Employer Advisory On Furloughs In Response To COVID-19

In light of the COVID-19 pandemic, many employers have been forced to reevaluate their businesses and specifically, their workforces. Many employers are considering layoffs (permanent separation) and furlough (generally, short-term separation). Especially in light of the anticipated economic stimulus package that Congress is expected to finalize this week (the stimulus package is said to incentivize employers to furlough employees instead of laying them off during these challenging economic times), furloughs will likely become more attractive.

Below, Hicks Thomas walks you through some of the high-level particulars to consider when contemplating a furlough of your employees. This article is only a summary, and if you do need to furlough employees, please consult your lawyer.

For additional information, contact Stewart Hoffer (shoffer@hicks-thomas.com; 713-547-9138).

Definition of Furlough

A furlough is an alternative to a layoff that allows an employer to quickly reduce payroll expenses. A furlough is a temporary, unpaid period away from work. Furloughs help employers retain talent, avoid separation costs, and in some cases, can avoid increasing their unemployment insurance premiums.

FLSA/Wage & Hour Issues

Non-Exempt Employees

For non-exempt employees, furloughs are fairly straight forward. A non-exempt employee is compensated for the hours worked. In adjusting a non-exempt employee’s hours or wages, the employer should be careful that the adjustment does not cause the employee to fall below the federal minimum wage for each hour worked. If the hours are adjusted to zero hours, the minimum wage issue is solved.

Exempt Employees

For salaried, exempt staff, furloughs present a particular challenge from wage and hour standpoint. For these employees, an employer must be careful to maintain compliance with the salary-basis requirements for salaried, exempt staff. When a furlough is for less than one full workweek and a salaried, exempt worker performs any work during that week, the employer must pay the exempt employee's full weekly salary. If a full week goes by and the furloughed worker hasn't done any work, then the employer doesn't have to pay them their salary for that week. But, even if they just do one or two hours of work, they must receive their full weekly paycheck. (During a furlough, the employer should collect any electronic devices that the company has furnished to workers, if possible, to lessen the chance an exempt employee will work off the clock.)

One alternative an employer can use to control labor costs relating to exempt employees – besides a furlough – is to simply reduce the exempt employee’s salary, but not so low as to go below the “salary basis” test (not less than $684.00 per week), which would jeopardize the exempt status of the employee.

Furloughed Employees and Benefits

Employees placed on furlough may lose benefit eligibility depending on how eligibility is addressed in the underlying plan documents. For specific questions on how a furlough would affect an employee’s employment benefits, we recommend you speak with your insurance broker to obtain specific information about your plans and how a furlough might impact an employee’s eligibility for continued coverage. Generally, however, the two issues that typically arise are how to treat employees that remain eligible for coverage due to a stability period and how to treat employees that would lose eligibility under the plan due to the furlough when the employer wants to maintain benefit eligibility.

Employers that utilize a look back measurement period to determine eligibility for segments of its workforce are likely to have employees in a stability period as that term is used in the Affordable Care Act. Employees in a stability period, by the terms of the plan, remain eligible for coverage as full-time employees even if they are on furlough. Employees in a stability period must be offered affordable coverage to avoid exposure under the Employer Mandate in the Affordable Care Act. Employees are responsible for paying their share of the premiums and can have their coverage terminated for nonpayment of premiums. An employer can choose, but is not required, to subsidize a greater portion of the premium for employees in a stability period.

Furloughed employees that are not in a stability period, either because the employer does not use the look back measurement method or because the employee is in a classification that is not measured to determine eligibility, will generally lose eligibility under the terms of the plan due to a reduction of hours unless the plan contemplates continued eligibility during a furlough. The loss of eligibility is acceptable to some employers, in which case the analysis for terminated employees will apply (e.g. offers of COBRA and whether to subsidize COBRA). However, some employers wish to maintain eligibility for employees on furlough even though they would normally lose eligibility under the terms of the plan. The employer-plan-sponsor will need to amend the plan to allow for the continued eligibility and will want to get carrier approval for fully-insured plans.

Generally, furloughed employees that aren’t in a stability period will not prompt the same affordability concerns as employees in a stability period because they are not considered full-time employees under the Affordable Care Act’s Employer Mandate. Employers have more flexibility in these situations to decide how much, if any, of the premiums they want to subsidize for these employees.

