What to Do with Your Staff if Your Business Temporarily Closes: Salary Reductions, Furloughs and Layoffs

COVID-19 is forcing an unimaginable number of small businesses to lay off their teams without much notice. And since 94% of hourly workers are unable to work from home during a forced closure, it can be impossible to continue doing business when your team can’t work.

Going through a forced closure is hard on all fronts, but especially when it involves upending your employees’ lives through layoffs, furloughs, and reduced pay. 

Here at Homebase, we recently made the extremely difficult decision to proceed with a layoff. The economic impact of the COVID-19 outbreak has greatly impacted our customers and thus hit our business. In going through the process ourselves, we evaluated many paths. We want share our learnings with you, so that you are informed about your options and can make the best choices for your business and team.

This article will help you understand the pros and cons of each approach when you’re deciding what to do with your staff during a forced closure. Use this information as a starting point—and then consult with an employment lawyer to get advice tailored to your situation.

What are my options when I have to close my business?

There are three terms used interchangeably when businesses have to close because of a shelter-in-place order: furlough, layoff, and reduction in force. And there’s no standardized definition for the first two. 

In order of less permanent to more permanent, you can choose to go down the following paths if you’re in this situation:

• Ask your employee to take time off: This is when you require employees to use accrued PTO or help them to see if they qualify for emergency paid leave outlined in the Families First Coronavirus Response Act (FFCRA). This is good for your employees because they will still get paid during this time of limbo.
• Temporarily reduce your team’s hours or salaries: If you still have work available, you can cut people’s hours or salaries and refocus their roles based on what your business needs right now. However, some states have notice requirements related to salary reductions that would make this hard to do. This also depends on whether your employee is exempt or nonexempt, which brings along other considerations.
• Furlough your team: A furlough is a short-term loss of someone’s job, which is basically a forced unpaid leave that allows the person to remain employed and they keep their benefits. There’s an expectation that you’ll bring them back to full-time after a period of time. Furloughs can be extremely difficult for employees because they effectively lose their pay, which can be a big hardship. However, in many states, furloughed employees would qualify for unemployment benefits. If however, you are unable to rehire this person, you will need to officially terminate their employment at a later date.
• Layoff (aka Reduction in Force):  A layoff is a termination—a permanent loss of someone’s job. If you’re optimistic that you’ll reopen once the pandemic is over, you can tell them you are optimistic that you will be able to rehire them (be careful of over committing here). But you don’t have any obligation to rehire them if you go this route.

Before I dig into each scenario, let’s talk about how the new Coronavirus Aid, Relief, and Economic Security Act (CARES Act) impacts your options.

The Paycheck Protection Program and SBA loan forgiveness

Under the Paycheck Protection Program, a small business that can keep their employees on payroll during the pandemic, is eligible to receive 2.5 months of low-interest loans. 

These loans will run retroactively from February 15 to June 30, 2020, and the maximum loan amount is $10 million, or 250% of an employer’s average monthly payroll.

When used for payroll costs, rent, utilities, or mortgage interest, the loans will be forgiven—meaning you won’t have to pay them back—if you’re able to keep your team on payroll or hire them again once you open. 

The Act also includes tax credits for businesses that retain their staff during COVID-19.

Each of these incentives from the CARES Act should be weighed as we walk through the options below.

Staff options during COVID-19 business closures

Here are how the different options stack up against each other: 

	Pay	Employer-sponsored health benefits	Unemployment benefits	Employer tax benefits under new COVID-19 laws
Asking team to take paid time off	Full	Yes	No	FFCRA, CARES Act
Cutting shifts, reducing hours or salaries	Partial	Maybe	Maybe	FFCRA, CARES Act
Furloughs	None	Maybe	Yes	No
Reduction in Force	None	No	Yes	No

Asking your team to take PTO

• Pros: Your employees will still be employed and getting paid.
• Cons: It doesn’t help you if your business is having cash flow issues.

Forcing your team to use their PTO means they still get paid. However, keep in mind that with the FFCRA that goes into effect on April 1, they may be entitled to emergency paid leave without having to exhaust their existing PTO.

However, if they take paid leave under FFCRA, you may be able to be reimbursed for 100% of the cost.

Temporary pay reduction

• Pros: Your employees will still be employed and getting paid, even if it’s less.
• Cons: Your employees will lose out on pay.

Cutting shifts and pay can be a temporary way to alleviate cash flow issues when you have to quickly close. 

If you offer employee benefits, you have to make sure your team doesn’t lose their eligibility for benefits if you reduce their hours. Contact your health plan provider to learn more, since some medical providers will waive the 30-hour-a-week eligibility threshold in light of COVID-19. 

Some workers will be eligible for partial unemployment benefits for the hours they would typically work. Since unemployment benefit rules differ by state, check with your state so you can be prepared to advise your team.

Furlough

• Pros: Your employees will still be employed. Your employees may be eligible for unemployment compensation and may remain eligible for employer sponsored benefits.
• Cons: Your employees are in a state of limbo, and they can lose a significant amount of pay. Your employees may end up quitting.

