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What Is a Furlough to Reduce Budget?

What Is a Furlough to Reduce Budget? thumbnail
Employers are seeking different, non-traditional ways to address budget deficits.

Furlough days are unpaid days off from work. Furloughs can be voluntary or mandated by the organization, and are generally used as an alternative to layoffs or a pay reduction. Some companies have implemented a combination of all of these options to address the budget. Watson Wyatt Worldwide Inc., surveyed 245 organizations in 2009 and determined that 65 percent of businesses were still relying on layoffs to reduce the budget. Only 17 percent had required mandatory furloughs, and 19 percent had asked employees to take voluntary furloughs.

  1. Why Choose Furloughs?

    • In several industries, including health care, education and for-profit services, employee salaries comprise more than half of the total operating budget. In difficult financial times, when budget reductions are a necessity, it can be difficult to cut budgets to the levels needed without addressing salary and benefits in some way. Layoffs have been the traditional approach to budget reduction, but this means actually reducing the workforce and impacting operations. Many companies have already implemented hiring freezes and have increased vacancy rates as a result. They simply cannot absorb a layoff without drastically negatively impacting the services they provide. Furloughs may provide a more acceptable solution for both employers and employees.

    What Types of Furloughs?

    • Employers may choose to ask employees to take voluntary furloughs, or they may mandate a specific number of furlough days for employees. Among mandated furloughs, employers can choose whether to set a specific day that employees must furlough, or allow employees to choose their own dates and times. Some organizations, including many states, close their doors to the public on a certain day of the week and mandate employees to take that day as a furlough day. The California DMV, for example, closed three Fridays a month for much of the 2009-2010 fiscal year.

    Advantages of Furloughs

    • Furloughs are attractive to the organization because they do not require any permanent reduction of the workforce. This allows employers to get back up to speed far more quickly when economic conditions improve, without the expense of rehiring and retraining employees. Furloughs can be implemented without closing offices or removing services, and allow employers to receive an immediate, temporary savings while maintaining their existing business model. Some evidence suggests that employees overwhelmingly prefer furlough days to the threat of losing their jobs. More than 80 percent of faculty surveyed at UCLA preferred furloughs to pay cuts or a combination of cuts and furloughs, and more than 90 percent of the Houston Organization of Public Employees preferred furloughs to layoffs, a December 2010 poll revealed.

    Disadvantages of Furloughs

    • Furloughs are not an ongoing solution. They represent a one-time savings that does not address fundamental structural issues within an organization. Furloughing employees has no impact on skyrocketing health insurance and retirement costs. Furloughs are more difficult to manage than layoffs and over the long term may represent a drain on morale. Employers must also be extremely careful to ensure they do not violate the Fair Labor Standards Act when implementing furloughs. Employees must not be permitted to perform work while on a furlough day, even checking email, otherwise they may be required to be compensated. Additionally, added pitfalls exist when dealing with exempt employees. These employees lose their exempt status during any week their pay is reduced due to furlough and become subject to overtime requirements.

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  • Photo Credit Cutting budget deficit image by chasingmoments from Fotolia.com

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