Premium Payment During Leave

If eligibility for health care benefits is maintained during a furlough, the employer can collect the employee’s share of premium to maintain the coverage during a paid or unpaid leave of absence. If the employee fails to pay the required premium, coverage can be terminated for non-payment.

Premiums may be collected (as determined by the employer’s policy) in one of the following manners:

  • Catch up. Some employers choose to keep employees on leave enrolled in their benefits until they return to active work, and then recoup those payments at the time the employees return to work. If there is a fairly large premium payment due at the time the employees return to work following the leave, it may be necessary for the employer to take deductions over several payroll periods. The main problem with the catch-up option identified by employers is that if the employee never returns to work, then it may be difficult or impossible for the employer to recover the employee’s share of premiums paid by the employer during the leave.
  • Pre-pay. If the leave is scheduled in advance, and the employee remains eligible for benefits during the leave, the employer may collect the employee’s share of premium for the rest of the plan year from the employee’s pre-tax earnings before the start of the leave.
  • Pay-as-you-go. During the leave, the employer may require the employee to pay the employee’s portion of the premiums to maintain coverage. Such payments would generally be on an after-tax basis, by remitting payment to the employer, and the employer could require payment no more frequently than regular deduction frequencies for employees during periods of active work. Most employers collect premiums from employees on leave of absence on a monthly basis.

In cases where there is paid leave, the employer may collect those premiums through salary reductions. However, for periods of unpaid leave, where the “pay as you go” method for collection is utilized, the employee would remit those amounts to the employer on a post-tax basis.

Failure to Return to Active Employment and COBRA:

If the employee stayed enrolled in the employer’s health care benefits during the leave, a COBRA qualifying event will occur when employment is terminated. However, if an employee remained eligible for coverage but did not maintain coverage by paying the applicable premium during the leave, the employee’s non-payment of premiums would result in a loss of coverage, which does not constitute a COBRA qualifying event.

Furloughed Employees and Unemployment Benefits

In Texas, a furloughed employee may be able to collect unemployment benefits. Especially with the relaxed waiting periods and work-search requirements recently adopted by the Texas Workforce Commission in response to federal COVID-19 legislation, furloughed employees have a higher likelihood of qualifying for unemployment benefits. If a furloughed employee applies for and receives unemployment benefits, it is likely that an employer’s account will not be charged if the furlough was due to the pandemic, but the Texas Workforce Commission has not yet offered definitive guidance on this.

Furloughed Employees with Employment Agreements

Finally, if the employee has an employment contract guaranteeing a certain rate of pay, that employee may not be eligible for an unpaid furlough without subjecting the employer to a breach of contract action.

Furloughs & The WARN Act

The WARN Act requires covered employers to provide at least 60 days’ advance notice of a mass layoff or plant closing. A covered employer is an employer that employs at least 100 employees, excluding part-time employees. The WARN act has important exceptions that excuse an employer from complying with its notice obligations, one of which to closings and layoffs that are caused by business circumstances that were not reasonably foreseeable at the time notice would otherwise have been required. Keep in mind, however, that the timing of layoffs may eventually trigger WARN notice obligations. For instance, a mass layoff within days or reasonably close in time to when the economic effects of the pandemic began materially affecting the United States will likely qualify for this “unforeseeable business circumstances” exception. However, an employer who furloughs employees for a longer period of time, and then determines that it has to engage in a mass layoff, might then have WARN Act notice obligations. Below are some thoughts on this issue.

First, a few important definitions bear noting. A mass layoff means a reduction in force that is not the result of a plant closing and that results in an employment loss at a single site of employment during any 30-day period for: (a) at least 33% of the employees and at least 50 employees (excluding part-time employees); or (b) at least 500 employees, excluding part-time employees.

A plant closing means the permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment, if the shutdown results in an employment loss at the single site of employment during any 30-day period for 50 or more employees, excluding part-time employees. An employment action that halts production or work is a shutdown even if a few employees remain. Closing of a shift, production line or business unit could trigger WARN obligations depending on the number of employees involved. A “temporary shutdown” triggers the notice requirement only if there is a sufficient number of terminations, layoffs exceeding six months or reductions in hours of work as specified under the definition of “employment loss.”

