Furloughs vs. Layoffs: What is the Difference?

During times of economic uncertainty or organizational changes, employers are often faced with the difficult decision of scaling back their workforce. This can be done through either furloughs or layoffs. While these terms might seem similar on the surface, they have key differences that are important to understand. Both involve reducing the workforce in some way. Still, knowing exactly what sets them apart will help you choose the best approach for your business and your employees.

What is a Furlough?

A furlough is essentially a temporary, unpaid leave of absence that allows employees to stay connected to the company even though they aren’t working or being paid during that period. The key word here is temporary—unlike layoffs, furloughs are intended to be a short-term fix. Companies—yes, the private sector—have used furloughs when they need to reduce expenses due to economic challenges or seasonal slowdowns.

During a furlough, employees are still technically employed, meaning they can usually keep their health insurance and other employee benefits. This can be a big relief for workers, as losing benefits is one of the toughest parts of being laid off. And while they’re not receiving their regular paycheck, in numerous instances, furloughed employees are eligible to apply for unemployment benefits to help cover the gap.

Furloughs are typically associated with a government shutdown—we'll get into that soon—so we'll cover examples in the private sector. One case of a furlough in action is in seasonal industries, like tourism or retail. For instance, a ski resort might furlough its staff during the off-season, but come winter, those employees can return to their regular roles. Still, this is not a widespread example because companies might prefer to hire seasonal employees instead. A common, recent scenario was during the COVID-19 pandemic, when many retail and tourism businesses opted to furlough around 500,000 employees instead of laying them off entirely.

Keep in mind that furloughs can vary in terms of how they are structured. Some might involve a complete stop to work, while others could mean reduced hours. Either way, the goal is to cut costs in the short term while keeping employees on board for when things pick back up.

Both nonexempt and exempt employees—typically salaried employees—can be furloughed, but the process is different for each group.

Can a Private Company Furlough Employees?

Both private and public organizations can furlough their employees. But, in the United States, furloughing is mostly associated with the public sector because, every now and then, federal employees are mandated—not requested, not offered the opportunity—to take their time off. Private companies tend to lay off their employees rather than furloughing them, even if there are legitimate reasons for doing otherwise.

What is the Difference Between Furloughs vs. Voluntary Time Off?

Voluntary time off is a program that is offered to employees so they can choose to take unpaid leave. Furloughing, on the other hand, is mandated on employees.

What is a Layoff?

A layoff is a permanent form of job termination, typically used when a company needs to downsize or eliminate positions due to financial struggles, restructuring, or other business changes. Unlike a furlough, where employees remain on the company's payroll (without pay) and hope to return to work, a layoff involves cutting ties with the employee altogether. Once laid off, employees stop receiving wages and benefits, and their employment is officially terminated. Also, layoffs are typically associated with the private sector, as opposed with furloughs, which can happen in the private sector but are more typical of federal working agreements.

Layoffs can happen for many reasons—an economic downturn, company-wide restructuring, mergers and acquisitions, or even the closure of an entire business. The key difference between being laid off and being fired is that layoffs are not related to employee performance. Employees lose their jobs through no fault of their own. It's simply a business decision based on lack of work, budget cuts, or organizational changes.

In many cases, laid-off employees are offered a severance package, which may include a payout based on their length of service, as well as access to career transition support, such as outplacement services. While not legally required, severance packages help soften the impact and provide some financial cushion while the employee looks for new work. Employers may also be required to give employees advance notice of a layoff, depending on local laws and the size of the company, but this is not standard: Layoffs usually happen very quickly and (former) employees are sometimes caught off guard and locked out from their laptops.

When employees are laid off, they are also typically eligible for unemployment insurance, which can help cover basic living expenses while they search for their next new job. Additionally, under the Consolidated Omnibus Budget Reconciliation Act (COBRA), former employees may be able to continue their health insurance coverage for a limited time by paying the full premium.

Layoffs are usually considered permanent, but there are rare, and highly regulated, instances of “temporary layoffs” where employees might be rehired if business conditions improve. Still, there’s no certainty that those employees will be available or even interested in coming back to the company. Temporary layoffs seem to be more frequent in Canada than in anywhere else.

Layoffs are a tough but sometimes necessary decision for businesses trying to stay afloat. Although they help companies reduce immediate costs, there are also downsides, such as increased unemployment costs and the potential difficulty of rehiring skilled employees when conditions improve. On top of that, layoffs can impact company morale and make it harder for the business to “bounce back” once the challenges are over.

What's the Difference Between Laying Off vs. Firing an Employee?

As we pointed out, when companies fire an employee, they penalize them for doing something inappropriate. Instead, laying off a worker has, typically, less to do with their performance and more to do with the company's cash flow. A laid off worker might be doing very well, but management might need to extend their cash runway, and cutting salaried employees is a quick way to slash operating costs.

Key Differences Between Furloughs and Layoffs

If you want to make the right decision when cutting down business costs, you must clearly understand the differences between furloughs and layoffs. We will present the implications from both points of view, employee and employer, so that you can have a picture of what is at stake with both decisions in real life.

