How to Help Clients Conduct Layoffs and Furloughs While Mitigating Their Risk
Economists predict the unemployment rate could hit as high as 20 percent before we see relief, the highest rate since the Great Recession. So, where do accountants fit in to help business clients during this unprecedented time?
While job losses during the Great Recession were mostly gradual, after COVID-19, we have seen this occur in a matter of weeks and no one can say with certainly what the recovery will look like.
Faced with a steep drop-off in business, many companies are having to make tough decisions just to keep the lights on. That is why it is important that in addition to honestly and accurately accounting for layoffs and furloughs for clients, that accountants act as trusted business partners, ensuring compliance where possible and identifying opportunities to improve cash flow.
To that end, here is a brief overview of some best practices that accountants should be aware of for businesses conducting layoffs, reducing hours, or furloughing employees so they can help clients manage their finances, ensuring compliance and avoiding risk of legal action and still keep the needs of the “person” in mind.
Avoid Layoffs With Remote Work
It seems like whenever times are tough for business, payroll is the first area to receive cuts. But given the impact on company morale, not to mention the risk of lawsuits associated with job losses, businesses should at least entertain other ways to reduce costs and retain talent. This is where the accountant’s intimate understanding of their client’s or company’s numbers can help.
With so many employees already working from home, for instance, accountants could analyze the potential cost savings of having some or all office employees work from home permanently and bring those analyses to clients. With commercial office leases typically composing anywhere from two to as much as 20 percent of a business’s revenue, there is unquestionably prime opportunity here to reduce expenses. Whatever leadership decides, just bringing these ideas to their attention helps demonstrate the value you or your firm bring to the business.
Consider Furloughs Before Conducting Layoffs
From a staffing perspective, furloughs are often the best option — for those businesses that can afford it — as having staff on standby can help companies get back to normal operations quicker. But that is not the only reason to consider furloughs over layoffs.
Unlike layoffs, furloughs actually reduce labor costs immediately, without adding new costs such as severance packages and cash payouts. That is a major benefit to companies facing cash flow shortages.
There is a downside, though, which accountants should be aware of when proposing this option to clients. Furloughs can be quite tough on employees — in some ways, even tougher than layoffs.
To ease the burden on employees resulting from their paycheck suddenly vanishing, firms should ensure that clients who opt for furloughs encourage employees to apply for unemployment benefits on the first day of their temporary leave. This action ensures employees receive the maximum compensation possible. Additionally, employees should be reminded that even those who use up their vacation time or personal time during the furlough may still qualify for unemployment benefits.
Furthermore, accountants should make clear that just because furloughs allow companies to avoid the costs associated with layoffs, that does not furloughs are completely “free” either. For instance, per federal law, businesses that institute furloughs lasting one or more full workweeks do not have to pay salaried, overtime-exempt employees their usual weekly salary. However, if the furlough lasts less than a week, and any salaried employees have worked at all that week, the employer must pay those employees their full weekly salary.
Handling Pay Cuts
Some other popular options used to avoid layoffs are reducing employee hours or instituting pay cuts. While employers in most places have the authority to reduce scheduled hours for hourly employees, the story is a little more complicated for salaried employees, as employers are not allowed to reduce weekly hours to reduce compensation for exempt employees. They must pay exempt employees the same amount for each pay period, regardless of how many hours they put in.
What employers can do is have exempt employees work fewer pay periods, while still paying them in full for each pay period they work. Take it from the Department of Labor: Employers are allowed to make a “bona fide” reduction of an exempt employee's salary "during a business or economic slowdown" as long as that reduction is not related to the "quantity or quality of work performed.”
However, these deductions from salaried employees’ pay should not be determined on a day-to-day or week-to-week basis, the fact sheet states. And the employer must continue to pay the employee at least the minimum weekly salary requirement (set at $684 on the federal level; individual states may have higher requirements) for the employee to retain their exempt status.
Ultimately, even with these stopgaps available to them, there are companies that will need to resort to layoffs to stay afloat. But companies intending to implement widespread layoffs should go into the with their eyes open with regard to the risks and negative effects it may have on their business. Accountants educated on the matter can help make sure clients understand these risks.
For one, employees who are laid off are far less likely than furloughed workers to return. That could make it hard to find qualified staff to perform key duties when the business is allowed to reopen.
And then there is the issue of deciding whom to lay off. To avoid actual or perceived discrimination, businesses should proceed carefully through selection process. A classic approach is last in, first out. But if a company does not have a specified policy like that in place, that does not mean leadership should randomly lay people off or let people they do not like go.
Another way to ensure layoffs are conducted on solid, defendable grounding is to align layoff requirements with the company’s goals and vision. Company leaders should thoroughly evaluate the positions and individuals that are unlikely to play a significant role in the company’s future, and layoff those employees first. Ultimately, no matter what approach the business takes, decisions should be made on objective, numerical grounds wherever possible.
It is essential to consider the potential for implicit biases or bad data in the selection process. That is why once leadership has made their selections about whom to lay off, the list should be carefully reviewed for disparate impact on employees who fall in one or more protected classes.
The list of individual characteristics considered to fall under a protected class varies from state-to-state, but a broad definition would include:
- gender expression
- sexual orientation
- national origin
In some places, even political affiliations are characteristics that cannot be used as grounds for either hiring or firing.
It Never Hurts to Double Check
This article is hardly comprehensive of every single compliance, or employment, risk that businesses will face when attempting to scale back payroll costs as there are far too many to possibly list here. Obviously, the more you know about compliance the better and knowing when to rely on HR experts may an important way to avoid possible missteps.
Your clients will ultimately appreciate the extra effort to ensure the best decisions are made during this tumultuous time.