Times have become uncertain in almost every industry. This has required employers to make difficult decisions. Working from home has allowed some employers to continue to do business as usual but this is not possible in every type of business. Two options for cutting back on staff are furlough and layoff. Both of them have implications for the employer and the employees impacted. Depending on the state your business is in, you will have different tax and accounting considerations.
What Is A Furlough?
A furlough is a temporary layoff from work. From the employee's perspective, it usually means there is an assumption that at the end of the furlough the job will still be there. From the employer's perspective, it means that you won’t need to hire and retrain employees when the reason for the furlough is resolved. Furloughs might look like:
- Less hours per week
- Working every other week
- A number of mandatory or voluntary weeks off
In an uncertain economic atmosphere, it is not easy to estimate the exact time that a furlough could last. There are many reasons a furlough might occur.
Reasons for furloughing employees
- Decrease in demand for products or services
- Not considered an essential business
- Financially a good idea to maintain fiscal viability
- Workplace needs to be sanitized due to virus risk
Implications of furloughing employees
- May impact federal CARES ACT Employee Retention Tax Credits on qualified wages
- Union Employees collective bargaining agreements
- Exempt Employees under the FLSA may result in wage/hour claims
- Raise in the unemployment tax rate
- Some states consider furloughs termination of employment and final pay obligations must be met
- Many employees retain benefits
- If medical insurance is not retained then COBRA must be offered in a timely manner
What Is A Layoff?
Layoffs are more permanent terminations of employment. During the coronavirus pandemic, employers are generally choosing this course of action for economic reasons more than for the reason an employee was not doing a good job. Many laid-off employees will eventually go back to their jobs but there is no guarantee the business will be able to survive the enforced closure. The money usually isn’t there to support maintaining staff.
Under normal circumstances, employees must receive warning of a mass layoff. The WARN Act has certain requirements for notification of not only the employees who will be impacted by the layoffs and the appropriate local and state officials as well. The size of the business and the percentage of affected employees are a part of the criteria. The rules have been relaxed due to COVID-19 and the unprecedented impact on certain industries.
When an employee is laid off, they become eligible for unemployment from the state in which they reside or where they perform the work if that happens to be different. During this time of the coronavirus, The CARES ACT also provides for an increased federal unemployment benefit. The state payment will affect the unemployment tax rate of the employer but the federal payment does not impact the rate charged.
When an employee is laid off, it is considered a termination of employment and all outstanding benefits must be included as a part of the severance package.
- Unpaid earned vacation time
- Severance pay (if required by the state where the business is)
- Union employees may have collective bargain requirements for severance pay
- COBRA must be offered in a timely manner
Dealing with the fallout from having to furlough and/or lay off employees may cause long-term financial implications. The COVID-19 pandemic has changed the way many companies are doing business. A knowledgeable accounting firm is your best source of information. At Chandler and Knowles CPAs, we are here to provide the information you need, along with any new changes occurring due to pandemic-related policies being passed by lawmakers. Contact us today.
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