Furloughs, Layoffs, and Terminations in the Time of COVID-19

Furloughs, Layoffs, and Terminations in the Time of COVID-19

In light of the tremendous consequences to business and individuals associated with the growth of the coronavirus COVID-19 (“Coronavirus”), Neider & Boucher, S.C. has recently published an employment law FAQ on various workplace issues, a primer on Force Majeure clauses, a review of the Family First Coronavirus Response Act (FFCRA), and an unemployment insurance overview.  Our clients have reached out with a myriad of questions regarding ancillary issues associated with running a business during this pandemic.  Because the lessons learned by some could be invaluable for others, we will continue to try to address and share those lessons with our clients and our community.

Topics Covered

This article addresses the following questions:

1. What is the difference between furloughs, layoffs, terminations, and what other rules concerning reductions in hours or pay should employers be considering?

2. What employee benefit concerns are implicated by the various reduction in hours issues facing employees.

As employers wrestle with determining the financial and operational impacts to their businesses from COVID-19, one of the most difficult questions employers are facing is determining how to maintain their labor forces during this difficult time.  Various government resources have already been made available to employers via the FFCRA that will hopefully enable employers to retain their employees on at least partial pay.  Additional government resources and programs are currently under construction to assist with this effort, but in the meantime, employers are being bombarded with information regarding employee terminations, layoffs, and furloughs, and what those decisions might mean for their businesses (and the employees themselves).  Our firm has already touched on some of the communications and discussions employers should be having with employees right now here, but a greater discussion is needed on what, specifically, the consequences of those decisions will entail.

1. Terminations, Layoffs, and Furloughs, Pay Cuts, and Reduced Hours.

Many employers are desperately trying to figure out replacement revenue streams for business lost due to the Coronavirus pandemic.  In the absence of immediate and clear government or private financing alternatives, employers are left looking to quickly cut costs.  As employee compensation and benefits is one the largest cost-centers for almost any business, employers are understandably looking for ways to trim their staff and associated costs.  Understanding the difference between terminations, layoffs, and furloughs, as well as an employer’s rights with respect to decreasing employee pay and hours, will be critical for employers in order to make an informed decision.  Employers should remember that there is not a formal legal definition of any of these terms and that they should be viewed as a continuum of choices.  The important part is being consistent when speaking with advisors and employees about the matters addressed below.  Relatedly, please keep in mind that the following is general guidance and employers should work directly with their legal professionals to determine how these issues apply to any given set of circumstances.

Furloughs, Pay Cuts, and Reductions in Hours

A furlough is when an employer requires employees to work fewer hours or to take a certain amount of unpaid time off.  The required reduction can be severe.  For example, an employer can tell an employee that no work is available and that the employee should stay home on unpaid leave for the next month.  In such a situation, it is common element of a furlough that the employee can remain on their employer’s group benefits (i.e., health insurance).  The employee may be responsible for his/her share of the premium or the employer can decide to pay the employee’s share during the furlough (which may also be refundable under the new Coronavirus response legislation).  Alternatively, the reduction can be mild.  For example, an employer may furlough its nonexempt (hourly) employees one day a week for the next two weeks and pay them for only 32 hours instead of their normal 40 hours each week.  That said, employers must be careful when furloughing exempt (salaried) employees to avoid jeopardizing the employee’s exempt status under the Fair Labor Standards Act (FLSA).  As a practical matter, furloughing an exempt employee over the course of a full workweek will generally insulate the employer from liability, since the FLSA states that exempt employees do not have to be paid for any week in which they perform no work.  However, furloughing an exempt employee for a partial week will be ineffective as salaried employees must be paid their entire weekly wage for any week in which they do any work.

Direct cuts in employee pay is another tool available to employers under the banner of “furloughs.”  Unless an employee is a protected by an employment contract or a collectively bargained agreement, their employment is likely covered by “at will” status, and therefore requiring an employee to reduce his/her hourly rate is legally permissible.  Standard non-discrimination and minimum wage considerations should be kept in mind, as well as certain timing issues (i.e., changes must be made prospectively rather than retroactively, changes should be made at the start of a new pay cycle rather than mid-pay period, etc.).  However, the general idea of furloughs is that everyone bears the burden of a cut rather than the employer engaging in mass terminations or layoffs.  As with reductions in hours, employers must also be careful in reducing the pay of salaried exempt employees to avoid FLSA issues, but generally these concerns are easily addressed.

