This article was originally published on Entrepreneur, and is adapted from Desmond's original guest post.
The term "furlough" comes from the dutch word verlof, which originally referred to the leave given to soldiers. So it’s fitting that during this global health war, furloughing is top of mind for many business owners. Here’s a Google Trends chart for the word “furlough,” showing how interest has spiked over the years, most notably recently:
Clearly, both employers and employees are interested in learning more about what it means to furlough employees, or be furloughed. But before leveraging this particular leave for your employees, here are some key legal aspects to furloughs that you should know.
Read: Confused about the difference between laying off or furloughing? Check out this handy guide.
1. Furloughed employees can’t be “engaged to wait”
Furloughed employees can actually still work for your business; you just need to pay them for their time worked. For example, some employers might furlough on a two weeks on, two weeks off schedule. But what employers must be careful of is having furloughed employees specifically wait on work. This is called “engaged to wait,” and is considered working.
For example, asking someone to stay by their computer “just in case I need you to do something,” can be considered engaged to wait. After all, the furloughed employee is basically being asked to “be on call.” Even if the employee has been furloughed, and even if the task takes only a small amount of time, they are being engaged to wait and must be compensated for the time worked.
This is why it is important to be very clear with furloughed employees that when they are off, they should not work at all, unless it is the employer’s specific intent to pay them. In light of this, managers should consider restricting any remote access to work email or files, in order to prevent any work from being conducted during this time.
2. Furloughed employee health benefits depend on your company’s policy
Many recent articles say that furloughing employees is a good way to keep them on your company’s benefits plan including health insurance, but that’s not necessarily true. Your specific policy dictates whether that is the case or not.
Key point: Many health insurance plans will only fully cover “full-time employees,” and depending on your furloughing situation, employees may no longer have enough hours in a month, quarter, or year to qualify as full-time. Business owners should check with their health insurance provider to see if furloughed employees can be covered at their reduced hours.
Furthermore, if a group of employees are furloughed and no longer meet the requirements of your health insurance plan to stay covered, this most likely triggers a COBRA qualifying event. Depending on each business's benefits package, owners might be on the hook to subsidize COBRA for furloughed employees, which can be a hefty expense. So before furloughing, review your company’s policy on whether the employer or employee or both subsidizes COBRA.
Side note: under the Affordable Care Act, employers must offer health insurance that is affordable to 95% of their full time employees, or face a penalty. So as long as any furloughed employees are considered full time, your business has an obligation to provide health insurance. More information here.
3. Furloughed employees could see 100% vesting of 401k plans
This is a good question to ask your 401k plan provider: Does furloughing X percent of my employees trigger a termination event that causes full vesting? According to IRS rules, a 401k plan becomes “partially terminated” when 20% or more of plan participants are terminated from employment (ie. laid off). This means the 401k plan will fully vest for the affected employees, including any and all employer contributions made.
While a furloughed employee is not a terminated employee, a mass and prolonged furlough could trigger partial termination of the plan. This is why employers should inquire about this with the 401k plan provider.
Why does this matter? The entire point of a 401k vesting period is to incentivize employees to stay loyal to a business for years. If the plan vests overnight due to partial termination, then some tenured employees have less reason to return when the furlough ends.
It’s also worth noting that 401k plans usually need to see 1,000 hours worked by an employee to be considered a participant for that year. In case of a long furlough, that might be impossible. Check with your plan provider to see if they can make an exception during this crisis if your business expects a lengthy closure.
4. Furloughed employees can work temp jobs in the meantime
Just because they’re not working for you doesn’t mean they can’t work somewhere else. Furloughing your employees always comes with the risk of them finding new full-time jobs, but they can also find temporary work during the furlough period without violating the furlough (unless you have a prior agreement in place, such as a noncompete). Additionally, they are not required by law to tell you about it.
Performing other work will affect furloughed employees’ unemployment benefits status, of course. They will have to report earnings which might offset or entirely cancel any unemployment checks. While this is up to the individual employee, business owners might want to inform them of this.
When the furlough ends, employees are expected to return to work. At this time, managers are allowed to make sure they don’t somehow have two jobs if disallowed by company policy. But until then, you don’t have any say in any employment they may engage in.
5. Furloughed employees might have to be paid overtime if they work
Remember the two weeks on, two weeks off furlough scenario above? There are many ways to furlough, and certain combinations may turn salaried (exempt) employees into hourly (non-exempt) employees. And that means they might be entitled to overtime pay where you must pay them more for hours worked.
The Department of Labor doesn’t want employers to try and be sneaky by “furloughing” employees to just certain days or weeks they are needed. So if they see salaried employees who all of a sudden have a changing amount of pay week-to-week (and if its also under $684 per week), they will consider them hourly and subject to overtime pay laws.
So if your business has some furloughed employees working here and there during this time, it’s best to have them work full weeks at a constant pay rate. Even reduced, as long as the pay rate is constant throughout, and above $684, they will not be considered non-exempt.
It’s not at all a bad idea to furlough employees during this economic shutdown. It’s a smart way to retain good talent, keep up morale, and keep employees on important benefits. Just make sure you do your HR due diligence before furloughing in case of any unexpected business ramifications.
For more information on how your business can deal with the impacts of the coronavirus pandemic, check out our resource center.
Desmond Lim is co-founder and CEO of Workstream, an automated hiring platform for companies hiring hourly workers. He is a graduate of Harvard and MIT Media Lab, former product manager at WeChat, and investor at Dorm Room Fund. He is based in San Francisco and lived in Palo Alto with his wife and two young daughters.