Updated: Jul 15, 2020
By Rayan Omer
As the shelter-at-home orders are still in place, small business owners are continuing to suffer the impact of COVID-19 due to their lack of cash flow and business stability. Even though employers appreciate their valuable employees and are trying to keep them as much as their business can afford, layoffs, pay decreases and hour reductions are on the horizon.
Before performing any layoffs or pay cuts, here are a few alternatives small business owners can consider in maintaining their businesses.
A furlough is when an employer temporarily suspends an employee’s ability to work while allowing them to remain employed. Furloughs can provide a sense of stability and confidence to employees who know they can still come back to work when things have settled, which can be a more comforting solution than being laid off. However, this tactic still poses a challenging situation for employees because they are not being paid during this time.
Furloughs have benefits for the employer as well. In hard times, employers don’t have the time to train new employees. Having to let current employees go is not the best route because it would have wasted the time and effort spent in the training process, as well as creating future expenditures for training new employees after the pandemic.
Before employers pave the way with a furlough for employees to return to the company after the hardship has ceased, they must consider whether the furlough is the right call to make here.
Reason for a Furlough
As the Harvard Business Review suggests, the first thing an employer should consider is the reason for a furlough. If the situation is temporary, it makes sense to keep your staff on leave as an employee retention strategy. But on the other hand, if the cause of a furlough is a permanent one, then a furlough is merely a delay tactic to an inevitable layoff. Temporary reasons include recession, pandemics, and/or difficult or unforeseen circumstances. A permanent cause, for example, is when a small business owner uses advanced technology that eliminates the need for an employee. In this example, a furlough is not the right decision because the employee is no longer needed due to the change in the company’s operational structure.
Which employees should you furlough?
A small business owner needs to carefully choose which employees are furloughed because this furlough will affect the benefits of each employee differently. Usually, employees on leave of absence would qualify for unemployment benefits. It’s also an excellent practice to keep their health coverage intact during this pandemic because your employees need it the most in these tough times, and it shows that you care about them. But, furloughing certain employees might affect their benefits negatively. For instance, temporary or contract employees and part-time employees may not be eligible for unemployment benefits while on furlough.
Employers should proceed with caution if they choose to furlough employees who are exempt from overtime pay. According to The National Law Review, an employer can legally impose a full–workweek furlough and not pay the exempt-employee their weekly salary. The exempt employee cannot perform any work during the furlough period. If the exempt employee does any work at all, the employer is generally obligated to pay that employee their full salary for the entire week. Thus, if small business owners decide to furlough an exempt employee for a whole week, they should do so at the beginning rather than in the middle of the workweek. For more information on exempt employees, check out Alan Burton Newman’s Blog.
Furloughing your employees comes with administrative costs that could outweigh the benefits of potential savings from furloughing. The same is true when you lose an indispensable talent that could’ve been saved by furloughing them instead of letting them go.
Another type of administrative cost is insurance plan coverage. In the US, there is a cut off time on how long the health plan can continue during a furlough. According to the US Office of Personnel Management, it’s typically a year in the US.
Employers should be alert to comply with the legal requirements that might arise. According to the Harvard Business Review, state laws vary in defining what constitutes work and may require employers to confiscate work laptops and cell phones of employees who are furloughed. Complying with this legal requirement is an administrative cost by itself.
A Channel of Communication
Finally, employers need to communicate their strategies with their employees. Opening a channel of honest, fair communication comes a long way in keeping your employees loyal.
Your employees will understand the situation better if you have been open with them. Allow them to raise their issues or concerns regarding any furlough decisions, while checking in with them during the furlough’s hard times.
What’s the Difference Between a Furlough and a Layoff?
A furlough is when an employer temporarily suspends the employee for a period of time with an expectation the employee will return to work once the suspension period is over. In a furlough, the employee is still on the company’s record books while a layoff is a complete termination of employment.
Both furloughs and layoffs are usually for economic reasons and could involve a mass number of people. Employers should be aware of the difference between a furlough and a layoff because a furlough triggers a notice requirement under the “Worker Adjustment and Retraining Notification” Act (“WARN”), as opposed to layoffs that don’t trigger the “WARN” Act. The common thing between a leave and a dismissal is unemployment benefits that may be available for both depending on state regulations.
What Are Employees’ Rights When They Are Laid Off?
