Employee Furloughs Can Be a Bad Alternative to Layoffs

Feb 9, 2009
This article is part of a series called Opinion.

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 part of a series called Opinion.