Unemployment Insurance and Furlough Q&As

Unemployment insurance and furloughs raise a host of practical questions for HR, some of the most common of which we answer below.

1. If we reduce our employees' work hours, will they still be eligible for unemployment insurance (UI)?

It depends on the amount of the reduction (each state law is somewhat different). Generally, a reduction of 20 percent or more in hours in most states would be sufficient to demonstrate that the individual is unemployed and would not be disqualified from establishing a benefit year and claiming weeks of unemployment compensation, provided that with the reduction he or she earns less than the state's definition of "partial unemployment."  

Typically, if an individual is paid the equivalent of his or her full UI weekly benefit amount for a week, he or she would be deemed not to be unemployed for the week, although some states have a higher threshold for defining partial unemployment. Each state UI law should be reviewed.

2. What should we tell employees who say they would rather be laid off so they can collect unemployment, and then rehired later rather than furloughed?

While many states have relaxed requirements around whether a separation was truly "involuntary" or not, it remains the case that a purely voluntary quit may be disqualifying or a basis for challenge. Also, because of the overwhelming number of applications, many workers are having difficulty getting claims filed and started while struggling to reach anyone at the unemployment office to seek help.  

Overall, it is better to continue working for a variety of reasons, including assuring that the employee may continue to be covered under the company health care plan, pension plan, if any, and continuing to accumulate wage payments to qualify for Medicare, future unemployment compensation and Social Security. The UI cash payment is only a temporary partial replacement.

Of course, there are also the nonmonetary benefits of working (e.g., socializing, developing skills and experience, greater likelihood of promotion and earning bonus payments).

3. If exempt employees' hours were cut and they are only working a few days a week, do they have to be paid their full weekly salary?

It is true that exempt employees in general should not experience variation in weekly pay even though their hours may vary. But it is possible to put in place either a formal salary reduction, or to put in place a partial week furlough, provided that it is relatively sustained (like for two or three months) and does not fluctuate based on business volume. Exempt employees' salaries, with or without a schedule reduction, should not be cut below the salary level needed to establish the exemption under the FLSA.

4. Can employees stay on the health insurance plan during a furlough? If so, how would they pay their premiums if they are not receiving a paycheck?

An employer may continue to keep employees on its health insurance during a furlough and either require the employee to pay the employee portion, or may choose to pay for both the employer and employee portion, which may require a plan amendment.  

Alternatively, depending on the wording of the plan, the furlough may trigger COBRA, and the individual may qualify to make payments for continuation under COBRA, or the individual may seek insurance through the private market that may be subsidized under the Affordable Care Act. 

5. We will be laying off employees. Can we lay off employees who are currently on Family and Medical Leave Act (FMLA) time off or paid leave under the Families First Coronavirus Response Act (FFCRA)?

An employer may lay off employees for lack of work even if they are currently on FMLA or paid leave under the FFCRA; however, if the individuals remain on payroll during the layoff, they may be able to assert continuing rights under those programs if they return to compensated employment.

6. In states that allow work-sharing programs, how can our employers develop a program that is compliant? Are there alternatives for employers that do not operate in a state with work-share programs that employers can utilize?

To be compliant, an employer must first review the provisions of 26 U.S. Code § 3306(v) that outline permissible work-share programs and then the complying state statutes, regulations and policies of the state that has adopted a work-sharing law. Employers must apply for approval of the work-sharing/short-time compensation (STC) plan that follows the limitations and accounting requirements in each state.

Employers in states without work-sharing/STC programs may adopt their own plans that are similar to STC by reducing pay to a portion of their workforce (but not so much as to result in denial of a week of unemployment that may be claimed). Many states permit earnings disregards that may be used to calculate the points at which unemployment compensation will continue to be paid notwithstanding continued payments to employees for a particular week. 

The advantage of STC is that a pro-rata amount of unemployment compensation may be paid to employees even if the reduction is as little as 10 percent or as much as 50 percent for a week. New York permits STC plans with reductions in hours up to 60 percent. However, there are significant reporting and accounting requirements associated with STC programs that increase the costs to employers of participating.

7. If employees are furloughed and on reduced pay, are employers still expected to provide 401(k) matching?

As long as the 401(k) plan continues to be in effect, payments that are required under the plan for the employer continue to be the employer's obligation. It is possible to amend plans or suspend these types of obligations, however. The terms of each plan should be reviewed.

8. Is there a tool employers can utilize to identify whether employees may be better off on UI or remaining on the payroll?

Every state maintains a definition of partial unemployment and has rules for the degree to which alternative earnings are disregarded, before deductions from benefits will be taken. Seyfarth has created a calculator that it uses with clients to help determine whether proposed partial-week payments or furloughs would inadvertently disqualify employees from unemployment or somehow make employees worse off than if they received full unemployment benefits. 

9. If an employee is furloughed and summoned back to work and he or she refuses the request, is he or she still eligible for UI payments?

If the offer of work is a bona fide offer of suitable work and there is a refusal, it should be disqualifying and result in a duration suspension or delay in benefits. Each state law should be reviewed for specific requirements for the imposition of the penalty.

10. Can we terminate employees and then contract with them as independent contractors?

Potentially, although a change in classification while providing the same or similar duties, especially on an exclusive basis, would be unlikely to survive challenge. Employers need to be careful that the new independent contractor terms and conditions are consistent with an independent contractor relationship. Auditors reviewing payroll typically review payment history and may assume that individuals who continue to be paid in regular intervals or who were treated as payroll employees should continue to be treated as employees. 

11. We are looking for ways to save without having to lay off employees. Any suggestions?

Many employers are looking for ways to redeploy workers into essential businesses or services. We see apparel manufacturers now making personal protective equipment (PPE), delivery drivers redeployed into the grocery sector and other creative ways to redeploy workers to businesses in need. 

We also see employers providing sabbaticals, furloughs and other ways to maintain an employment relationship while reducing payroll costs. Employers should also look to cost items other than legally required wages and compensation, such as cutting discretionary payments like vacation pay and employer pension contributions that are not required, eliminating merit increases, suspending bonus programs, findings savings with health insurance, or eliminating parking benefits and discretionary travel expense reimbursement. Collectively bargained agreement provisions may limit cuts that may be made without negotiating changes in the terms of the agreement.

Doug Holmes is president, UWC—Strategic Services on Unemployment & Workers' Compensation in Washington, D.C. David Baffa is partner and national co-chair of the Employment Litigation & Counseling Practice Group with Seyfarth Shaw LLP in Chicago.