Receive daily articles & headlines each day in your inbox with your free ERE Daily Subscription.

Not logged in. [log in or register]

Employee Furloughs Can Be a Bad Alternative to Layoffs

by Feb 9, 2009, 7:16 am ET

You can’t read a newspaper these days without reading about organizations that are implementing employee furloughs in order to save money and to avoid layoffs. They might seem like a good idea but they might end up not saving money at all and could cause more turmoil than they are worth.

This article will cover the many problems associated with putting employees on furlough, or a temporary leave of absence or temporary layoff and a “lower-impact” alternative to permanent layoffs.

Under furlough programs, employees are asked or forced to take days off without pay. The net effect is a reduction of an employee’s annual income. Furloughs are being used in a variety of industries from healthcare and education to transportation and high technology.

Firms that have deployed them recently include newspaper giant Gannett, network appliance superstar Cisco, computer chip maker Intel, the state of California, Arizona State University, and the #1 car maker in the world Toyota.

While the tool may be popular and widely used, that doesn’t make it effective or the best choice.

Managers Lack Courage to Make Tough Decisions

Firms use furloughs instead of layoffs because they lack the courage to look individual employees in the eye and terminate them.

The key to any effective salary-savings program is to target the individuals who add little value compared to their salary. The process of selecting low-performers can cause turmoil among employees, so managers take the easy way out by cutting a portion of the salary of every employee.

In my view, managers get paid to make tough decisions, not to avoid them.

This “peanut butter” approach where you spread the pain evenly might seem like a good socialist type idea, but if your goal is to maintain a high level of organizational performance, furloughs can cause more problems than they solve.

Potential Problems with Employee Furloughs

Not all furlough programs are exactly the same, but in general, here are some of the many issues or problems that they can cause:

