COVID 19: Layoffs, Furloughs and Loans

On March 19, 2020, the Governor of California issued a “Safer at Home” Order and declared that only essential businesses should remain open to the public. Other states have issued similar mandates. Currently, millions of Americans have already lost their jobs due to the COVID-19 (Coronavirus) crisis and, according to a Federal Reserve estimate, the projected unemployment total could reach 47 million.

Employers all around the country are struggling with how to respond to this difficult situation. The following information is intended to help employers make an informed decision.

Layoffs

A layoff is an involuntary separation between an employer and an employee that occurs through no fault of the employee. Typically, layoffs occur when there is not enough work. A layoff can either be temporary or permanent. Because a layoff is “without cause,” employees are able to collect unemployment benefits.

While an employee is eligible for rehire, a layoff is a type of termination. Laid off workers are no longer considered employees. Employers who implement a layoff risk losing talented or established workers who will likely be seeking other employment. No one knows how long the COVID-19 restrictions will be in place, so layoffs bring an inherent risk of being required to retrain new hires once business is able to resume. An employer may allow employees to maintain benefit coverage for a defined period of time as an incentive to remain available for recall, but there is no guarantee that the employee with return.

Furloughs

A furlough is considered to be an alternative to a layoff. It can be administered in different ways, such as a reduction in work hours or a requirement for the employee to take a certain amount of unpaid time off. However, unlike a layoff, the furloughed worker remains an employee. As such, a furlough is akin to an unpaid leave of absence. The employee is guaranteed working hours once business resumes. Furloughed employees are eligible for unemployment benefits.

A furlough reduces the risk of losing experienced employees because there is guarantee of employment (although furloughed employees are still free to look for other jobs). One potential risk is liability for wage and hour laws. Furloughed employees may be tempted to continue working. If that occurs, the employee must be paid for the time he or she worked. Therefore, furloughed employees should not have access to email accounts and active employees should not be contacting furloughed employees.

SBA Loans

Small Business Administration (SBA) Loans provide an alternative to layoffs and furloughs. Once again, there is uncertainty about how long the COVID-19 restrictions will last. Optimistically, the crisis lasts only a few months and then business is able to resume. If that is the case, a payroll loan may be worth researching.

The SBA has declared most California counties as disaster areas due to COVID-19. These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The SBA can offer loans to small businesses at an interest rate is 3.75%. The interest rate for non-profits is 2.75%. Small businesses are also eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000.

The SBA also offers a Debt Relief program intended to provide a reprieve to small businesses as they overcome the challenges created by this health crisis. Under this program, the SBA will pay the principal and interest of new 7(a) loans issued prior to September 27, 2020. The SBA will also pay the principal and interest of current 7(a) loans for a period of six months.

This is a realistic alternative for employers who wish to maintain their workforce this trying period.

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Daniel Thompson is an employment lawyer with Davis & Wojcik APLC, a Southern California based law firm with offices located in Temecula and Hemet. He is also the author of Land of Liability: A Guide for California Employers. He can be reached at (951) 652-9000.

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