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Furloughs: A Way To Lay Off The Layoffs?

As companies look for ways to cut costs, a growing number are turning to non-traditional, more creative approaches to meet their goals.

Furloughs – or time off without pay for a temporary period - are topping the list right now.

Why? Because they address some of the problems that layoffs can create.

First, cutting too fast and too deeply into organizational muscle creates risks for a company’s long-term health, especially after the decade-long struggle some have had finding and keeping talent. It’s impossible to predict when we’ll climb out of the recession, but when we do, the return to growth will be harder, and take longer, if an organization is running too lean in key areas. Second, the actual savings from cutting staff are often not what they seem. There are hidden costs involved – including severance payments, early retirement benefits and rehiring – that only become clear over time. Last, and perhaps most critically, layoffs can take a big toll on an organization, eroding employee engagement and morale.

Furloughs, by contrast, help reduce costs and keep people engaged and productive, while retaining agility for the future.

For example, an employee might be required to take off five days without pay each quarter, thereby reducing the company’s compensation costs by about 8% with no offsetting increases today or in the future. The company maintains a full complement of talent to move quickly when the economy strengthens. And employees are reacting surprisingly well.

Recent Towers Perrinresearch suggests that employees understand their fate is closely intertwined with that of their company and there is a new sense of “shared destiny” in succeeding together. Most employees are willing to share the pain to help both their employer and their co-workers. They’d rather take some amount of unpaid leave than watch colleagues lose their jobs. Beyond that, furloughed employees maintain benefit coverage, which is increasingly important today. And for some, furloughs provide “found” time for family, volunteer work, or continued education.

Implementing a furlough instead of laying employees off signals that management cares about employees’ well being. They’re saving jobs for the long-term benefit of all employees. They’re saying unambiguously “we’re all in this together.” This is particularly the case if a furlough is mandatory and across the board – from the executive floor to the plant floor. Decades of Towers Perrin research support the notion that employees who feel they are being led by a caring, competent and committed executive group are far more likely to do what it takes to help their company through tough times.

There are some complexities in designing furloughs, including the level of flexibility feasible for salaried versus hourly employees, possible eligibility for unemployment payments in some situations and clarity and communication around ongoing benefit coverage. But most of these are easily addressed with careful technical review and involve less organizational time and effort than a layoff or significant cutback in benefit programs.

Of course, furloughs are just one tool in an organization’s cost-cutting arsenal. Decisions about where and how to reduce costs depend on a range of criteria, including the magnitude of current financial challenges, probable near and long-term revenue and profit projections, competitive issues, longer-term strategy and talent implications. Many organizations will need to use a mix of both traditional and nontraditional methods to get through this crisis.

But it’s heartening to know that as of last December, almost a fifth of U.S. employees we surveyed – including those in the retail, chemical, high tech, and media sectors as well as heavy manufacturing – reported that their companies were using furloughs to some extent by reducing hours and pay proportionately. As this approach gains more acceptance, we should see a growing number of organizations that have saved jobs, kept people positively connected to the company and engaged employees in expending discretionary effort for the long-term success of the company.

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Julie Gebauer is Towers Perrin Managing Director, leads the Workforce Effectiveness practice and the firm's organization research business and the author of "Closing the Engagement Gap."