Options to Reduce Costs for Employers Navigating Economic Uncertainty

What’s the difference between a furlough and a temporary layoff?

From a legal perspective, there’s no difference. Employers who need to temporarily remove employees from the work schedule can use either term. It’s important to ensure that employees are paid in a timely manner, and the timing of payment depends on the duration of the break in service.

The California Labor Commissioner’s office considers a break in service lasting beyond the current pay period to be a termination. This triggers the requirement to pay out all final wages, including accrued and unused vacation, on the employee’s last day of work. Additionally, the employer should provide the employee with standard termination paperwork, such as the Notice to Employee as to Change in Relationship form and the Employment Development Department’s (EDD) For Your Benefit pamphlet.

Some employers may also use the term “furlough” to refer to a reduced weekly work schedule. In this circumstance, the employer should provide affected employees with EDD’s Notice of Reduced Earnings form, as they may be eligible to receive partial unemployment insurance benefits to cover some of their lost wages.

What is work sharing and how does it work?

Work sharing is an alternative to layoffs that allows employers to reduce employee schedules while also granting those workers the ability to receive partial unemployment benefits. For example, rather than lay off 20 percent of employees, an employer could reduce every employee’s hours and wages by 20 percent. Depending on the employees’ wage rates and length of employment, the EDD would potentially make up some of the lost wages for those workers through partial unemployment benefits. Doing this results in the employer receiving a similar fiscal effect as a complete layoff but avoiding permanently losing those employees to other businesses.

An employer must meet several criteria to be eligible for work sharing:

• At least 10 percent of its workforce (and a minimum of two employees) must suffer at least a 10 percent reduction in hours and wages;
• Health and retirement benefits must remain the same; and
• Comply with several notice and reporting requirements.

Employers can learn more about work sharing and the detailed requirements for eligibility on EDD's website.

Can I reduce my exempt employees’ hours and salaries on a prorated basis?

In general, exempt employees must be paid a flat salary for any week in which they perform any work. However, during the 2009 recession, the Division of Labor Standards Enforcement (DLSE) issued an opinion letter stating that an employer could reduce exempt employees’ hours and salary on a prorated basis, if:

• The reduction in hours and salary is temporary and done to avoid layoffs; and
• The exempt employees’ compensation remains above the minimum salary threshold.

Employers should still consult with legal counsel prior to reducing exempt employees’ hours and salaries. Because the 2009 opinion letter was specifically written to address the 2009 recession, and the DLSE has not officially retracted it, it’s possible that it would come to a different conclusion today. Additionally, courts are not required to follow DLSE opinion letters, so a judge could find an employer’s plan invalid, even if it’s consistent with the test outlined above.

Businesses can, however, reduce exempt employees’ wages if they perform no work in a workweek (again, their wages must remain above the minimum salary threshold). But this only applies for full week absences — employers should ensure that exempt employees aren’t performing small amounts of work, even checking emails and voicemails, while they are off the schedule.

I’ve reduced my employees’ hours, but some are now requesting to use sick time for the days they’re off work. Is that possible?

Paid sick leave (PSL) is available for the diagnosis, care or treatment of a health condition, or for preventative care for employees or certain family members. If an employer allows employees to use PSL for other reasons — such as to replace lost wages during a company shutdown — the PSL will be treated as Paid Time Off. If that occurs, the PSL will be considered vested wages and subject to payout at termination.

Additionally, PSL is generally only available for days employees are scheduled to work. If an employer permits employees to take PSL on days they are temporarily off the schedule, nothing will stop other employees from requesting PSL on their regularly unscheduled days, such as weekends.

What are the legal criteria for selecting employees for layoff?

In all termination decisions, employers must be nondiscriminatory; they cannot take adverse action against employees because of protected characteristics, nor can they terminate in retaliation for engaging in any legally protected activities.

Beyond those basic requirements, employers can follow their own company policies when it comes to selecting employees for layoffs. Objective standards — such as terminating employees with the least seniority or shutting down entire departments — are the most straightforward. If employers intend to use more subjective standards, such as terminating the lowest performing employees, it’s helpful to have documentation of poor performance in case the employees claim that they were terminated for illegal reasons.

Finally, employers should use caution if they choose to terminate their most expensive employees. Often, these employees have the most seniority, and employees over the age of 40 are protected against age discrimination. Even if unintentional, employers need to avoid any terminations that appear to be based on membership in protected classes.

How do I handle a mass layoff?

California’s Worker Adjustment and Retraining Notification (WARN) Act requires employers with more than 75 employees to provide affected workers and state officials with at least 60 days’ notice of a mass layoff, relocation or termination. The WARN Act defines a “layoff” as “a separation from a position for lack of funds or lack of work.” Mass layoff is further defined as a layoff during any 30-day period of 50 or more employees.

Employers whose reduction in force meets those requirements must provide notice to the affected employees, their union representatives, the EDD, any local workforce investment boards, and the city and county government officials for the communities where the layoff will occur.

Some WARN Act exceptions are for faltering companies or unforeseeable circumstances. Otherwise, employers that violate the WARN Act’s notice provisions can be liable for back pay to affected workers as well as civil penalties of up to $500 for each day of the violation.

After a layoff, do I have to prioritize my former employees when I’m ready to rehire?

Only limited categories of employers are required to offer laid-off employees the first chance at rehire. In 2021, the California Legislature created a “right to recall” for workers laid off for COVID-19-related reasons. This law applies to hotels, certain private clubs and event centers, airport hospitality operations, and building service providers, such as janitorial and maintenance. It is scheduled to sunset at the end of 2025.

For all other employers, no law requires they rehire laid-off employees before opening jobs up to new workers. However, employers should still ensure that their layoff/rehire process doesn’t give the appearance of discrimination. For example, if an employer laid off several employees who were over 40 years old, and then a month later rehired younger employees for those same positions, the older workers could claim that the layoffs were merely a proxy for age discrimination.

Employers who want to hire new employees soon after layoffs can limit liability by documenting the need for different workers. For example, a restructuring of operations or a major new client in an industry unique from that previously served may require employees with new skill sets.

CalChamber’s Labor Law Helpline allows our Preferred members and above to discuss a broad range of employment law-related issues with an employment law expert plus it gives us insight into the current issues our members are facing to allow us to better serve member needs.