Many organizations are turning to furloughs as an option over layoffs. In the short-term, furlough will optimize the cost of productivity while closing the budget gap. In the long-term, the organization is saving because they are able to keep their top employees and not have to hire and re-train staff. In our current time of economic crisis, furlough is an optimal choice for reducing costs and maintaining the integrity of the organization in the least invasive aspect.
Are furloughs an optimal option over layoffs in order to reduce a deficit? I currently work at the University of California, San Diego which is part of the implementation for furloughs in an attempt to reduce the deficit without increasing the unemployment rate in California. Currently the state of California is in a 26 billion dollar deficit and climbing, and has resulted in furloughs for state employees. Furlough’s are defined as the placing of an employee in a temporary non-duty, non-pay status because of lack of work or funds, or other non-disciplinary reasons (Bellafronto & Cleveland, 2009).
In the current difficult economic times many employers are being forced to make difficult decisions to keep their businesses viable, including laying off employees to reduce payroll costs. More employers, however, are considering alternatives to layoffs. These alternatives allow employers to retain staff, particularly top talent and employees with institutional knowledge (Bellafronto & Cleveland, 2009).
Employers understand that keeping tenured and often loyal employees employed in anticipation of an inevitable upswing in the economy will also reduce the need to re-hire and re-train personnel which is a very costly and timely endeavor (Heathfield, 2009).
Although reducing employee salaries may be an easy solution to an economical crisis, such reductions are often discarded as too demoralizing and often leads to employees looking for new employers. In order to avoid losing valued employees, many employers are attempting to reduce labor costs without layoffs are considering two alternatives: 1) mandatory furloughs and 2) reduced work hours. When done correctly, these can result in cost savings, but there are important legal considerations to keep in mind. This paper will discuss the economical impact of furloughs (Bellafronto & Cleveland, 2009).
Employee furloughs is a mandatory time off work with no pay. Usually furloughs are implemented as an alternative to a layoff. Employee furloughs can occur in both public and private sector organizations (Heathfield, 2009). Furloughs are often implemented when revenue or projected revenue fails to match expenses. Currently, the state of California, is in a budget crisis and there is a mandatory employee furlough being implemented amongst all state employees. At the UC system all 10 campuses are required to take a mandatory furlough or pay cut.
During mandatory employee furloughs, employees are required to take unpaid or partially paid time off of work for periods of time (Heathfield, 2009). The employees generally have either scheduled time off or a set amount of days required to be taken off per month or throughout the fiscal year (Bellafronto & Cleveland, 2009).. To schedule employees with a contract, including union-represented employees, for employee furloughs, the contract must be renegotiated. The negotiations about employee furloughs generally include a call-back date (Heathfield, 2009).
In the state of California the UC school system gave each university the option between mandatory furlough and reduced salary. All of the UC’s individually held town meetings to hear the voice of the employees to analyze what the employees preferred. The employees voted and pushed for a furlough instead of a cut in salary. Although the furlough does ultimately result in a reduced salary, it is demoralizing to have employees work the same amount of hours for reduced pay. As an employee of the UC system, I also voted for the furlough. I strongly believe that it is easier to accept a non-paid day off than a reduction in salary. Fortunately, during employee furloughs, benefits usually continue, which is one of the employee furlough’s differentiating factors from a layoff.
In addition, other companies have implemented work sharing programs. Work sharing is an Unemployment Insurance program that allows an employer to reduce the number of hours an employee works during a week while unemployment compensation makes up some of the difference in income. Since the current issue is that the state is in a budget deficit, utilizing unemployment would not be cost efficient for the state (Heathfield, 2009).
Factors or Costs
According to the UC President Mark G. Yudof, effective July 16th, 2009, the UC Board of Regents approved a systemwide furlough as part of a plan to offset $813 million in state funding reductions for the 2008-09 and 2009-10 fiscal years. The furlough is viewed as a short-term solution to close the deficit and manage the budgets under the new budget for the upcoming fiscal year. If the furlough is successful, the university will be able to remove the furloughs and ensure long-term success.
