More companies turn to furloughs to save money, jobs

Adam Jadhav will film a humorous video that he'll post on Shelley Cox will finish the classroom observation hours needed for her elementary education license. Rebecca Evans will refurbish her bathroom before taking a boat trip off the coast of North Carolina. The activities vary, but each of these folks has the same reason for their free time: Employers forced them to take a short, unpaid leave.

To curtail costs while avoiding the strain of layoffs, companies, colleges and state governments are mandating temporary hiatuses, commonly known as furloughs. RV-maker Winnebago Industries, the state of California, the University of Arizona and USA TODAY parent Gannett are among dozens that have used this tactic to save millions in payroll and other expenses.

"Furloughs are really coming under much greater consideration by employers," says Julie Gebauer, managing director at human resources consulting firm Towers Perrin.

Historically, industries such as heavy manufacturing, retail and airlines have furloughed employees when demand for their products or services slowed. But a growing number of other sectors have put this option on the table when analyzing ways to slash expenses, she says.

And more are expected to.

Window- and door-maker Pella recently reviewed a range of cost-cutting options, including layoffs, and went with four-day workweeks and one-week furloughs for a portion of its hourly employees.

It was a hard decision, says human resources Vice President Karin Peterson, but layoffs would have had "a significant impact" on morale and the company culture. With the unpaid leave, Pella saves money, and employees keep their jobs and benefits.

"We're making decisions that impact (workers) and families," she says. "The options that we're taking aren't the lowest-cost, but they're a balance between the needs of our business and the needs of our people."

Employees given one-week furloughs are eligible to apply for unemployment compensation in some states.

"People aren't getting the hours, and they're not getting the compensation, and unemployment is only a portion of what one can earn," Peterson says.

Paychecks may be pared, but most folks on leave still have to cover monthly expenses such as food, utilities and child care. Those who want to do something ambitious with the free time — such as tackling nagging do-it-yourself home repairs — still have to pony up for supplies.

"As a single mom, this is gonna hurt quite a bit," says Evans, who works in marketing.

She also echoes the sentiments of many when she says, "But I'm just happy to have a job."

Better than layoffs

It's a tough break, but furloughed employees could have it much worse, says Marion Crain, an employment and labor law professor at Washington University in St. Louis.

Employees are often "upset and angry" when they first hear about the unpaid leaves, she says. But they're better off than many who'll be handed pink slips or forced to take less pay for the same amount of work.

More than 3.6 million people have lost jobs since the recession began in December 2007. And 7% of the 245 U.S. companies surveyed by employee benefits consultancy Watson Wyatt Worldwide have sliced worker salaries.

Furloughs are "actually a job-saving action by the employer," says Crain.

Yet, the motivation behind furloughs is not entirely altruistic, says Gebauer. Employers who have temporary hiatuses rather than layoffs save on severance costs, as well as future rehiring and retraining expenses when an economic turnaround eventually comes.

Many of those employers will dramatically reduce payroll expenses with the furloughs. For instance, furloughs and salary reductions for Maryland state employees are scheduled to save the state more than $34 million during the 2009 fiscal year.

Some companies have furloughs because layoffs just aren't an option.

Winnebago has already had "significant layoffs," says spokeswoman Sheila Davis. "When you reach a certain point in your employee base, it is important to preserve your corporate structure so that when the market returns — which we know it will — we will have the employees and resources to respond."

Furloughs are not simple to implement, says Doug Christensen, a partner in Dorsey & Whitney's Labor and Employment law practice group in Minneapolis.

There're a bevy of complex legal issues that companies must navigate, he says, such as:

•Firms need to check for any pre-existing employment agreements that will allow workers to claim that they were "legally promised" certain pay per week, month or year.

•Firms with so-called exempt, or salaried, employees must be careful in how they structure the leaves to make sure that the furlough is not done in a way that converts those exempt workers into non-exempt employees who could try to claim overtime pay.

•If an exempt employee performs any work at all during a week-long furlough — such as answering an e-mail that comes through a work BlackBerry — he or she is owed the entire week's salary.

Sinking morale

In addition to legalities, employers also have to worry about staffing levels and about how workers will react.

"Morale is in the gutter" in Atlanta, where firefighters have been forced to take furloughs that reduce their work hours and pay by 10%, says Jim Daws, president of Local 134 of the International Association of Fire Fighters.

Response teams are understaffed, he says, making for a "greatly increased" risk for citizens — and firefighters — to get hurt. Many of those firefighters are also exhausted because they're working second and third jobs for extra cash, he says. "It's a terrible situation."

Pella created a communications plan and brought in state unemployment staff to answer benefits questions. But even with those steps, "There's going to be some level of morale deterioration whenever you have conditions like these, because there is fear," says Peterson.

Clemson University in South Carolina, which began five-day leaves on Dec. 1, took an unusual approach to ease some of the strain. It set up a "Furlough Relief Fund" to support those "who face the most severe financial hardship" during their leaves.

More than 300 donations totaling $71,363 came from faculty, staff, students and trustees. Individual amounts ranged from $2 to $5,000. Fund managers looked at factors such as salary level, total household income and family size before distributing money to 158 employees.

Some businesses are running promotions to ease the furlough sting. Last Friday, the Ikea in West Sacramento offered a free breakfast (eggs, bacon, potatoes and coffee that sells for $1.98 normally) to furloughed California state workers. Twice a month, Squaw Valley USA ski resort in Lake Tahoe offers the state workers a lift ticket for $30 instead of the regular $79 price.

Gaining momentum

More furloughs in more industries are likely.

Nearly one in 10 employers expect to implement a shortened workweek within the next 12 months, according to a study by Watson Wyatt. Another 6% will force mandatory furloughs, and 9% say they'll have voluntary furloughs.

Fire union chief Daws expects the firefighters' furloughs to extend beyond the initial cut-off date of June 30. "It doesn't look like there is any end in sight" to Atlanta's financial woes, he says.

But company executives and workplace experts don't expect mandatory furloughs to remain a commonly used cost saver once the economy recovers.

In addition to the "tricky" legal rules that apply to furloughs, they can also raise "significant morale issues," says employment lawyer Christensen.

Pella, which is keeping the option of more mandatory furloughs open for now, would rather go with voluntary furloughs, as it has done in the past.

It's better "to give people some control over their destiny," says Peterson.

As for the mandated furloughs, "My preference is to not always have to go there. … But as an alternative, it's certainly better than mandatory layoffs," she says.

TELL US: Have you had to take an unpaid furlough? What did you do with the time?