Comparing a Furlough vs a Layoff: What's the Difference?

When times get tough, tough decisions typically follow. For many business owners, one of the hardest calls you will ever make is deciding how to reduce your workforce. Furloughs and layoffs are two of the most common options, and while they are often thought to be the same, they are very different. Choosing the wrong one can have real consequences for your employees, your budget, and your compliance with labor laws.

In this article, we will break down the differences between a furlough and a layoff, walk through the pros and cons of each, and answer the most common questions employers have on the topic. Let's begin.

Key Takeaways from this Article

• A furlough is a temporary leave of absence or reduction in hours, while a layoff is a permanent or indefinite separation of employment.
• Furloughed employees are still considered active employees and may retain their benefits, while laid-off employees lose their employment status and benefits.
• Both furloughed and laid-off employees may be eligible to collect unemployment benefits, depending on the state.
• Maine employers with 100 or more employees must pay severance in the event of a facility closure, relocation, or mass layoff under updated state law.
• Choosing between a furlough and a layoff depends largely on the expected duration of the financial hardship and whether you anticipate needing your workforce again in the near future.

What is a Furlough?

A furlough is a temporary, unpaid leave of absence or a reduction in hours for employees. The key word here is temporary. When a business furloughs its employees, the expectation is that those employees will return to work once conditions improve.

Furloughs are most commonly used during short-term financial challenges, slow seasons, or unexpected events that disrupt normal business operations. During the COVID-19 pandemic, for example, many restaurants, hotels, and retail businesses furloughed their staff rather than laying them off, with the intention of bringing everyone back once restrictions were lifted.

It is important to understand that the rules around furloughs differ depending on whether an employee is salaried or hourly.

For hourly or non-exempt employees, a furlough can mean a simple reduction in hours. An employee who normally works 40 hours per week might temporarily be reduced to 20 hours or placed on what is called a zero-hour schedule, meaning they are still employed but not currently scheduled for any shifts.

For salaried, or exempt, employees, furloughs must be handled differently. Under the Fair Labor Standards Act, salaried employees must receive their full salary for any week in which they perform any work at all. Because of this, furloughs for salaried employees must be structured in full week increments. If a salaried employee is furloughed, they cannot check their email, take a work call, or perform any job duties whatsoever during that time. Many employers will temporarily suspend access to work systems and email accounts to ensure compliance.

Advantages of a Furlough

There are several reasons a business might choose a furlough over a layoff, and the benefits can be significant.

• You get to keep your team intact. When business picks back up, you can bring your employees back without going through the process of recruiting, hiring, and training new people.
• Furloughed employees are still considered active employees, which means they may continue to receive health benefits through your company plan, depending on your specific plan terms.
• A furlough sends a message to your team that you value them and intend to bring them back. That kind of reassurance can go a long way in preserving morale and loyalty.
• Furloughs can be structured in a variety of ways, such as reducing everyone's hours slightly or rotating weeks off among employees, giving you flexibility in how you manage the financial impact.

Disadvantages of a Furlough

Furloughs are not without their drawbacks, and it is important to go in with a clear picture of the potential downsides.

• There is no guarantee that your employees will wait for you. Furloughed employees are free to look for other work, and many will. You could lose valuable team members to competitors who are actively hiring.
• Managing the compliance requirements around furloughs, including benefits continuation and pay rules for salaried employees, can be complicated.
• Extended furloughs can damage morale. Employees who are left in limbo without a clear return date may feel anxious and disengaged, even after they come back to work.
• Depending on your health insurance plan, a significant reduction in hours could disqualify some employees from coverage, which creates additional administrative work and potential COBRA obligations.

What is a Layoff?

A layoff is a termination of employment that occurs due to business reasons, not because of anything the employee did wrong. This is an important distinction. Being laid off is not the same as being fired. A layoff happens when a company no longer has the resources to support a position, not because of an employee's performance.

Layoffs can be temporary or permanent. In some industries, such as hospitality or landscaping, seasonal layoffs are common. Employers may lay off workers during the slow season and rehire them when demand picks back up. In other situations, layoffs are permanent, particularly when a business is restructuring, closing a department, or reducing its workforce for the long term.

When an employee is laid off, they are no longer considered an active employee. They lose access to their benefits, and their employment relationship with the company ends. However, they are typically eligible to receive unemployment benefits, and they may also be entitled to COBRA continuation coverage for their health insurance.

