• Employee Furloughs: Considerations under Employee Benefit Plans and Programs
  • September 15, 2009
  • Law Firm: Krieg DeVault LLP - Indianapolis Office
  • Yes, employee furloughs are becoming more common.  What is a furlough?  It is essentially an unpaid leave of absence that is intended to be temporary, and does not involve termination of employee status.  A furlough can be for a short period, such as one day each month, or weeks or months at a time.  Depending on an employer's policy, an employee can usually take vacation or personal time for his or her furlough, or may simply take it as unpaid leave.

    Retirement Plans

    For purposes of the company's retirement plan, if an employee is on furlough at plan year end, and the plan has a requirement that an employee must be employed on the last day of the plan year, such an employee is still entitled to a contribution because the employment relationship has not ended.  In crediting hours of service for purposes of vesting, the normal rule is that only hours paid are credited.  However, a furlough of one day a week or one day a month is not going to affect crediting of hours where an equivalency is used (for example, where one hour is worked in a week, 45 hours is credited for that week).  Therefore, it is important to determine how service is credited under your specific retirement plan. 

    Welfare Benefit and Cafeteria Plans

    Employers who sponsor welfare benefit plans (such as group health plans) and cafeteria plans must also consider the impact that a furlough or a reduction in hours will have on both an employee's eligibility to continue to participate in those plans, and the manner in which an employee pays his share of the premiums required for participation.  Often, welfare and cafeteria plan eligibility criteria require an employee to be regularly scheduled to work a certain number of hours each week in order to participate.  If the plans' eligibility criteria does not allow employees to remain eligible while on an unpaid leave of absence (other than FMLA leave), employers could end up providing coverage to employees who are technically no longer eligible.   Doing so can lead to denials of coverage by insurance companies and stop-loss carriers.  In addition, if an employee on unpaid leave of absence ordinarily pays for his coverage on a pre-tax salary reduction basis, an employer needs to implement a policy and procedure for receiving payment for the period of time that employees are not being paid, and allow for this contingency in the cafeteria plan document.  

    A company that is forced to institute furloughs or reductions in hours due to hard economic times is undoubtedly dealing with many complex issues.  However, anticipating the issues that relate to employee benefit plans and programs before the furloughs begin is the best way to avoid future problems and unexpected strains on company resources.