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Avoiding Furlough Fallout

Cash-strapped executives are turning to furloughs to cut payroll costs while maintaining human capital.

August Cover​​​Carol Jones is spending her Thursday morning in atypical fashion—not working, even though she has proposals due to clients. Jones isn’t procrastinating. The solutions engineer’s employer mandates that she take one unpaid day off a week for five weeks in each of the first three quarters of this year. She’s waiting to hear about the fourth quarter.

Jones isamong a growing number of furloughed workers. The strategy of mandating leave without pay is now increasingly deployed by private-sector employers as well as by universities, airlines and public-sector employers—where furloughs remain common.

The number of people furloughed, or working part time for "slack work or business conditions," shot to 6.5 million in June, up from 3.7 million a year prior, according to the July Employment Situation report by the Bureau of Labor Statistics. The average workweek for production and nonsupervisory workers on private nonfarm payrolls fell to 33 hours—the lowest level on record since 1964.

A June Watson Wyatt survey found that 13 percent of 179 HR executives had imposed mandatory furloughs, with another 6 percent expecting to do so in the next 12 months.

Fred Crandall, Midwest practice leader for strategic rewards at Watson Wyatt in Chicago, credits the popularity of furloughs to the unusual uncertainty of this recession. "No one knows how long and how deep this recession is. Companies are unsure of the near-term demand of their goods and services, and they don’t want to be put in the position of laying off people and then turning around and having to rehire them."

Furloughs are appealing to executives who foresee short-term contraction in demand and don’t want long-term damage to their human capital. But employers unfamiliar with the practice can make costly legal, retention and morale mistakes.

"Companies are doing this to preserve the human capital they need to compete," notes Crandall. "But it does no good to preserve bodies if you don’t get the heart and soul and commitment from them."

Furlough Rationale

Even the Best Small Company to Work for in America isn’t immune from the financial crisis. In addition to reaching the top spot on the 2009 list from the Society for Human Resource Management and the Great Place to Work® Institute, Berlin, Wis.-based Badger Mining Corp. implemented rolling furloughs this year. "We saw demand drop in two of our plants," says Beth Nighbor, SPHR, associate development leader. "We had the plant manager of each location look at their production and set schedules for the rest of the year so that everyone shares in the time off and shares the burden."

Furloughs are scheduled up to a month at a time and affect 120 nonexempt employees out of a total workforce of 165. "We are planning to continue the furloughs through the end of 2009, and it will depend on business conditions if we extend it to 2010," says Nighbor.

It’s a familiar story to Joe Lake, director of global HR operations at Ashland Inc. in Covington, Ky. In January, he didn’t know what the future held for more than 16,000 employees at the diversified chemical company.

"We were seeing a downturn in our business," recalls Lake. "Executives were looking at payroll as the biggest expense, so, from an HR standpoint, we wanted the least impact on employees."

Lake formed a team of HR representatives from the company’s five businesses to research what other companies were doing to cut costs. The team analyzed options from layoffs to pay cuts to furloughs and ultimately recommended furloughs.

Limit the Furlough Pain

Furloughed employees interviewed for this article suggested the following tips for making the news easier to handle:

  • Communicate early and often. As soon as HR executives decide to implement a furlough, they should meet with employees face to face and follow up with online messages. Don’t wait to have all the information to make the announcement, and don’t withhold information, such as how to qualify for unemployment benefits.
  • Within set parameters, give employees flexibility. Badger Mining Corp. lets employees choose their furlough days as long as the supervisor approves, allowing them to schedule around child care needs and vacations.
  • Spread the pain. Companies instituting weeklong furloughs should check with their employment attorneys about spreading the pay loss over several future pay periods. The Campagna Center’s exempt employees signed an agreement drawn up by its lawyer to deduct future wages. Nonexempt employees who worked overtime in subsequent weeks still got paid for that time.
  • Accentuate the positive. Get employees to share ideas on how they are spending their time off. From working on hobbies to spending time with children to starting new business ventures, the time off can be reinvigorating. (For more, see the sidebar "Make the Most of Your Furlough" on page 40.)