The federal “WARN” Act requires employers to give a 30-day notice when an employee gets laid off work if:
• The company has 100 or more full-time employees with at least six months on the job; or
• Employs 100 or more staff that work at least a combined 4000 hours a week (in the private sector)
According to Flexjobs, other instances that might require an employer to provide a 30-day notice includes when a company experiences mass layoffs of full-time employees ranging from 50 to 499 of full-time employees. A business owner might be required to give advance notice in such circumstances.
If you propose a severance package to your employees, they are not obligated to accept it. Hence, your compensation package might require them to waive certain rights. For example, an employee may have to sign a non-compete agreement that prohibits them from working for individual clients or employers for a specific time in exchange for severance.
Generally, layoffs are not a quick, easy option, as many employers may think. For example, when it comes to Union employees, the situation is far different from the normal.
Small business owners should be aware of the bargaining agreement that may prohibit layoffs altogether (“no layoff” clause). In such circumstances, an employer will either need to negotiate with the union or rely upon an exception to the duty of bargain, such as the “compelling economic exigency” doctrine.
Also, there are benefit liabilities that the collective bargaining agreement may impose. For instance, if an employer is required to contribute to a multi-employer pension plan, a layoff could be considered a withdrawal from the agreement that triggers the employer’s liability.
Reduction in Hours
Generally, hours can be reduced for those employees who don’t qualify for over-time, including employees paid on an hourly basis. When an employer makes huge reductions in employees, usually more than 50% of employees, as mentioned earlier, this reduction triggers the federal WARN Act. Under this federal law, an employer must provide employees with a 60-day notice to the reduction of hours, so that these employees can find other alternatives in the job market.
Reduction in Pay
In short, an employer can reduce your pay if an employment contract doesn’t protect you.
No law states that an employee deserves a certain amount of pay. Nevertheless, an employer may not cut the payment to a degree where it’s under the minimum wage required by the federal government and the relevant state laws.
As for employees who are exempt from overtime because they are protected by an employment contract, their salary must remain the same. Reducing their pay could potentially move those exempt employees to a non-exempt status, which makes them qualify for paid overtime. However, if an employee is not working for more than 40 hours, this concern should not be an issue.
Employers should be prudent when reducing exempt employees' pay, as there are other potential legal pitfalls for doing so. Union workers are similar to individuals with employment contracts, as they are shielded from hourly or pay decreases during the life cycle of their commitment.
Either way, a reduction in pay cannot be enacted without notifying the employee under the “WARN” Act discussed above.
Small business owners should be cautious when minimizing the economic impact of the pandemic by reducing labor. Even an obvious act of reduction can cause a potential claim of discrimination or retaliation. For instance, if all the laid-off employees were only from a certain race or religion, this could be a red flag in your company that a legal claim might be on its way. Therefore, employers should document their layoff reasons and make sure they have consistent criteria when doing so.
Cut Off Unnecessary Expenses
Lowering other non-essential expenses is also an excellent tactic to maintain your employees. For instance, if the small business owner used to provide any snack/lunch at the employees’ break room, it would be wise to eliminate these perks in order to save on costs.
Having the right staff at the right time is also crucial. For example, if you know that your business is booming on Saturday, but it’s slow on Sunday, then it’s crucial to have your staff ready on Saturday while reducing them on Sunday. This method would improve staff efficiency.
Asking volunteers for help instead of independent contractors would also cut down on your expenses which allows you to keep your employees.
Employers should take advantage of the tax credit provided in exchange for keeping your employees’ payroll going, or providing paid sick leave for Coronavirus related reasons.
For more information on paid sick leave, check out my article “Paying the Sick and Tired” at the Legalucy blog.
Finally, in unprecedented circumstances, difficult decisions must be made. Whether a small business owner should furlough their employees or lay them off would depend on each business’ situation. Employers need to check their payroll costs and current funds, if they can survive and for how long. Otherwise, a hard decision needs to be made, even though every employee is a valuable asset to the business.
Laying off employees or furloughing them is tough on both sides regardless. Living on unemployment benefits is not a joke. But with empathy, open communication and honesty, your employees might be more understanding than you think, which gives you a chance to rehire them in a brighter future.
Are you interested in launching or sustaining a pandemic proof small business? Spot issues, take action, stay safe, and thrive in a post Covid-19 world with Legalucy. Learn more at thelucyreport.com
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