Furlough programs, if designed improperly, carry some liability risk (read “Time Out,” the full story on furloughs). But the possibility of a wage and hour lawsuit is just one factor to consider when planning a furlough. The impact on employees’ eligibility for insurance benefits and unemployment compensation are two other considerations.
A reduction in hours could have the unintended consequence of disqualifying employees from medical, dental and life insurance coverage, which commonly are offered only to full-time employees who work a designated number of hours per week.
“You need to be cognizant of benefits implications,” says Karen Glickstein, a shareholder at Polsinelli Shughart. “Are you cutting people below the level where they would be eligible for company benefits plans?”
It’s important to consult benefit plan documents to determine at what point benefits could be jeopardized, adds Glickstein, former chair of the Employment Law Committee of DRI–the Voice of the Defense Bar. The longer the furlough program is in place, the greater the chance that employee benefits could be compromised.
There are two possible solutions: Either the furlough program could be adjusted so that employees still work the number of hours that qualify them for benefits, or the benefits plan could be amended.
“You may have to amend the plan to say employees working 30 hours per week are now eligible for benefits,” says Robert Duty, a partner at Dykema Gossett.
Likewise, Duty says, salary reductions may impact benefits tied to salary, such as company-paid life insurance, which typically is offered at a multiple of annual salary.
“Somebody needs to review the summary plan description and make sure you are doing what you want to do,” he says. If you want the insurance benefit to stay the same while salaries are reduced, you may be able to change the formula in the plan for the period during which the salary reduction is in place.
Another consideration is whether the furlough program will make employees eligible for unemployment compensation. In some states, employees who are on furlough for a week at a time can qualify for unemployment, or employees who work fewer than a designated number of hours per week and are paid less than the weekly unemployment benefit may be considered partially unemployed and received reduced benefits.
“It depends on the state you are in whether or not you are immediately eligible for unemployment benefits,” Duty says.
Additionally, employees who quit following a salary reduction may qualify for unemployment benefits if the pay cut is deemed “unreasonable.”