Layoffs and Termination

A layoff is a temporary termination from employment, usually where there is not enough work to be performed.  Though the intention of layoffs is that they are temporary measures, they still constitute a termination of employment and employees do not have a specific right of rehire.  Much like termination, employees are typically able to collect unemployment benefits and are terminated from the employer’s group employee benefit plans (though continuation rights via COBRA and state programs may allow the employee to stay on the plans).  Layoffs implicate both federal and state employee notice laws which Neider & Boucher, S.C. has addressed in the linked blog above.  In many cases, these notice requirements will not necessitate action by the employer, but a review of both state and federal regulations is strongly encouraged.

If the employer decides that an employee(s) will never be able to return to work, the layoff becomes permanent and becomes a termination.

2. Employee Benefit Issues.

Use of Accrued Vacation, Sick, and Other Paid Time Off

When the decision is made to layoff or terminate an employee, questions arise regarding whether the employer must pay out accrued sick, vacation, or other paid time off (PTO).  In Wisconsin, employers are not required to provide employees with vacation benefits, either paid or unpaid. Employers may prospectively freeze employee PTO accrual policies during periods of economic difficulty.

If an employer chooses to provide such paid leave benefits, the employer must comply with the terms of its established policy or employment contract in accordance with Wisconsin Statutes Section 109.01(3).  Therefore, employers should carefully review the policies that have been communicated to their employees before rushing to deny or withhold PTO payments.

In furlough and even in layoff situations, employers may desire to force employees to use accrued PTO benefits before providing any other compensation to the employees.  Generally speaking, this type of policy with respect to nonexempt (hourly) employees is permissible, but the decision to implement this policy should not be taken lightly.  For one, the employer’s existing policies may not permit this employer action and the sudden implementation of this policy may be viewed as a form a wage theft by state regulatory agencies.  Additionally, other federal, state and local regulations may prohibit or impose consequences that would undermine or hinder the employer’s goals.  For example, the new FFCRA prohibits employers from forcing employees to utilize accrued PTO prior to or during the employer’s utilization of the Public Health Emergency Leave and Emergency Paid Sick Leave for certain Coronavirus-related absences.

For exempt employees, except as prohibited by law, the employee’s employment contract, or the employer’s policy, imposing a mandated PTO use policy is similarly acceptable.  However, because of the nuances of the FLSA, exempt employees are entitled to payment of their full salary during any workweek in which they work (including even minimal tasks like checking email).  Therefore, if an exempt employee exhausts his or her PTO during the middle of a workweek, the employee must be paid a full salary for that week (there are ways that a furlough policy can work around this requirement, but the nuances are beyond the scope of this article).

Employee Benefits

Another significant concern for employers is how a furlough, layoff, or termination decision will impact employees’ entitlement to participate in the company’s employee benefit plans (group health insurance policy, dental policy, etc.).  Generally speaking, group benefit plans are dictated by the terms of the specific plan’s policy materials.  As such, employers should review the terms of their  Plan Document and Summary Plan Description, general policy document, certificate of coverage, initial group insurance application, etc. and work with their insurance carrier, broker, and legal professionals to understand the employer’s responsibility with respect to the employee and each plan.  The following discussion focuses on group health insurance plans for Applicable Large Employers and small businesses, so where the term “plan” or “policy” is used, keep in mind this refers to a group health insurance plan.

  • ACA Benefit Eligibility Issues for ALEs

Generally speaking, most plans dictate eligibility based on the number of hours worked subject to the requirements of state and federal regulations such as the Affordable Care Act (ACA).  The ACA’s “Employer Shared Responsibility” (ESR) provisions apply to Applicable Large Employers (ALEs), those employers with more than 50 “full-time equivalent employees.”   ALEs are permitted to follow standard benefit eligibility requirements for their full time employees, but have specific rules for employee eligibility when it comes to Variable Hour Employees (VHEs).  ALEs are permitted to utilize the “Look-Back Method (LBM) (a fairly complex system in which the ALE adopts separate measurement, administrative, and stability periods) for determining VHE eligibility and dictating whether VHEs can stay on the plan when their hours are reduced.  Under the LBM, if an employer determines that a VHE is eligible to enroll in the plan (the employee averages 30 hours per week during the employer’s measurement period) and the employee does, in fact, enroll in the plan, the VHE must be allowed to remain on the plan even if his or her hours drop below 30 hours per week.