  1. Cost savings? Although they are designed to save money, most furloughs save a lot less money than actual layoffs would. During furloughs, employees receive either a reduced wage or no wage, but their employee benefits (up to 40% of salaried), equipment costs, office costs, etc., continue. Many organizations have units that require certain staffing levels (i.e., hospitals) or 24-hour service providers. In those situations, you will be forced to pay expensive overtime (or to hire costly contract replacements) to make up for individuals who are out on furlough that day. As a result, the net savings is less than most reductions in force. If your organization also freezes construction projects, the weather damage and the pilferage that occurs during the delay might cost you more than the actual labor savings from the furlough.
  2. The workload doesn’t decrease. Just because an employee doesn’t come to work doesn’t mean that someone else will do the work for them. It merely means that there will be more work “piled up” when they return from their furlough days. The net result is that employees have to do the same amount of work in less time. Obviously this formula increases employee stress, customer wait time, and error rates.
  3. Top performers deserve better. Treating everyone equally might seem fair, but actually, it’s not fair to top performers. They have done an excellent job, delivered tremendous value for the organization, yet are punished the same as poor performers. In other words, if you had a choice between furloughing Tiger Woods and Homer Simpson, would you actually furlough them both? Wouldn’t you want your top performers there everyday? It’s also important to realize that top performers differ from average workers in that they are in constant demand. Regardless of the economy, top performers have other job opportunities. A better practice would be to reward your top performers by permanently releasing the bottom performers so they don’t have to work alongside them. Incidentally, the idle time off during furloughs is an opportune time for all employees to look for another job where performance is rewarded. Incidentally, furloughs unfairly frustrate high-performing and mission-critical business units because they are treated (punished) the same as the slacker business units. In the same light, business units with a short-term impact and focus are damaged, while units with a long-term focus (who could stand some delays in the short-term) receive the same level of cuts. Again failing to offer pinpoint cuts demonstrates bad management decision-making.
  4. Turmoil. Most organizations fail to adequately explain why the furloughs are needed, and none promise that they won’t be repeated. Both the talk of furloughs and their actual execution is always a major distraction to employees. Both will cause stress and anxiety, but more importantly the amount of inner office discussion, rumors, and gossip will increase to the point where it will be hard to get any work done. Pinpoint layoffs are painful but they’re over quickly and they don’t drag out the pain and turmoil.
  5. It’s not really a short-term solution. While furloughs are billed as short-term solutions there’s plenty of research to show that they don’t always forestall layoffs. What you end up getting is short-term turmoil and then the same layoffs that you probably should have done in the first place. Stretching out the pain with the same end result isn’t a sign of great management.
  6. Angry customers. Reduced staffing levels anger customers. You have reduced their service but not the fee that they pay. In a competitive marketplace, some customers either can’t or won’t wait, so you’ll lose them to someone else that is fully staffed. Organizations that constantly strive for great customer service can kill their “brand image” quickly as a result of the turmoil caused by a work furlough program. Delaying sales calls and customer complaint resolution translate into lost business opportunities that might never return. Customers aren’t stupid; they read about furloughs in the paper and they can sense turmoil and reduced service levels.
  7. Product quality. Reduced workloads affects product quality. Reduced staffing levels and having your best people “out that day” will likely increase error and accident rates and it will hurt your brand image.
  8. Innovation. If your organization requires continuous innovation in order to compete in a fast-moving environment, furloughs are a bad solution. The disruption and uncertainty that they cause will kill any innovative spirit almost immediately. Because your key generators will be facing the same workload with less hours to complete it, their innovation levels will go to zero. It’s hard to plan ahead and think of innovations when your job security is up in the air.
  9. Job search. The uncertainty by this short-term solution is likely to cause most of your employees to go into “job search mode.” Some of this is likely to be on company time, further decreasing productivity.
  10. Recruiting will be damaged. Because most furloughs are publicized, potential candidates will certainly think twice about joining the organization. Referrals will likely go to hell because your employees will be reluctant to refer anyone into the current state of turmoil. All of this will likely damage your external employment brand image as a “well-managed” organization and the cost of repairing it will be huge.
  11. Teamwork. Project deadlines don’t change because of furloughs. Because some furlough programs allow individuals to take their “time off” during different time periods, teamwork will deteriorate. Projects that require all team members to be there at the same time will suffer dramatically. If a manager is on furlough, poorly supervised employees are likely to do undesirable things during their absence. Because your experts will be available for fewer hours, costly consultants might have to be hired to supplement their normal workload. If your organization conducts research or experiments, reduced staffing levels may kill or damage them.
  12. Lawsuits. Many furloughs will be challenged or stalled by lawsuits from unions and others that feel that they were “legally promised” a certain amount of pay per year. The costs of the lawsuits must also be factored into your ROI equation.
  13. Scheduling. Furloughs are a nightmare to scheduling managers. If individuals are allowed to select their own days off, the amount of time that managers would have to devote to scheduling in order to keep the workers happy, as well is to maintain performance, would be significant.

An Example

Imagine if your organization was the Arizona Cardinals right before the Super Bowl. Under the standard furlough program, your star quarterback Kurt Warner might be absent during one day of practice when your star receiver Larry Fitzgerald is there.

Both would wonder why they are being punished both in preparation time and in salary, when the smarter move would have been just to release the poor performers (the third string quarterback and wide receiver). If the trainer was on furlough, injuries would increase and last longer. The turmoil that the furloughs would cause before the game would strap morale and concentration. The fans that expect the very best would be frustrated and obviously team performance would suffer. Both would probably leave the team as soon as possible to go to one that was managed better and offered stability.

How much would that cost your team compared to the proposed salary savings?

A Better Solution Is Workforce Planning

Most crisis decisions can be attributed to poor workforce planning and weak management. Business revenues seldom fall off “overnight,” so the best managers identify “precursors” (warning signs) and act before things get out of hand.

Unfortunately, most HR departments have painfully weak workforce planning capabilities, so they don’t alert decision-makers in enough time to come up with an effective plan. The net result is that weak executives make truly dumb “peanut butter” decisions to institute hiring and pay freezes, voluntary buyouts, and furloughs.