Companies go this route when they can’t afford to keep paying staff but don’t want to lose them entirely. Like with all of your options, you need to be sure to document your rationale for which employees are selected for the furlough, and you should be careful that your decision does not have an adverse impact on any protected classes of employees.

A furlough is forced unpaid leave that can be as short or as long as you set. Employees can be furloughed in short-term increments, such as weeks or days, or for several months at a time. And you don’t have to furlough all of your employees at once. 

Here are some of the differences to keep in mind when reducing pay or furloughing non-exempt vs. exempt employees:

• Nonexempt employees: If an hourly employee works while on furlough, you have to pay them for the hours worked. You can reduce a nonexempt employee’s wages and hours, but you need to make sure their wages are above the minimum wage requirements in your area. Some regions with predictive scheduling laws may require you to give advance notice, which may not be possible in these circumstances. 
• Exempt employees: Employers need to be especially careful to remain in compliance with the Fair Labor Standard Act (FLSA) when furloughing exempt employees as there are some strict rules about how exempt employees are paid. Typically exempt employees are paid on a weekly basis and thus would be entitled to their standard weekly pay even if they were furloughed for part of a week. When furloughing exempt employees it is best practice to do so in weekly increments that align with when they are paid.

Should you choose not to furlough your exempt employees, but rather reduce their weekly pay and possibly hours, make sure it doesn’t go below the FLSA minimum salary threshold for exempt workers, which is currently at $684 a week. Don’t forget to also check your state’s regulations, as some states have higher minimum salary thresholds for exemption.

Employees can’t continue working while on furlough. To ensure this, employers typically revoke access to work email and company communication accounts. 

In some states, furloughs mean that you have to comply with final paycheck requirements. Check with your state labor department to see if that’s the case.

You can choose to cover medical benefits while furloughing your team, paying just the employer portion or both the employer and the employee portions of the premiums. 

Paying the full premium is helpful to employees since furloughs are unpaid, and it may be hard for people to cover their portion of the benefits premiums when not earning wages.

In some states, furloughs may make your employees eligible for COBRA if they lose group health coverage.

For more details on what to think about in terms of benefits coverage during a furlough, check out this guide from Sequoia.

Layoff

• Pros: Layoffs are hard, period. But if you have no other option, this is your option. Your employees will likely qualify for unemployment compensation.
• Cons: Layoffs are complicated and involve a lot of legal and HR implications. You’ll have to recruit and rehire a totally new team if and when your business bounces back.

To protect your decision, first determine the criteria you’re basing your decision on. Is it because you don’t anticipate your business will be able to open after the COVID-19 pandemic is over? Or that you don’t have enough cash to tide you over until your business reopens or you receive financial assistance?

Make sure you’re clear on the reason why, since there may be less severe routes you can take.Laying off employees is the most severe step you can take when dealing with a temporary closure.

A layoff is a complete termination, where employees lose their jobs and their benefits eligibility. However, you can offer terminated employees a severance package and possibly COBRA if they’re eligible.

Once you’re positive a layoff makes the most sense, create criteria for who the layoff will impact and how employees will be evaluated. Are specific positions being eliminated? Is it based on tenure or seniority? Or perhaps role potential for when your business opens? In other words, a server might not be able to work, but a cook can if you’re offering delivery. 

Analyze that list and see if there are any trends that emerge. Then, document your decisions and rationale. You need to be careful that a layoff is not impacting any one protected class of employees more than others, because you don’t want impacted employees to file a discrimination lawsuit. And if anyone does file a lawsuit, you will want to refer to that documentation.

What happens to my team’s health insurance during a furlough or layoff?

If you have to make a COVID-19-related job cut, be careful of unknowingly eliminating your team’s benefits eligibility. 

Typically, getting in touch with your plan provider will be the easiest way to determine this. You can also refer to your plan documents to look at your team’s eligibility requirements.

Some providers are bending eligibility rules because of COVID-19, allowing more access to group health coverage even if the “actively at work” hours are below the limit. 

Is there anything else I need to think about?

The WARN Act

If you have 100 or more employees, you may be required to give 60-days notice if you’re laying off 50 or more people under the Worker Adjustment and Retraining Notification (WARN) Act.

Read more about potential WARN Act requirements here. Many states have their own state specific WARN acts with differing requirements, so be sure to review the requirements in your state.

Additionally, with the impact of COVID-19, some states such as California have modified their WARN requirements to be more favorable for employers who need to move quickly and may not be able to adhere to the required notice periods.

Employment contracts

If you have an employment contract, some of the options listed above may violate any guaranteed pay or PTO obligations spelled out in your contract. Review your employment contracts and talk to an HR professional if you’re in this situation.

_____

When figuring out what to do with your team when you have to close your business, it comes down to one question: Do you think your business is going to survive COVID-19? And if not, what if you receive the federal aid coming through the CARES Act or the paid leave tax credits in the FFCRA?

If that’s not enough, you may want to furlough your employees while you figure it out and wait for financial help to come through. But if you don’t see a way forward, it’s better to be clear and upfront with your team so they can collect benefits, look for work, and move on.

Remember, this is not official legal advice. If you have any questions or concerns about salary reductions, furloughs, or layoffs, be sure to consult an employment attorney.