Temporary vs. Permanent

One of the biggest differences is how long each is expected to last. A furlough is temporary—the worker is still an employee, just on a break until things improve. The goal is for workers to come back to the job when things turn around. On the other hand, a layoff is typically permanent. When someone's laid off, it means employment has ended, and while rehiring is sometimes possible, it’s not something that everyone can count on.

Wages and Benefits

Furloughs and layoffs also affect an employee’s paycheck and benefits differently. If someone's furloughed, they stop getting paid but usually get to keep benefits like health insurance. It’s a way for businesses to save on payroll while still offering some security to employees. With layoffs, it’s a clean break—workers lose both wages and benefits, though some companies might offer severance as a parting gesture.

Cost to the Company

For employers, furloughs are like hitting the pause button on payroll. They still have to cover some costs, like benefits, but they avoid the hassle of having to recruit and train new people later. Layoffs, though, wipe those costs off the books entirely. That’s why companies facing serious long-term challenges might lean toward layoffs to cut expenses more drastically.

Employee Experience

From an employee’s perspective, both furloughs and layoffs can be stressful, but in different ways. Furloughs leave employees in a sort of limbo—there’s hope you’ll return, but it’s not a sure thing, which can create some anxiety. Layoffs, on the other hand, are a done deal. Laid-off workers get closure, but they also have to face the reality of being out of a job.

Legal Aspect

There are some legal distinctions as well. If someone is furloughed, they're technically still an employee, which means companies need to follow labor laws—the Fair Labor Standards Act, FLSA—and, in many cases, continue offering certain benefits. Layoffs often come with legal requirements like severance packages or notice periods under laws like the WARN Act, which requires companies to give employees notice in case of large layoffs.

When to Choose a Furlough vs. Layoff

Deciding between a furlough and a layoff isn’t easy, and it requires thoughtful scrutiny of the company’s financial health, employee morale, and the future of the business. So, how do you determine which is best for your situation?

When to Choose a Furlough

Furloughs are a solid option if you’re expecting a short-term downturn but are confident that business will bounce back. They allow you to cut costs temporarily without severing ties with your employees completely. This is particularly useful when you have skilled workers whose talents you can’t afford to lose eventually. Industries with seasonal fluctuations, like tourism or retail, might rely on furloughs to manage staffing needs during slow periods, but, mind it, it's not the standard practice. For example, a theme park might furlough employees intending to bring them back once a busy season rolls around.

Another advantage of furloughs is the flexibility they provide. You can implement them in different ways, like rotating furloughs where employees work reduced hours or days rather than being out of work for weeks or months at a time.

Still, keep in mind that furloughs won’t eliminate all costs. Employees will still be on the hook for benefits like health and life insurance, and prolonged furloughs could lead to declining morale if employees feel left in limbo for too long. They can also start their job search with more spare time than they had previously. And furloughs might damage your brand permanently. It'd be wise to consider volunteer time off instead.

When to Choose a Layoff

If your business is facing more long-term or structural challenges, a layoff may be the least bad choice. If you’re uncertain about whether you’ll be able to bring back employees or if your business needs to permanently shrink its workforce, a layoff might provide the clarity and financial relief you need.

Layoffs are often more cost-effective in the long run because you aren’t paying salaries or benefits, and they also allow employees to access unemployment benefits right away. Additionally, laid-off employees are typically provided severance packages, which can ease their transition into new opportunities and soften the blow to your company’s reputation.

That said, layoffs are a more drastic step and can hurt company morale, as remaining employees might fear that they’re next. You're cutting ties with the capital—your employees—that make your business earn money. Usually, and especially if your business is well run, you should expect a drop in revenue after a layoff.

How to Decide

There’s no one-size-fits-all answer, but the decision between a furlough and a layoff regularly comes down to your company’s financial situation and the outlook for the future. If you expect to recover soon and can afford to keep employees connected to your business, furloughs might be the way to go. On the other hand, if you need to make permanent cuts to stay afloat, layoffs could offer a more practical solution.

Whichever route you choose, just remember to handle it with care. Let your employees know why you’re taking this step and what they can expect moving forward. And be very unambiguous about what you're doing.

Make Informed Decisions with the Right HR Software

Furloughs are temporary breaks that should allow businesses to hold on to their talent, while layoffs involve permanent separations that can provide quick financial relief. Furloughs typically keep employees connected to their benefits and leave the door open for their return, whereas layoffs signal a clear end to employment but may offer severance and unemployment benefits to ease the transition.

So how should businesses decide between the two during economic challenges? It comes down to the business’s long-term outlook. If the downturn appears temporary, and you want to retain your team for a quick bounce-back, furloughs might be your best option. Conversely, if your company faces prolonged financial strain or restructuring, layoffs could offer the necessary financial relief to stay afloat.

If you're pausing or cutting ties with a team, you should be certain that it's the least ill decision. Company and employee metrics are one way to be certain that the decision is grounded on results and performance. Certain HR solutions, like TalentHR, offer people analytics and review features so you can always determine what's best for your company based on the facts.

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To learn more about software for employee management, visit TalentHR.