—Adrienne Fox

"With layoffs, it’s hard to re-recruit people and to fill jobs quickly if you start growing again," Lake explains. "With pay cuts, it’s hard for people to get back to what they were making. With furloughs, people get paid less for the year, but the salary for next year won’t be affected."

Everyone from the CEO down, in the United States and Canada, was required to take furloughs, according to Lake. However, some hourly plant employees were exempt, depending on production demand. In other countries, the company didn’t mandate furloughs due to employment laws forbidding the practice. Instead, Ashland educated overseas workers on the reasons for the furloughs and asked them to take voluntary furloughs, which the majority did. Ashland operates in 100 countries.

Like Badger Mining and Ashland, a small, nonprofit charity is also feeling the pinch of an uncertain economic forecast and pinning its future on furloughs. The Campagna Center, a provider of early Head Start and other academic programs in Alexandria, Va., has seen a significant drop in financial support from corporations and individuals.

In February, CEO Karen Hughes found herself staring at a $200,000 budget shortfall, even after painful staff cuts late last year. Knowing the tide of charitable giving would not turn in her favor anytime soon, she gathered her senior management team to brainstorm cost-savings ideas.

They saw the problem as temporary and sought to avoid more layoffs, says Hughes. "We could not hurt the children or the programs."

The executive team decided on an organizationwide, one-week furlough during spring break when schools were closed. The 167 employees quickly got on board. "It helped that the staff saw that the executives were going to share in the pain," says Hughes.

With spring break only weeks away, Hughes had to act fast to consult her attorney and devise a policy. (For more on the legal risks of furloughs, see "Cutting Hours Without Raising Hackles" in the April 2009 issue of HR Magazine.)

Communicating the Plan

Once leaders decide to furlough workers, HR executives recommend announcing the decision, even if you don’t have all the facts ready.

In December 2007, Fermilab, a U.S. Department of Energy (DOE) high-energy physics lab in Batavia, Ill., received news that Congress was cutting its budget by $53 million to $320 million for 2008. Facing the deficit, "We had to work quickly," recalls Judy Jackson, director of communications.

Pier Oddone, director of Fermilab, held an all-hands meeting in January with its 2,000 employees to explain the budget cuts and the mandatory, organizationwide furlough beginning the next month.

"The typical strategy for management is to withhold information because the financial picture is unclear, so management waits to get all the facts," says Crandall. "But employees interpret that as hiding information, and they think the worst."

Indeed, the one time Fermilab leaders weren’t forthcoming; it came back to bite them. Employees had questions immediately about eligibility for employer-funded state unemployment benefits in Illinois. The HR professionals knew that if people filed for unemployment, the money would come off the top of the furlough savings. "There was initial obfuscation about unemployment eligibility," admits Jackson. "Employees sensed that immediately and reacted negatively to it. We dealt with it and wound up bringing in unemployment experts from the state every week to take them through the process."

Illinois and 17 other states, including California, Florida and Massachusetts, offer unemployment benefits to involuntarily furloughed employees. Depending on the state, employees must meet thresholds on the amount of lost pay and the time they are involuntarily furloughed.

Fermilab’s leaders communicated the furlough policy through three tools:

  • All-hands meetings with the director so everyone in the lab could hear the news in person and ask questions.
  • Daily e-newsletters read by 85 percent of employees at least four times a week.
  • A dedicated page on the web site about the furloughs where employees could get updates and post questions that were answered within a 24-hour period by members of the HR staff.

One of the challenges faced by Fermilab and every organization in a highly connected, 24-hour-access business world: the prohibition of work by exempt employees while on furlough. "The researchers work at home and think about their research at home," explains Jackson.

The communications team did the typical messaging about why employees were legally forbidden from working while on furlough. But Jackson says it was an omitted message that really drove the intent home. "Every Tuesday, the director has a column in the e-newsletter," she explains. "But when he was on furlough, we left it blank. Word also got around that the DOE [officials] called to speak with the director while he was on furlough. The director not taking the DOE’s call definitely sent a message."

