Furloughs vs Layoffs Amidst Coronavirus, What’s Best For Employers and Employees?

Furloughs vs Layoffs Amidst Coronavirus, What’s Best For Employers and Employees?

by Onyinyechi Muilenburg

Over the past few weeks, many employers have been asking us whether they should cut payroll expenses through temporary furloughs and layoffs to allow their employees to access expanded unemployment benefits in the recently passed CARES Act. This is a difficult decision for most employers in the age of COVID-19.

To put in perspective how unprecedented the current situation is, the New York Times recently reported that the speed and scale of today’s job losses are like nothing we have seen before. Until recently, The New York Times writes, “the worst week for unemployment filings was 695,000 in 1982.” By contrast, in the last week of March, the number of new unemployment claims was a staggering 6.6 million.

With countless sectors of the economy essentially shut down, they are struggling to make payroll, deferring nonessential expenses, and exploring all possible options to cut costs. The federal government has taken steps to help, such as passing the Paycheck Protection Program in the CARES Act. As the name suggests, the program provides forgivable loans to certain employers to help cover payroll costs through the downturn.

The CARES Act also creates a $600 federally subsidized weekly increase to existing state unemployment benefits while expanding the maximum length of time to receive those benefits to 39 weeks; a 13-week increase to the usual 26-week limit.

Taking Texas as an example, this means that an employee who earns roughly $50,000 per year can receive the equivalent of the employee’s former salary from collecting unemployment benefits. Some employees may actually receive more through unemployment than they would earn by working. The federal government’s intent is for unemployment benefits to provide a full salary replacement for the average worker, an essential relief measure in today’s economy.

This leaves struggling employers with a dilemma: Should they do whatever they can to maintain payroll for employees who might have very little work anyway in light of quarantines and shutdowns, or should they conduct temporary furloughs so their employees can access expanded unemployment benefits? To understand the considerations that go into this decision, let’s briefly explore how unemployment benefits work for both employees and employers.

Prior to the CARES Act, employees typically became eligible for unemployment benefits only if they were laid off or furloughed due to factors such as lack of work, a reduction in force, or poor economic conditions. Employees were generally not eligible if they voluntarily left their employment or were terminated for cause. The CARES Act extends eligibility for benefits to employees who cannot work for a number of COVID-19-related reasons, such as being sick, caring for a child who is unable to attend school, or being in quarantine.

If an employee qualifies for benefits, the state benefit amount is calculated as a percentage of the employee’s quarterly salary, subject to a state-specific weekly cap. In Texas, for example, the current maximum weekly unemployment benefit is $521 for 26 weeks. When combined with the $600 federal subsidy, this means that certain employees receive $1,121 per week through unemployment; an outcome which is consistent with the federal goal of providing a “full” salary replacement for the average unemployed worker.

To facilitate unemployment benefits, employers have always contributed to a state unemployment insurance fund. The size of that contribution is based on each employer’s experience rating, which changes depending on how many of an employer’s former employees receive unemployment benefits.

Every state has a minimum and maximum unemployment tax rate, which can range from 0.6% to nearly 6%. This tax rate is assessed on a percentage of each employee’s salary, such as the first $10,000 each employee makes. This is a controllable expense, which becomes higher or lower depending on the number of successful unemployment claims.

In recent weeks, employers have conducted layoffs, furloughs and other painful cost-cutting measures out of financial necessity and a lack of alternative options. If these last-resort measures negatively impact employers’ experience ratings and drive up unemployment insurance costs, then employers who have already cut all possible expenses in response to an existential threat may face increased tax rates at a time when they cannot afford additional spending.

Recognizing this, many states have introduced and/or passed legislation so employers would not face increased costs if their employees receive unemployment benefits as a result of COVID-19; these claims would have no impact on an employer’s experience rating and, consequently, no impact on the employer’s future unemployment insurance rate. Texas has a chargeback protection program for employers. You can find the details at: https://statutes.capitol.texas.gov/Docs/LA/htm/LA.204.htm#204.022.

With this overview in mind, how do we answer clients who ask whether they should conduct furloughs to allow their employees to access expanded benefits? Two factors must exist to make temporary furloughs a solution with minimal drawbacks for both employers and employees:

First, if the furloughed employee makes roughly $50,000 or less — the exact salary depends on each state’s maximum weekly benefit — then the employee could receive more than the employee’s full salary while collecting unemployment benefits.

Second, if the employer’s state does not modify experience ratings for COVID-19-related unemployment claims, then the employer’s unemployment tax rate will not increase as a result of the furloughs.

Where both factors exist, an employer can temporarily reduce payroll without impacting unemployment rates, and then assist employees in applying for unemployment benefits. Once approved, employees receive the $600 federal subsidy on top of existing state benefits, allowing them to collect their full salaries, or more, while knowing that their jobs are waiting for them when the economy recovers.

Outside of this specific combination of factors, employers may still need to make painful decisions to weather the economic storm. The difference is that one or both parties lose. Employees who make substantially more than the average worker only receive a fraction of their salary through unemployment benefits, regardless of the federal subsidy. Furloughs and layoffs also become more burdensome for employers if the decision impacts their experience rating and thus raises their unemployment insurance costs.

Of course, sometimes an employer’s financial circumstances force the employer’s hand. Despite increases in unemployment rates, struggling employers can save much more money by conducting furloughs and layoffs than they would lose in the resulting rate increases. Thankfully for many employers and employees, other aspects of the CARES Act provide much-needed relief which helps prevent workforce reductions.

This week, for example, countless employers are applying for forgivable loans through the Paycheck Protection Program, which will keep workers employed through the downturn. Hopefully existing programs will continue to help while the federal government and various states implement more relief efforts in the coming weeks.

No information in this article is intended to constitute legal advice. For specific legal advice, please contact an attorney.

If you have any questions or would like more information about labor & employment, please contact Derek Flynn.