Furlough: What Does It Mean For Your Finances?

Read more on our COVID-19 Resource Guide

Sometimes in an attempt to save their organization, business owners may lay off their employees. Or some — especially so given the financial effects of COVID-19 — have implemented temporary layoffs like furloughs.

If this is your situation, do you know how it might affect you? We’ll explain exactly what a furlough is, and how it might change your financial situation.

Furlough is a temporary unpaid leave of absence for full-time and part-time employees due to economic conditions affecting a company. During tough economic times like a recession, many businesses decide to furlough employees instead of laying them off or eliminating jobs.

Doing so offers companies the opportunity to save on expenses. That way, jobs can be saved while being able to remain competitive in their industry. Considering labor costs such as employee benefits and payroll make up a huge part of a company’s overhead costs, it’s seen as a fast and easy way to cut back.

Both furloughs and layoffs are designed to help preserve a business’s capital by cutting back on overhead costs. The reasons for both can be the same — whether there’s a lower demand for certain products and services or an event like COVID-19 affecting all businesses.

The main difference, however, is that a furlough is a temporary move, whereas layoffs are permanent.

There are other main differences between the two, mostly to do with the availability of benefits.

Furlough

Think of a furlough as a forced unpaid leave of absence from your job. When the furlough period is over, there’s an expectation that you can return to your job — your employer will keep the position open as long as you want it back. Depending on your employer, being furloughed could mean that you’re not working at all, or it could mean you’ll experience reduced working hours.

Since it’s a temporary move, employees may be able to keep employee benefits such as their 401(k) accounts and health insurance benefits. It’s best to check with your HR department, as different companies have different policies on what coverage they maintain.

Layoff

A layoff is a permanent move, where your employment is terminated. The reason generally has nothing to do with your work performance. Instead, it’s based on factors such as downsizing, company restructuring or going out of business.

Once laid off, your position or job isn’t guaranteed, though you may be able to be rehired. It also results in a loss of employee benefits such as company-provided health insurance – though there are ways to continue coverage.

Depending on the company, laid-off employees may be eligible for severance pay. Plus, they’re also eligible for unemployment benefits – requirements may differ from state to state.

Here are some questions you’ll want to consider if you’re being furloughed.

Do I Still Have A Job If I’m Furloughed?

Yes, you still technically have your job. Depending on your employer, your furlough period will be different (though you’ll probably know ahead of time). However, once it’s over you may return back to your job.

Can I Seek Other Employment During A Furlough?

You can look for another job during a furlough, but the ability to take another position will depend on the contract you currently hold with your company. For example, if you signed a noncompete agreement, you can’t take on another position with a company that’s in the same line of business. Some agreements don’t allow any additional employment. All this to say, if you’re trying to get a temporary job, it’s best to let your HR department know and they can advise you what actions can be considered a breach of contract.

Otherwise, you can get another job. For many, this means a short-term position at retail or grocery stores, where management knows that you may be there temporarily. Such positions offer the opportunity to supplement your income. Now if you got hired for a permanent position and you want to leave the job you were furloughed from, you’ll need to officially quit, and file all required paperwork.

Can Furloughed Employees Collect Unemployment?

Employees who have been furloughed can apply for unemployment benefits – these are administered at the state level. To apply for these types of benefits, you’ll need to contact the unemployment office or department from your state. You can usually file in person, online or by phone. Some proof you might need includes recent pay stubs and your Social Security number.

If you’re struggling to pay bills while waiting on unemployment benefits, there are other ways to seek financial help during COVID-19. This includes talking with your creditors and lenders about your financial situation and working on a payment plan. In some cases, you may be able to defer your payments for a predetermined amount of time.

Can I Make Up For Certain Benefits After The Furlough Period is Over?

This depends on your employer and the type of benefits you receive. For example, some employers offer a 401(k) contribution match. In this case, an employer may allow you to increase your contributions once the furlough period is over so you can take advantage of the employer contribution.

Some employers may keep paying for your health benefits even if you can’t cover the employee portion. After returning to work, you may need to make arrangements to pay back the amount owed if you can’t do so with your next paycheck.

What Should I Do If I Receive a Furlough Notice?

Employees who receive a notice or letter through their employer should review all information carefully, including the time period you’ll be furloughed and benefits you’ll still receive. Don’t forget to stay in touch with people in your company, especially your manager and supervisor, in case there are any new developments. Same goes for the HR department if you have any questions.

Perhaps most importantly, ensure that your contact information on file is up to date so that your employer can reach you.

The truth is that furlough periods are difficult, even more so if you don’t have a backup source of income like a sizeable emergency fund to draw from. Sure, it’s good that you’ll have a job to go back to, but in the meantime, you need to find some way to take care of yourself financially. That’s why it’s important to understand your rights, such as what benefits you’re entitled to and whether you can take on temporary unemployment.

Even if you have some savings to last, it’s still a good idea to learn more about securing your finances during COVID-19 such as going on a reduced budget or applying for any benefits you qualify for. Hopefully your furlough doesn’t last long, and you can return to work soon.