The workforce planning solution is simple and straightforward. Develop a process that pinpoints poor performers, low-impact jobs, and no longer needed skills well in advance of any crisis. Then a percentage of the workforce must be made contingent (i.e., part-time or contract employees). Then when costs increase or revenues decrease, these contingent workers are easily scaled.

Should the need for larger cost-reductions occur, managers must pinpoint terminations where they have the least impact on performance and the highest impact on cost reduction. That means selecting and terminating individual low-performers, individuals with non-mission-critical skills, and reducing the workforce in low-impact and low-performing business units.

Final Thoughts

There is no weaker area within talent management than workforce planning. This problem, coupled with the fact that managers and executives are literally “afraid” to make tough termination decisions, result in the widespread use of many ineffective cost-reduction approaches that end up doing more harm than good.

They often institute these programs for the silliest of reasons. For example, one newspaper chain instituted work furloughs because “that’s what Gannett did.” Managers will continue to make these uninformed decisions, in part, because talent management executives make little attempt to institute metrics to prove which “labor cost reduction” approaches actually work.

Because managers refuse to collect data, you’ll have to take my word for it. A majority of the organizations that have recently instituted employee furlough programs will have to institute a second round of cuts or layoffs before the year is over. Sad but true.

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.

  • http://infohrm.com Bill Gilmyers

    In today’s challenging economic environment I’ve talked to many managers who insist that now is not the time for workforce planning. Things are happening too quickly, they insist, to do anymore than simply try to stay ahead of the next round of bad news. In fact, as Dr. Sullivan indicates, nothing could be further from the truth. Obviously, those organizations that already have strong workforce planning processes have a distinct advantage now, having already identified those core jobs and skill-sets necessary to succeed. This allows them to ensure that decisions around layoffs address the business cycle in the short-term while giving due consideration to the strategic objectives of the firm in the long-term.

    That said, even companies that have done little or no workforce planning will be well served in using the current economic downturn as an opportunity to identify which organizational roles will be fundamental to the growth of the business when the economy ultimately begins to recover, or even if it doesn’t. Using workforce planning techniques to match a company’s demand for employees with projected supply, and developing proactive strategies to address any gaps is a critical responsibility of HR in bad, as well as good, times. Doing so enables firms to make informed and strategic decisions when forced to cut staff, as opposed to taking the proverbial “peanut butter” approach that cuts not just fat from the organization, but muscle and bone as well.

  • Bryan Baldwin

    Well reasoned argument. Two big challenges to implementing this sound approach for those of us in the public sector:

    1) It usually takes a small novel reviewed by an entire legal team to get someone fired.

    2) Order of layoff is often determined by seniority, not job performance.

    One could easily argue that what is really required in many public organizations is system-wide reform. The efforts we’ve seen to try to do that lately have met with mixed success.

  • http://www.thehiringsite.com Mary Lorenz

    I wish you’d offer more examples of these ineffective cost-reduction programs and the “silliest of reasons” managers are choosing furloughs. No one thinks their reasoning behind tough decisions is silly until someone points it out. Perhaps if you could offer more concrete examples of these ineffective cost-reduction programs (and why they are so), it might stimulate managers to recognize the faults within their own orgranizations, reevaluate their programs and implement better workforce planning.

    One more note: For all the literature out there about the ultimate costs of (and alternatives to) layoffs, cuts and furloughs – businesses continue to do these things in droves. What gives? Is it that people seems like many either refuse to listen? Refuse to believe it? Or are they simply taking a “we’ll cross that bridge when we get there” approach?

  • Joseph Slevin

    John, thanks for the great in depth article on furloughing employees, especially your emphasis of the same by the top organizations.

    I would like to add, though, that these are supposed to be cost saving measures across the board. I would imagine the CFOs just love the idea that the major liability of vacation time is reduced greatly across the whole company, since employees would most likely be required to take vacation time.

    Additionally, I would imagine that over the last few years these companies have cut through re-engineering, right sizing and related projects. The high performers in these companies already are stretched beyond what was considered normal work. Eliminating the under performers should be limited to those whose work would not negatively effect the work and performance of those higher performers.