This story also illustrates that employees have an insatiable appetite for information in these uncertain times: The deeper the level of detail, the better.

"I had four meetings at all our schools in person and went line by line with them over the health of the organization," Campagna’s Hughes recalls, in an effort to allay long-term financial fears by explaining the line of credit it had with the bank and the value of the large building it owns in the center of Old Town Alexandria. "I was afraid it was too much information, but actually it was the thing that they told me helped the most with the news."

Furlough Aftershocks

Despite communication, retaining top talent and keeping morale high can be challenging. "People are worried about the future of the laboratory," says Jackson. "They wondered if the cut indicated a lack of commitment by Congress to science and the work they do."

Lake says Ashland’s upfront and transparent communications strategy helps with morale and retention, but he knows the program is far from a perfect solution. "Not all employees thought this was the best thing," he says. "When the economy turns around, we may lose people because of this."

At Jones’ telecommunications company, she says, "Everyone is very frustrated. I haven’t talked to anyone who prefers the furlough to a layoff because no one thinks they’re the one who would get laid off." She knows of one top salesperson who saw the furlough as the "straw that broke the camel’s back" and has left the Minneapolis company for a competitor.

The combination of furlough savings and a $5 million anonymous donation helped prevent layoffs at Fermilab. But it didn’t save the lab from losing top talent. "We did lose some top-notch researchers" as a result of the furloughs, notes Jackson. "We didn’t have a mass exodus, but we had losses."

Morale also suffered. Last December, Fermilab conducted employee focus groups to find out if the organization had systemic discrimination problems against women and minorities. The good news: Discrimination wasn’t a problem. The bad news: People had residual unease related to furloughs that had ended seven months earlier. "We suffered a ding to our morale because of the furloughs," says Jackson. "It’s been months later, funding is fine, but the aftershocks linger."

Badger Mining’s financial picture also looked brighter when it turned a profit in the second quarter. But beyond saving money, the company’s rationale for having furloughs was also about creating a flexible workforce that ebbs and flows with production demand. "You have to come up with a plan that’s a win for the organization and your employees," says Nighbor. "Our employees are willing to make the sacrifice to help the company get through the tough times. When the economy gets better, they’ll share in the good times as well."

Make the Most of Your Furlough

Ashland Inc.’s HR director Joe Lake spent his weeklong furlough on a Mediterranean cruise and returned more refreshed than he had from any vacation in recent memory. "Most times you go on vacation, but you are still checking e-mails and voice mails and still maintaining contact with clients," says Lake. "I heard from employees that being legally compelled not to work gave them a much-needed mental break."

In a sign of the times, before the first furlough, Ashland’s HR team gave employees tips for messaging that explained that they really were unavailable during their furloughs.

The team advised employees to call key external contacts to explain the situation and give them the opportunity to address their needs before the furlough began.

Lisa Strahota, an office assistant at Badger Mining Corp., spends her furlough breaks with her two young children, allowing her to save money on day care costs. "People are glad they still have a job, and we like having time off, especially in the summer," she says.

When Laura Cochran got word that her employer, the Gannett Co. Inc., was mandating furloughs for its 31,000 employees nationwide, instead of groaning about it, she decided to capitalize on it.

"We knew Gannett has 85 newspapers and 23 broadcast stations across the nation, so how do we take advantage of that?" says Cochran, a content manager based in McLean, Va. "We thought, ‘I would like to go to Denver for my furlough, I wonder if anyone would like to come to D.C.?’ Out of that idea came" The workers’ house exchanges turned a furlough into a "furcation."

The idea went viral on, and many Gannett employees have reaped the free-stay benefits.

Some hotels and resorts are offering furlough deals as well. The Sheraton Cincinnati North posted this message on its web site: "Times are tough, we understand. Take time to celebrate family with the furloughed workers’ special discount package." And furloughed California state workers took advantage of lift-ticket discounts offered by Squaw Valley ski resort in February.

​—Adrienne Fox

The author is a contributing editor and former managing editor of HR Magazine.

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