By Sandra J. Sucher and Shalene Gupta | Harvard Management Update
Furloughs are often a much better alternative to layoffs for both companies and employees. However, until the COVID-19 pandemic, they had been infrequently used in the United States. During the Great Recession only 0.5% of the U.S. workforce participated in furloughs, while 1 in 5 workers experienced a layoff. Today, in the most uncertain time any of us have ever known, many companies are turning to furloughs, creating a road to return when there is once again work to do.
Furloughs enable companies to reduce staffing costs while sidestepping layoffs. Furloughed employees either work reduced hours or, as is more common now, are put on a work leave that can last as long as the company needs. Most furloughed employees receive no pay from the company, but companies generally continue covering health insurance. Employees can draw unemployment benefits during their furlough and can normally work for other companies. The major benefit of furloughs to employees is that workers have a job to return to, while companies don’t have to go through the painful and expensive process of rehiring and training new talent and losing someone they’ve spent years cultivating.
Despite the obvious benefits, questions about implementation abound. Here are some important points managers should keep in mind when considering furloughs.
BEFORE IMPLEMENTING FURLOUGHS
The first step is making sure that furloughs are the right decision. Furloughs are best used as a worker-retention strategy in the face of temporary financial difficulties (like recessions and pandemics). However, if your company is dealing with permanent changes, such as a decreased demand due to advancing technology or the adoption of new strategies that require employees with entirely different skills, a furlough will only delay the inevitable layoff.
Second, managers need to carefully consider the types of employees that will receive furloughs. Part-time, temporary or contract employees may not be eligible for unemployment benefits while on furlough, and the administrative costs of furloughing them may outweigh any potential savings. The risk of losing star talent or the cost of having employees with specialized knowledge stop working should also be considered carefully. When Honeywell International implemented furloughs during the Great Recession, for example, it exempted engineers on high-priority new product development projects and employees that deal directly with customers.
Third, furloughs come with administrative costs that vary depending on the local laws. Some governments require that companies contribute to a worker’s pay, although the US does not. Most employers will pay health insurance, but insurance plans usually place limits on how long furloughs can last. Employers will need to do their homework on the legal requirements — an administrative cost in and of itself.
Fourth, managers should evaluate the perceived fairness of the furlough. Layoffs often target underperforming employees, while furloughs can affect a greater proportion of the workforce, which may strike some employees as unfair. To alleviate this, managers should consider spreading the pain, by rotating departments or divisions so employees are not forgoing their paychecks for several weeks at a time, imposing an overall reduction of hours across the board or using other cost-savings measures such as salary cuts for senior leaders.
Finally, employers should provide as much advance notice as possible. Research has shown that employees are most likely to trust their managers when they exercise information fairness. This involves communicating about what you intend to do, why you have chosen that strategy and how employees will be affected. After the general communication, managers should make themselves available to employees and give them the chance to raise concerns and questions.
DURING THE FURLOUGH
While employees don’t work during a furlough, that doesn’t mean they stop existing. Managers should be actively thinking about how to have a “good” furlough: one that is fair and boosts morale as much as possible.
First, if employees are not getting paid, there should be absolutely no pressure for them to do work. When Fermilab used furloughs in 2007, the director left his monthly column in the company newsletter blank in order to drive this message home.
Second, a frequent and transparent communication strategy is the key for boosting morale. Early and frequent communication is essential, even if a company doesn’t have all the answers. It’s more reassuring to hear that leaders don’t have an answer but do have the issue top of mind, then it is to hear obfuscation or, worse, nothing at all. To this point, companies should appoint a single, trusted source — preferably someone in a position of authority — to communicate about the pandemic and the company’s response. Next they should communicate frequently — weekly or even daily — and always at the same time of the day, so employees know they are still valued. If employees aren’t allowed to use company email during their furlough, make sure you’re reaching them at an alternate email address or by posting on an accessible webpage. Companies should also create a process for employees to communicate questions and concerns and receive answers from someone with authority and knowledge.
Managers should continue to monitor the furloughs to ensure they spread the pain as fairly as possible. In 2009, Badger Mining Corporation, a Wisconsin-based industrial silica sand manufacturer, allowed employees to choose their furlough days so they could schedule around child care and other plans.
AFTER THE FURLOUGH
It’s important to understand that you can’t erase the inevitable pain that furloughs cause. Living on unemployment benefits can be difficult and, in this pandemic, the replacement jobs workers find could expose them to the risk of contracting COVID-19. Employees who return once the furlough is over may have complex feelings. After Fermilab’s furloughs ended, the company conducted focus groups on the effects. It found that employees still felt uneasy and that their morale was affected negatively for months after their return to work.
Managers should not assume that they are in the clear once a furlough has ended. Employees will still need frequent and transparent communication — a rational basis for hope — about the state of affairs and recovery plans, along with reassurance that the future is bright.
Furloughs can be an excellent strategy — just ask Honeywell, whose stock returns were 279% higher than the competition’s after the Great Recession ended. But like all strategies, thoughtful implementation is needed for employees and employers to reap the maximum benefits, while undergoing minimal damage. Furloughs have become a sudden — and welcome — feature of this pandemic world, allowing companies to maintain connections with their employees, cut costs while still providing employees benefits and create a path to a seamless recovery.
Sandra J. Sucher is a professor of management practice at Harvard Business School. Shalene Gupta is a research associate at Harvard Business School.
Image credits: Martinmark | Dreamstime.com