Furlough vs. Layoff

Furloughs and layoffs are two ways employers address the problem of not having enough work or enough budget for their employees. However, a furlough is meant to be temporary, while a layoff is more likely to be permanent.

How Furloughs Work

A furlough can be structured in different ways and have different causes. Here are a few:

• Your employer tells you to stop working completely for a month. A major contract has been delayed, and there's no work for you to do. They still expect the contract to come through, and then you'll go back to your usual schedule.
• Your employer tells you to take four weeks of unpaid vacation, one per quarter. There's an overall reduction in work that's expected to continue throughout the year.
• Your employer says you now have Fridays off until further notice. Business has slowed down, but they still want you around on a regular basis.
• Your employer isn't reducing your hours or pay. However, they are requiring you to use all your paid time off by the end of the year.

What to Do When You're Furloughed

The good news about being furloughed is you may not need to look for a new job. Employers often implement furloughs to spread a reduction in work across employees because they want to keep those employees.

The bad news is that you may still have enough work—or a strong enough promise of future work—that you can't easily make up for the pay you're losing and don't want to invest a lot of time in a job search. However, the extra time could also allow you to explore a job change or pursue additional education or training that you were already interested in but didn't have time for.

Maintaining Your Income

See if your employer will allow you to use paid time off during your furlough. Using PTO can reduce the hit to your income. It also means you'll have less (or no) PTO when you return to your regular schedule, but maintaining your income may be a more urgent concern.

If your employer allows it, picking up freelance, independent contractor, and gig worker jobs can be helpful for filling short-term gaps in employment or reductions in hours, especially if you're still getting benefits from your employer. But the income may be less predictable, and the change may disrupt your routines. On a more positive note, you might enjoy the change of pace, make more money than you expected, or find a different type of work you like better.

Taxes

If you take on a side hustle during your furlough, you will be responsible for paying your own income taxes, since there's no employer tax withholding on this type of work. You may need to learn how to make quarterly tax payments. Also, some employees may not be allowed to perform other work during a furlough, particularly for a direct competitor. Find out what your employer's policy is, and then verify its legality.

Retirement Contributions

During a furlough, you may not be able to contribute to your workplace retirement plan or receive a matching contribution from your employer. Keep in mind that you can use an IRA to make retirement contributions on your own behalf. If money is too tight to make those contributions now, you can wait until closer to the federal income-tax–filing deadline to decide if and how much you want to contribute.

Back Pay

Some furloughed employees may receive back pay once the furlough ends, particularly federal government workers who are covered under the Government Employee Fair Treatment Act of 2019.

How Layoffs Work

Layoffs are more straightforward than furloughs. Your employer will let you go completely, and you will have no work at all. You will need to look for a new job if you want to keep working. Being laid off means that you haven't done anything wrong; your employer simply no longer has enough work for you. It's not the same as being fired for cause.

You have a reasonable expectation of being rehired in several months if you work in one of these industries where seasonal layoffs are common:

• Tourism
• Hospitality
• Agriculture
• Retail
• Farming
• Hunting
• Fishing
  

What to Do When You're Laid Off

The bad news about being laid off is that you'll almost certainly need to look for a new job. You will also want to immediately look into applying for unemployment benefits.

Find out what tax benefits and public assistance you may be eligible for, such as the Earned Income Tax Credit, Savers Tax Credit, Child Tax Credit, and health insurance subsidies. You've paid into these systems as a tax-paying worker. Now it's your turn to use them.

You may also be able to get relief for many of your bills. Look into food banks, utility bill assistance, rent or mortgage payment relief, student loan forbearance and income-driven repayment plans, free healthcare clinics. While the United States is not known for its social safety net, you might be surprised how many programs are available at the federal, state, and local levels, as well as directly through the companies you make payments to, if you've never accessed them before.

Severance Pay and Taxes

If you've been with the same employer for long enough, you may receive severance pay or a severance package. This can reduce the financial blow of being laid off and give you more time to look for a job you really want instead of the first job you can find. Severance may reduce or make you ineligible for unemployment benefits.

You'll have to report your severance pay and unemployment benefits as income when you file your annual tax returns unless your income is below the filing threshold. You may owe tax on these benefits, depending on what your modified adjusted gross income for the year adds up to. It may end up being a lot lower than usual because of your layoff, and you may owe little to no additional tax beyond what your employer already withheld when you were working.

However, if you are rehired quickly or have already earned a lot for the year, you may want to set aside money in savings in case you owe more when you file your annual tax returns. Prepare your returns as early as possible when the new year rolls around so you can see how much you will owe and have time to find the money.

Retirement Accounts

Once you are laid off, you will no longer be able to contribute to your workplace retirement plan or receive a matching contribution from your employer. You can use an IRA to make retirement contributions on your own behalf, however, and you can wait until closer to the federal income tax filing deadline to decide how much you can afford to contribute.

You'll also need to decide whether to keep your retirement account with your former employer or roll it over into an IRA. Taking a hardship withdrawal from your retirement account is an option if you need cash to stay afloat. If you had a retirement plan loan outstanding when you were laid off, you may need to repay it quickly to avoid taxes and penalties.

The Bottom Line

Whether you've been furloughed or laid off, it's rarely a good feeling. Remember that your employer's decision was economic, not personal. Remember that there's no shame in being furloughed or laid off: it happens to almost everyone at some point, and usually several points throughout their working years. Finally, know that you have many options to get help, and many people who can empathize and want to help you: They've probably been where you are, too.