An employment loss means (a) an employment termination, other than a discharge for cause, voluntary departure or retirement, (b) a layoff exceeding six months, or (c) a reduction in hours of work of more than 50% during each month of any six-month period. The regulations indicate that “an employment loss does not occur when an employee is reassigned or transferred to employer-sponsored programs, such as retraining or job search activities, as long as the reassignment does not constitute a constructive discharge or other involuntary termination.” Courts have routinely recognized that employees placed on paid leave do not suffer an employment loss until the end of the leave (i.e., when employment terminates). There is also no employment loss under WARN if a closing or layoff is the result of a business relocation or consolidation and, prior to the closing or layoff, the employer either offers (a) to transfer the employee to another facility, if the job is within reasonable commuting distance or (b) to transfer the employee to another site, regardless of distance, and the employee accepts within 30 days of the offer or the closing or layoff, whichever is later.

Whether a “furlough” or layoff is subject to the WARN Act depends on a number of factors, including the employer’s size, the nature of the employer’s action the duration of any layoff or furlough, and the number of employees that the employer’s action affects. A furlough or lay off of fewer than 50 employees does not trigger a WARN event. If the layoff or reduction in hours lasts less than six months, there is no WARN event. But be careful here. Some employers implementing a layoff because of COVID-19 might believe it will be less than six months, but the lingering effects of the pandemic could last longer than expected, and so could the resulting furlough or layoff. Under the WARN regulations, an employer who has previously announced and carried out an anticipated short-term layoff (six months or less) that is being extended beyond six months due to business circumstances not reasonably foreseeable at the time of the initial layoff is required to give notice when it becomes reasonably foreseeable that the extension is required. Of course, an employee could claim the extension was reasonably foreseeable at the time of the initial layoff and, thus, the employer should have provided WARN Act notice at least 60 days before the beginning of the initial layoff. Thus, the timing of the layoff or furlough could affect whether a WARN Act notice is required.

The WARN Act can be a tricky animal. Accordingly, a comprehensive discussion of its obligations are beyond the scope of this article. Before any covered employer conducts a mass layoff or furlough, it should contact WARN counsel for a complete analysis of planned workforce reductions.

Alternatives to Furlough

Of course, there are alternatives to furloughs including, layoffs, shared-work plans facilitated by the Texas Workforce Commission, or converting full-time positions to part-time hourly positions.

Option 1: Layoff

While all of the legal issues that can arise during a mass layoff are beyond the scope of this article, one issue is worth mentioning. Because the pandemic and the resulting business closures are not “reasonably foreseeable” (or might constitute a natural disaster), WARN Act notice regulations may not apply, but, as discussed above, that depends on many factors that must be analyzed in the context of the employer’s specific situation.

Option 2: Shared Work Plans Through the Texas Workforce Commission.

Shared Work allows an employer to: (a) use partial unemployment benefits to supplement employees’ wages lost because of reduced work hours; (b) reduce normal weekly work hours for employees by at least 10 percent but not more than 40 percent, but this reduction must affect at least 10 percent of the employees in a unit.

Employees who qualify will receive both partial wages for the work they do and shared work unemployment benefits through the Texas Workforce Commission. If the employer currently provides benefits like health insurance, the employer would have to keep paying for those benefits.

It normally takes 30 days for the Texas Workforce Commission to process these plans. However, the Texas Workforce Commission says they are doing everything it can to speed things up.

Option 3: Convert Full-Time Positions to Part-Time Hourly Positions

If the Shared Work Plan with the Texas Workforce Commission will not work for your company, an alternative may be to change the hours and status of any at-will employee. Under this scenario, for people who are already hourly employees, your company would simply assign them fewer hours. For salaried employees, your company could issue notice that because of the pandemic, business operations have declined and therefore, the employee’s salaried position is being eliminated. Another alternative to termination may be offering the affected employee a part-time hourly position, which they may choose to accept.

All economists expect U.S. employers to institute layoffs and furloughs in the coming days. While such measures may be an effective means by which to control costs during hard economic times, an employer should keep in mind all applicable laws, polices, ERISA Plans and contracts when planning it. If an employer fails to plan a workforce reduction or furlough, the resulting litigation costs could well eliminate some or all of the cost-savings the employer is trying to achieve. Thus, all employers would be well advised to consult with labor and employment counsel before engaging in such cost-savings measures.

Notice: The purpose of this document is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This document does not create an attorney-client relationship, should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.