    Basically, companies like Toyota and Cisco, who have eliminated non performing units, may be hoping that things turn around for the whole organization that is currently underperforming across the board.

    Where furloughing really hurts is in customer service and repair related services. Additionally, there must be a law of diminishing returns. Just like companies that cut costs to manufacture products in much lower cost environments. Although you can hire 10 or more possibly there than in the Western countries, more often than not, those 10 can never afford to buy the product they are manufacturing, so, here we have a lose/lose scenario.

    I think the above companies have to have considered they are close to the bone and have reduced in the past to what they feel are optimum levels. Any more could create even more work force problems.

    Joe Slevin
    http://www.linkedin.com/in/joeslevin

  • Steve Delaney

    Here the author states an oft sited Machiavellian position on the premise here is that sharing the burden of a tough economic climate through “temporary furloughs” is not fair to “top performers” and that management is simply too spineless to cut dead wood, and cut deeply.

    His main statement is that “the key to any effective salary-savings program is to target the individuals who add little value compared to their salary.”

    But, there are countless reasons Top Performers ARE sacrificed in every downturn; and cause for concern if you find yourself still on the corporate payroll.

    At the end of the day you may find that you have in fact been “left behind.”

  • Steve Delaney

    rephrased…

    Here the author shares an oft sited Machiavellian premise that sharing the burden of a tough economic climate through “temporary furloughs” is not fair to “top performers” and that management is simply too spineless to cut dead wood, and cut deeply.

    His main statement is that “the key to any effective salary-savings program is to target the individuals who add little value compared to their salary.”

    But, there are countless reasons Top Performers ARE sacrificed in every downturn, and cause for concern if you find yourself still on the corporate payroll; wheather furloughed or not. In either case, at the end of the day you may easily find that you have been “left behind.”

  • James Huether

    Normally I like your comments, and with this issue, I understand you make many good points. However I think one thing you miss is that we are in a very unique situation these days. Once a person gets laid off, they won’t be hired back, and as one person stated, lay-offs usually are done these days more by age of the employee than anything else. Furloughs allow temporarily for less people to lose their jobs, and allow for a bit of sharing the pain. I agree that in the long term it may not be a good solution, but currently, I think it is a humane way to keep people working. Let everyone make a little less income, so more of us will at least have a job and not have to go into the ever-growing pool of people who are starting to lose everything.

  • Merlynn Bertini

    I have to diagree with most of what was said in this article–given the present economic conditions. Does anyone really believe there are fewer angry customers after a layoff? Given the current economic conditions, I find it hard to believe that furloughs are going to put employees into a “job search mode” and a layoff will make employees want to stay? While I am a very strong proponent of workforce planning, the article takes a very narrow view of the current economy.

    Additionally, what was not addressed is how top performers respond when a lay-off/RIF occurs–and that is a reduction in productivity. There was a very good ERE article last December which addressed the issues of decreased productivity and confirmed what many HR people already knew–that employee productivity declines after a layoff.

    Merlynn Bertini

  • Pingback: Links 02/10/2009

  • Sherman Gandee

    This is the first time I have ever responded to any article online but I have grown tired of the authors constant HR bashing in his articles I have read. I think he has been away from the front lines too long and it is easy to take pot shots from the ivory tower! What triggered this response was comments like; managers lack of courage to make tough decisions, their unwillingness to look someone in the eye, they don’t do manpower planning.
    I would venture to say that many if not most of us HR people have been through countless downsizings, terminations and the like where we personally had to deliver the bad news! However, when you have already cut your organization to the bone where everyone left is an excellent performer then you do what you have to do to survive. If someone feels punished, it could one of 3 problems; you have not looked them in the eye and explained the seriousness of the situation, they could care less about their co-workers, or they could care less about the company. Temporary furloughs have worked well for us.