Although the university is optimistic about the furlough, it is demoralizing and difficult for the employees to endure. In the current economical situation, and with the constant news of businesses laying off employees, UC employees are appreciative to have a furlough in lieu of a mass layoff. Most California business are amidst a human resources hire freeze, and it is difficult to obtain new jobs.
The hire freeze amongst other corporations gives the UC an increase market power. Although, we are amidst a furlough, the furlough is only applicable to non-federally paid employees. The UC campus is made up of both federal and state funds. Fortunately, the furlough is only applicable to state funded employees, such being the case that the federal funded research programs are still very much thriving and now have market power with regards to hiring highly qualified applicants. According to our human resources department, for each job opening we have over 300 applicants and most of the applicants are over qualified but in the current economy are willing to take any job. The university is able to obtain a highly qualified candidate for a lower salary.
The federal research funds are an important revenue source for the UC system. These funds are released to the UC along with a 54.5% indirect cost rate that is associated with every dollar spent. For example for every $500,000 that is awarded to the university, $272,500 is allocated as indirect costs. Indirect are allocated as funds are spent, therefore, for every dollar spent 54.5% is revenue for the university. It was a wise decision to exclude the federal research funds of the furlough, because in the end the university would lose revenue and if the funds are not spent by the time allotted, the funds are to be returned to the government. In addition, it is calculated that for every 1 million dollars awarded by the federal government, 17 jobs are created.
According to the UC California Budget News (2009), the UC system faces an unprecedented $813 million deficit in state support. The furlough plan is part of a system wide strategy to address the deficit. In an effort to lessen the hardship on employees, the UC has devised a plan is based on a sliding scale. Employees who have higher salaries will have a larger number of furlough days and a correspondingly higher salary reduction. Salary reductions range from 4 -10 percent.
The UC President estimates that the furlough implementation will produce a savings that is estimated to cover about one-quarter of the universities budget gap. On a personal note, I will incur 16 furlough days which is equivalent to a 6% salary cut (UCSD, 2009)
In addition to the furloughs, the university also plans to increase student fees in order to eliminate another quarter of the budget gap. All of the departments have been given strict guidelines for immediate debt restructuring, drastic cuts in spending on campuses and within the Office of the President will make up the remainder of the budget gap (UCSD, 2009).
Implementing a furlough is a way to reduce expenses in order to close the budget gap. In doing so, employers are able to keep their staff, and will save money in the long-term as well as the short-term. Hiring new staff is very expensive and not cost-efficient, there are costs associated with training, background checks and it often takes a minimum of 6 months for an employee to get caught up to speed with the other employees.
The furlough is a more favorable option to layoffs for employees as well as employers. Although the employees are required to take mandatory furlough days, the workload or demand is not decreasing. The university is constantly in high demand with regards to education as well as research. We are now facing the issue of supply, where supply is the laborers needed to run the university. There are a lot more expectations given to employees who have to do the same amount of work in less demand, and this could affect the productivity of the university.
In summary, furloughs are an optimal option over layoffs when used to reduce a deficit. Cost analysis have shown that furloughs are both a short-term as well as a long-term solution to budgetary deficits. The UC system proved to be a great example of an organization that is using this options in order to maintain productivity as well as maintaining the integrity of the UC system.
Maurice, S. & Thomas, C. (2008). Managerial Economics, 9th ed. New York: McGraw-Hill.
Bellafronto, E. Cleveland B. (March 5, 2009). Furloughs may be smarter than layoffs. Legal times.
Heathfield, S. (2009). Employee Furloughs. About.com http://humanresources.about.com/od/glossaryf/g/furlough.htm
UCSD. (July, 2009). University of California Budget News. http://www.universityofcalifornia.edu/budget/?page_id=87