Furlough vs Layoff
A furlough is a temporary, unpaid leave or reduction in hours in which the person stays employed. A layoff is the end of employment for business reasons, which the employer may or may not expect to reverse. The words are used loosely, and the difference matters, because it decides whether final pay is due, whether health coverage continues, whether the WARN Act's 60-day notice applies, and whether an exempt employee can lawfully be paid nothing for a week.
The screen below applies the federal WARN thresholds to a proposed action and adds the headline rule for the four states with the most demanding mini-WARN laws. The rest of the page sets out the differences, the pay rules for exempt and non-exempt employees, what happens to benefits and unemployment, and how to choose between the two.
WARN Act threshold screen
Federal WARN thresholds only; the state row gives the mini-WARN headline. Employment losses within any 90-day period are aggregated. This is an initial screen, not a substitute for counsel on a reduction in force.
The differences that matter
| Furlough | Layoff | |
|---|---|---|
| Employment status | Continues; the person is on unpaid leave or reduced hours | Ends on the effective date |
| Expected return | Yes, to the same job, on a stated or expected date | No, or only by rehire |
| Final pay | Not triggered; regular pay for hours worked | Due on the state's final pay deadline, with accrued vacation where required |
| Health coverage | Usually continues if the plan's hours rules allow; the employer often keeps paying its share | Ends per the plan; COBRA election notice follows |
| Unemployment insurance | Generally eligible for full weeks without work or for partial benefits on reduced hours, depending on the state | Eligible, subject to the state's earnings history rules |
| WARN Act | Not an employment loss unless it exceeds six months, or hours are cut by half or more for six months | An employment loss that counts toward the thresholds |
| Severance and release | Not usual | Usual where the employer wants a release; ADEA group rules apply |
| Accrued leave | Retained; some employers require it to be used first | Paid out where state law or policy requires |
| Recall | Expected; the person keeps seniority and tenure | Rehire as a new hire unless a recall right is agreed |
The word "temporary layoff" straddles both and is best avoided. In most states a temporary layoff with a definite recall date is treated like a furlough for unemployment purposes and like a termination for final pay purposes, which is the worst of both. Choose one, name it, and write down the expected duration.
The exempt employee rule
Non-exempt employees are paid for hours worked, so a furlough of any length simply reduces their pay. Exempt employees are different. Under the salary basis test in 29 CFR 541.602, an exempt employee must receive the full weekly salary for any week in which they perform any work, with limited exceptions. A furlough that takes an exempt employee off for two days in a week and docks two days' pay breaks the salary basis, and the consequence is not limited to that employee: the exemption can be lost for every employee in the same job classification subject to the same practice, with overtime owed to all of them.
The lawful ways to furlough exempt staff are therefore: whole workweeks in which no work at all is performed, including no email; or a prospective, bona fide reduction in salary and schedule that reflects a long-term change rather than a week-to-week adjustment, and that keeps the salary above the exemption threshold. Employers that furlough exempt employees by the week need to block their access to systems, because an answered email on a Tuesday makes the whole week payable. The exempt versus non-exempt entry covers the threshold, and the salary to hourly calculator shows what a reduced schedule does to the rate.
A furlough of non-exempt employees needs care in different places: the reduced schedule must be given in writing, any state predictive scheduling law applies to the change, and accrued paid leave cannot be taken from them in states that treat it as wages.
Benefits and unemployment during a furlough
Group health plans set eligibility by hours or by employment status. A furlough that drops an employee below the plan's hours threshold can end coverage even though the person is still employed, which is a COBRA qualifying event (a reduction in hours) with the same 30-day employer notice deadline as a termination. Many employers negotiate with the carrier to keep furloughed staff on the plan and continue paying the employer share; the employee's share is collected on return or by direct payment. Whatever is agreed goes in the furlough letter. Applicable large employers under the Affordable Care Act also need to check the measurement method they use, because a furlough in a stability period does not remove the coverage obligation.
Unemployment insurance is state-run, and most states pay full benefits for a week of furlough in which no work was performed and partial benefits where hours were cut, subject to the state's earnings disregard. Work-sharing (short-time compensation) programmes in around half the states pay a percentage of benefits to employees whose hours are cut by a set range, typically 10 to 60 per cent, without a layoff, and are designed for exactly this situation. Retirement plan contributions usually pause with pay, and loan repayments on 401(k) loans can default if not addressed.
