• During a furlough, employees may be protected by certain regulations of the Department of Labor (DOL), Equal Employment Opportunity Commission (EEOC) and Fair Labor Standards Act (FLSA).
• Some employees may be eligible for unemployment benefits during a furlough.

A furlough—sometimes referred to as a temporary layoff—is a mandatory leave of absence imposed by an employer. 

How does a furlough work?
Typically, a company will give employees advance notice of a furlough. Once furloughed, employees generally don’t continue getting paid. But because they’re still employed by their company, they may continue receiving their fringe benefits, including health care coverage. 

The timing and structure of a furlough can vary. Some companies may reduce working hours during the week. Others may furlough employees for a block of time—for example, a few weeks. Companies affected by seasonal demand for their product or service may initiate longer furloughs, potentially lasting for months.

Instances when companies may furlough employees
Organizations may furlough employees for a variety of reasons including when they feel they need to:

• Reduce payroll
• Survive a slow period that requires less staffing
• Suspend operations, such as during a government shutdown
• Balance the budget
• Manage supply shortages

Workers are generally classified in two ways—that can be important in terms of how companies must pay them during a furlough. The classifications are: 

• Exempt employees, who work for a salary and generally don’t earn overtime pay
• Nonexempt employees, who are entitled to earn minimum wage and get paid overtime when their workweek exceeds 40 hours

Employers have to comply with certain requirements during a furlough, including those of the DOL, EEOC and FLSA. Here are some key requirements:

• Discrimination: Companies are prohibited from furloughing employees for a number of reasons. They include race, country of origin, gender, age, sex, religion, disability or protected genetic information. 
• Hours worked: Employers are required to pay furloughed exempt employees their full weekly salary if they work any amount of hours during a given week. If they don't work at all during a week, they typically won’t be paid. When nonexempt employees are furloughed, they’re generally only paid for the hours they work. 
• Minimum pay: An employer can reduce the salary of both exempt and nonexempt employees during a furlough—but they can’t do it to the extent that their pay drops below minimum wage.

Do furloughed employees get unemployment?
In general, furloughed employees can file for state unemployment benefits and collect the full amount they are eligible for. Employees who are still working but whose hours have been cut may also be eligible to file for unemployment benefits depending on the total reduction in time worked. Note that this can vary depending on the state they live in. 

While a furlough is typically temporary, a layoff permanently ends an employee’s working arrangement with their employer. And while furloughed employees generally return to work after a period of time, laid-off employees don’t return to work unless they’re rehired.

Here are some other key similarities and differences between a furlough and a layoff:

• Benefits. Employees who’ve been furloughed may continue to receive benefits that include insurance coverage. They may also be able to file for unemployment benefits. Laid-off employees may also receive health insurance coverage for a certain period of time. In either case, be sure to clarify your situation with your employer. 
• Severance packages. Since furloughed employees usually keep their jobs, they generally aren’t eligible to receive a severance package of pay and benefits. Laid-off employees may sometimes receive a severance package.
• Paid time off (PTO): Employees who’ve been furloughed generally can’t cash out their accrued vacation time during their furlough leave of absence. But laid-off workers may be able to receive a PTO payout. That can depend on where they live and the stipulations of their work agreement.

If you’ve been furloughed, you have options for mitigating the loss of your wages. You could file for unemployment insurance, for example. The program, which is administered jointly by the Department of Labor and the US states, gives cash benefits to eligible workers who’ve become unemployed through no fault of their own.

Are unemployment benefits subject to federal income tax? You can use the Internal Revenue Service’s Interactive Tax Assistant tool to see if you’ll owe taxes on your unemployment benefits. You may also need to pay state and local income taxes, depending on where you live.

Once you sort out unemployment benefits, you could start to take a look at more personal things.

Assess your financial situation
Once you’re made aware of a furlough at your organization, you could evaluate your current financial status. There’s plenty to consider, but you might want to project your lost income based on the length of the furlough and how much you have saved to cover expenses.

From there, you can determine the best course of action. In the event that your furlough becomes permanent, you can learn more about how to budget and plan financially after a job loss.

Seek out income-earning opportunities
Depending on the terms of your employment contract and your furlough arrangement, you may be able to subsidize your income by picking up freelance work or independent contractor gigs. Check with your employer about your options and whether you’re free to make extra money while you’re furloughed. 

If you are, you could evaluate your skills to find short-term jobs that are a fit for you.

Apply for other jobs
Thinking about applying for a new job during your furlough period? Examining what you find most fulfilling in a job could help you find a good match. Also, consider the skills you have to offer before applying for a new position. 

Your furlough period can be a good time to update your resume or curriculum vitae (CV). It can also be helpful to reach out to colleagues for letters of recommendation and tap into your professional network for references. 

Expand your skills
While you’re furloughed, you can use your free time to develop skills. You could enhance your hard skills—these are job-specific duties—by taking online classes or pursuing a certificate program. 

You could further develop your soft skills—these are interpersonal skills like communication and adaptability—through books, podcasts or online courses. 

A furlough is a mandatory temporary leave of absence required by an employer. It’s different from a layoff, which is more permanent. 

Employers may initiate furloughs for a number of reasons. Cost reduction is a major one.

If you ever experience a furlough, you might find that it creates lots of uncertainty and stress. But taking a proactive approach to the situation could help you position yourself for a successful return to the workforce.