What is Furlough?

By Patricia Miller

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Furlough describes a temporary layoff, a modification to normal working hours and a reduction in pay for a specified period of time or an involuntary leave.

The term furlough describes a temporary layoff, a modification to normal working hours and a reduction in pay for a specified period of time or an involuntary leave. Businesses will use furloughs for a variety of different reasons, the most common reasons are when a business is in temporary shutdown or when undertaking a reorganization and it is not clear which employees will be retained.

In recent times, furloughs have been commonly used during the global pandemic as many businesses, particularly in the leisure and hospitality sector, had to temporarily close their doors. Furlough can be used in place of redundancies or layoffs to retain staff and reinstate their normal working hours and pay once conditions have improved.

How furlough works

A furlough works by placing employees on temporary leave either for their full working hours or part of them. They are typically short-term but can also be long-term depending on the reasons and circumstances. An example of furlough would be a company imposing a 4 day week and reducing pay to match the new working hours in a bid to reduce costs.

Other furloughs can be seasonal such as companies providing landscape gardening. These types of businesses may furlough their employees during the winter months when business is generally quieter and reinstate them in the spring.

Shortages of materials in factories may also result in furloughs, if materials are delayed in arriving at the factory, the employer may decide to furlough some or all of the staff until the materials are delivered and full production can resume.

Another cause for furlough can be shutdown. This can occur when political bodies do not provide sufficient funding during the fiscal year to cover the wages of government workers. For example, in 2015 the state of Washington furloughed more than 26,000 employees because lawmakers were at an impasse regarding the state budget.

During 2020 and 2021 the UK government backed a furlough scheme whereby businesses who were unable to continue to operate or couldn’t operate at full capacity due to the pandemic could furlough some or all of their employees.

Furloughed employees received 80% of their normal pay up to £2,500 per month and were prohibited from carrying out paid work anywhere else. Businesses that furloughed their staff continued to pay all employers’ National Insurance and pension contributions but could claim back all or some of their furlough costs via government grants.

Benefits of furlough

The advantages of furlough include:

Avoids redundancies

Whether put in place during the global pandemic, to cover a period of shutdown or materials shortages, furlough can help businesses avoid redundancies. By placing staff on temporary leave, they can reinstate their working hours once things have returned to normal.

Saves businesses money

By using furlough instead of laying off employees, businesses can save money on wage bills and will also save money on hiring and training new employees once conditions have improved.

Drawbacks of furlough

The disadvantages of furlough include:

Can lower employee morale

If the furlough is unexpected it can have an effect on employee morale. It can make them feel insecure about the future of the company or the security of their job. When morale is impacted it can lead to more stress and lower productivity levels.

Reopening takes time

Following a period of furlough whether it is short-term or long-term it can take businesses a while to reopen and get back to business as normal. Some staff may not have returned and new staff may need to be hired and trained which can all take time.

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Author: Patricia Miller

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.