A furlough that runs long changes character. Under 29 U.S.C. 2101, a layoff exceeding six months or a reduction of more than half the hours for six consecutive months is an employment loss for WARN purposes, counted from the day it began, so a furlough announced as short and extended past six months can create a retroactive notice violation. Employers that see a furlough running long should either recall or convert it to a layoff with notice before the six-month point.
Choosing between them
- Furlough when the work is coming back within weeks or a few months, the people are hard to replace, and the cost of keeping them on benefits is lower than the cost of rehiring and retraining. Furloughs preserve institutional knowledge and, for employees, preserve tenure, seniority and continuous service for leave eligibility.
- Lay off when the work is not coming back, when the furlough would exceed six months, or when carrying benefits for people who are not working is not sustainable. A clean layoff with notice, severance and a release is more honest than a furlough everyone knows will not end.
- Consider alternatives first. Hiring freezes, reduced hours across the board, voluntary unpaid leave, and work-sharing programmes reduce payroll without ending anyone's employment, and several of them are what a WARN notice period is designed to give employees a chance to plan around.
- Select by documented criteria. Whichever is chosen, the selection of who is affected is where discrimination claims arise. Use written criteria tied to the business need (role, skill, location, performance from existing reviews), run the adverse impact analysis on the selected group by age, sex and race before announcing, and keep the analysis.
- Write the letter. A furlough letter states the start date, the expected duration or review date, that employment continues, the pay and benefits arrangement, the instruction not to work, and the recall process. A layoff uses the termination letter with final pay, COBRA and the severance agreement.
Either way the offboarding checklist applies in part: access is suspended rather than revoked for a furlough, property usually stays with the employee, and the state notices depend on whether the state treats a furlough as a separation for unemployment purposes, which most do.
Key takeaways
- A furlough keeps the person employed on unpaid leave or reduced hours; a layoff ends employment. The choice decides final pay, benefits, unemployment and WARN exposure.
- Exempt employees can only be furloughed in whole workweeks with no work performed, or by a bona fide prospective salary reduction. Docking days breaks the salary basis for the whole class.
- A furlough that cuts hours below the plan threshold is a COBRA qualifying event with the same 30-day notice deadline as a termination.
- Furloughs longer than six months, or hours cuts of half or more lasting six months, become WARN employment losses counted from day one.
- Federal WARN applies at 100 employees; California, New York, New Jersey and Illinois set lower thresholds and New York and New Jersey require 90 days.
- Select who is affected by written criteria, test the selection for adverse impact before announcing, and put the arrangement in a letter.
Frequently asked questions
What is the difference between a furlough and a layoff?
A furlough is a temporary, unpaid leave or reduction in hours during which the person remains employed, keeps their tenure and usually their benefits, and is expected to return. A layoff ends employment, triggers final pay on the state deadline, ends benefits with a COBRA notice, and counts as an employment loss under the WARN Act.
Can furloughed employees collect unemployment?
In most states, yes. A week of furlough with no work performed is treated as a week of unemployment, and reduced hours may qualify for partial benefits subject to the state's earnings rules. Around half the states run work-sharing programmes that pay a share of benefits to employees whose hours are cut by a set percentage without a layoff.
Can an exempt employee be furloughed for part of a week?
Not without losing the exemption. The salary basis rule requires the full weekly salary for any week in which an exempt employee performs any work. Furlough exempt staff in whole workweeks with no work at all, including email, or make a bona fide prospective reduction in salary and schedule that stays above the exemption threshold.
Do furloughed employees keep health insurance?
It depends on the plan's eligibility rules, which are usually based on hours or active status. If the furlough drops the employee below the threshold, coverage ends and a COBRA election notice is due. Many employers arrange with the carrier to keep furloughed employees on the plan and continue paying the employer share.
Does the WARN Act apply to furloughs?
A furlough is not an employment loss under WARN unless it lasts more than six months, or reduces hours by more than half for six consecutive months. If it does, it is counted from the day it began, so a short furlough that is extended past six months can create a retroactive notice violation. WARN applies to employers with 100 or more full-time employees, with 60 days' notice for plant closings of 50 or more losses and mass layoffs of 500, or 50 to 499 at one third of the site.
Is a layoff the same as being fired?
Both end employment, but a layoff is for business reasons unrelated to the individual's conduct or performance, and the employee is generally eligible for unemployment insurance and, where offered, severance. Being fired for cause is a termination based on the individual's conduct or performance and may affect unemployment eligibility if misconduct is shown.