  • Pingback: BlogERP Links 02/10/2009 « Competitive intelligence on e-recruitment SaaS Vendors

  • Joseph Slevin

    Is there any reason why there are blog links with no comments on them? I understand wanting to link to an article to get your thoughts out there, why not have the blog quoted or something or the whole article if it is your blog with a link? Joe Slevin

  • A Will

    I think Dr. Sullivan brings up some good points but I think many of them only apply to very specific situations. Running through his list:

    1. Sure, if you have to hire temporary replacement workers to cover your furloughed staff then you won’t save much money – that seems pretty obvious. And if a furlough is going to allow your construction site to get ransacked you might want to avoid that.

    2. I think many companies are considering furloughs because their workload has decreased. Maybe they anticipate it increasing again in the future and the cost of laying people off and then hiring new people is greater than a short furlough. Either way, if the workload would pile up as a result of a furlough then doing layoffs will have the same impact – more work for the people remaining.

    3. This is a pretty good and a tough one to figure out. While top performers are important, many businesses rely on the second tier performers as well and if you alienate all of them you could get in trouble.

    4. For many organizations layoffs will cause the same turmoil as a furlough. Just like with a furlough, no company is going to promise that there won’t be more layoffs.

    5. Is the author saying furloughs never work? I’m sure there are plenty of times when furloughs are followed by layoffs – just like many times layoffs are followed by more layoffs – but I don’t see what that invalidates the idea of a furlough.

    6. Once again, I’m not sure how layoffs don’t have the same (or worse) impact on being “fully staffed”. If you do layoffs you’re permanently not fully staffed. Obviously, there are some businesses where a company-wide furlough for any duration would have a huge impact on customers – I assume those companies would do staggered furloughs or consider other options. I don’t think a customer would decide to take their business to a company that did layoffs instead of one that did a furlough.

    7. I think this is the same as point #2 and has the same issues – if you do layoffs your best people will have that much more on their plate, which would negatively impact product quality.

    8. Again, I think doing layoffs would give the remaining staff as much uncertainty as a furlough would. If you do layoffs these innovators will be facing a larger workload with the same number of hours – is that better than the same workload with fewer hours?

    9. Seriously, I don’t understand why a furlough is a short-term solution but layoffs are a long-term solution. Both situations freak out the employees.

    10. Same thing – would people refer candidates to a company that just did a round or two of layoffs? Many places, when they do layoffs, target the more recent hires – seems like a scarier situation than a furlough. No doubt, in either case you’re going to run into problems with recruiting but I really don’t see why a furlough would be worse than layoffs.

    11. This seems silly – you wouldn’t implement a furlough program that then forced you to hire expensive consultants to cover your missing employees. Does anyone do that? Of course that’s a bad idea. Also, won’t teamwork suffer when you lay off half the team? Seems like you’re better off working on the project knowing that your teammates will be back soon to help out.

    12. I don’t know much about this one.

    13. I think if your business has complex scheduling needs then you would need to implement a furlough program that can accommodate those needs.

    The example the author gives is entertaining but does nothing to support his position. First of all, if the team fired the third receiver they would have been without 6 catches and 71 yards in the game. Without the third string QB their preparation for the game would have suffered. Wouldn’t they have been better off doing a one-day furlough of the entire team? Why can’t a furlough program be tailored to the organization?

    I guess my main point is that there are certainly many drawbacks to doing a furlough and I’m sure there are many situations where a round of layoffs is a better plan. However, I don’t think you can make the blanket statement that layoffs are always the better approach.

    I think there’s a lot of value in keeping a good team together. If your team is made up of similarly performing members (i.e. not a couple of super stars and a handful of duds) then sharing the pain with the hopes of having the team intact when business picks up again seems like a valid approach to take.

  • Pingback: HRM Today - Blog Archive » When Anxiety Over Layoffs Won’t Lay Off

  • Pingback: Think Strategically About Your Workforce « Infohrm’s Weblog

  • Pingback: Do furloughs even work? « My unions, CSUEU & CFA!

  • Pingback: 5 Ways to Stay Focused at Work | Shecky's

  • Pingback: Furloughed employees | Calicastillo