If an ALE chooses not to adopt the LBM, the ALE defaults to what’s called the “Monthly Measurement Method” (MMM).  Under the MMM, each VHE’s hours are measured monthly and if the employee averages 30 hours per week in a particular month, the employer must allow the VHE to enroll in the plan, and if the VHE then averages less than 30 hours per week in a subsequent month, the VHE may be removed from the plan and offered COBRA.

  • ACA Benefit Eligibility Issues for Small Employers

For non-ALE employers, employee eligibility will be dictated by the terms of their plan documents.  For most such employers, when an employee drops below the necessary eligibility threshold (actively working and averaging 30 hours per week), or if the employee is furloughed completely and is not working at all, the employer can decide whether to keep the employee on the plan or terminate the employee from the plan, subject to any continuation rights through such programs as COBRA or similar state-based continuation.

For both ALE and small business owners there are business and legal considerations to keep in mind when deciding whether or not to terminate an employee from a group insurance plan.  The simplest and safest approach is to terminate the employee from the plan and offer him or her the ability to re-enroll through COBRA or a state continuation right, as applicable.  In such a situation, the employer can agree to pay the employee’s premium during the absence, certain notice documents must be provided, and the employee can be brought back onto the plan normally once regular working conditions resume.

On the other hand, many employers may desire to keep the employee actively on the plan to retain the good will and connection to the employee so that once this pandemic is behind them, the employee will be well-positioned to promptly return.  Various “breaks-in-service” rules under the ACA and state law complicate what rights employees have once terminated from employment or off the group insurance plan for any significant amount of time.  Also, employers may wish to take advantage of the tax credits afforded employers under the FFCRA for paying for their employees’ share of the insurance plan premiums.

However, keeping employees who do not necessarily meet the eligibility requirements of the plan runs the theoretical risk that the plan’s insurance carrier, when faced with a large claim from an enrolled employee, will conduct an audit of the claim and deny coverage to the employee once his or her ineligibility is discovered.  This concern is somewhat addressed by the horrendous publicity an insurance company would face from such decision in this time of pandemic.  That said, it is still a legitimate concern.  Employers who would like to keep laid off employees on their benefit plans should discuss this with insurance carriers to see if they will agree to waive certain eligibility requirements.

Disability Policies and Paid Sick Leave

Many employers carry employer-paid group Short Term Disability (STD) and Long Term Disability (LTD) policies in the event that their employees suffer a significant injury or disability, impairing their ability to work.  Most STD and LTD policies cover bona fide disabilities that require medical certification and prevent an employee from working.  Where employers have furloughed their employees because of a government mandate or a lack of work, it is unclear whether such STD and LTD policies would apply.  That said, STD and LTD benefits almost certainly apply in circumstances where an employee who could otherwise be working contracts COVID-19 and develops a bona fide disability such as hospitalization.  Therefore, it is critical employers review these policies carefully and be in regular contact with their insurance carriers and benefit brokers to understand the policy nuances.

FFRCA; April 2, 2020; and Tax Credits for Employee Payment

The FFRCA is set to take effect on April 2, 2020.  Neider & Boucher, S.C. recently posted an article on the new FFCRA but, by and large, the tax credit and wage/benefit refund incentives outlined in the FFCRA may not be applicable in any of the situations discussed above.  For example, the 12 weeks of Public Health Emergency Leave (2 unpaid weeks, 10 paid weeks) applies to situations where an employee could be working but cannot because they are caring for a child whose school or daycare has been closed.  Additionally, numerous employers have inquired as to whether wage and benefit payments made prior to the effective date of the legislation are reimbursable in accordance with respect to its Paid Sick Leave or Public Health Emergency Leave provisions.  The short answer is that we cannot say with absolute certainty whether otherwise qualifying paid leave incurred by an employer prior to April 2, 2020 would qualify for these tax credits.  We will continue to monitor as this legislation and regulator guidance develops, but close and frequent communications with your legal and tax professionals will help to keep you as informed as possible.


This article was authored by Attorney Joseph Camilli, a graduate of the Hamline University School of Law, practicing business and employment law as part of Neider & Boucher, S.C.’s business team.  Attorney Camilli was recognized as a 2019 Up and Coming Lawyer by the Wisconsin Law Journal.

The guidance provided above is general in nature and readers are encouraged to reach out to Neider & Boucher, S.C., or to their own legal counsel to determine the applicability of these issues to their own personal and/or business needs.