It is also worth noting that laid-off employees must be compensated for any accrued paid time off they have earned, depending on state law. In Maine, employers with 10 or more employees must pay out any unused, accrued vacation time to employees that are laid off.

Advantages of a Layoff

While layoffs are never easy, there are circumstances where they are the right business decision.

• Layoffs provide immediate and significant cost relief. Unlike furloughs, which may still require you to cover benefit costs, a layoff eliminates ongoing salary and benefit expenses entirely.
• For employees, a layoff provides clarity. As difficult as it is, knowing that a job is gone allows employees to move forward, file for unemployment, and begin their job search without uncertainty hanging over them.
• If your business is facing long-term or permanent structural changes, a layoff is a cleaner solution than keeping employees in an indefinite furlough that may never end.

Disadvantages of a Layoff

The downsides of layoffs are real and can have lasting consequences for your organization.

• When you lay off employees, you lose their expertise, their experience, and the investment you made in training them. That is not easy or cheap to replace.
• If and when you are ready to hire again, you will need to recruit, onboard, and train an entirely new group of employees. That process takes time and money.
• Depending on the size of your workforce, you may be subject to the federal WARN Act, which requires employers to provide 60 days' notice before a mass layoff or plant closing. Failure to comply can result in significant penalties.
• Maine employers with 100 or more employees should also be aware that updated state law now requires severance pay in the event of a permanent closure, relocation, or mass layoff. Affected employees must be paid one week's pay for every year of service, which can add up to a significant financial liability. 

Comparison: Advantages and Disadvantages of a Furlough and Layoff

Furloughs

Layoffs

FAQs on Furloughs vs Layoffs

Is it better to be furloughed or laid off?

There is no right answer here, as it depends on the situation. Being furloughed means you still have a job, you may keep your benefits, and you have a path back to employment. Being laid off means you lose your job, but you get a clear break, can file for unemployment right away, and can begin your job search without waiting. For some employees, the certainty of a layoff is preferable to the uncertainty of a lengthy furlough. For others, holding onto their job and benefits is worth the wait.

Is being furloughed the same as being laid off for unemployment purposes?

Not exactly. Laid-off employees can typically apply for and receive unemployment benefits as long as they meet their state's eligibility requirements. Furloughed employees may also be eligible for unemployment in many states, particularly if their hours have been significantly reduced or eliminated entirely. However, the rules vary by state, so it is always best to check with your state's department of labor for specifics. In most cases, furloughed employees are not required to actively search for a new job the way laid-off employees are, since they are still considered employed.

Why would a business owner furlough instead of lay off employees?

The biggest reason is talent retention. If a business owner believes the financial hardship is temporary and expects to need their team again in the near future, a furlough allows them to hold onto their employees without the cost of a full payroll. It avoids the time and expense of hiring and retraining down the road. It also sends a message to employees that the company values them and intends to bring them back, which can preserve loyalty and morale during a difficult time.

How long can a company furlough an employee?

The length of a furlough is generally up to the employer's discretion and is typically tied to the expected duration of the business' financial hardship. There is no strict federal limit on how long a furlough can last. However, most HR professionals and employment attorneys recommend that furloughs not exceed 12 months. If it becomes clear that the situation will not improve within that timeframe, a layoff is likely the more appropriate and transparent option. 

Do furloughed employees get paid?

No, furloughed employees do not receive their regular pay during a furlough. The purpose of a furlough is to reduce payroll costs, so employees are either working reduced hours or not working at all during that time. Employees may have the option to use any accrued paid time off during the furlough, although many employers restrict this since it defeats the cost saving purpose. Once the furlough period ends, employees return to work and resume receiving their regular pay.

Do employees receive health benefits when furloughed or laid off?

Whether a furloughed employee keeps their health benefits depends on the employer and the terms of the company's health insurance plan. Many employers choose to continue coverage during a furlough, but if hours are reduced enough that an employee no longer meets the plan's eligibility requirements, they may lose coverage and become eligible for COBRA instead.

For laid off employees, it is more straightforward. Since a layoff ends the employment relationship entirely, laid off employees are no longer eligible for the company's group health plan. Employers must notify them of their right to continue coverage through COBRA, though the employee will be responsible for paying the full premium on their own.

Conclusion

Whether you are considering a furlough, a layoff, or simply trying to understand your options, the most important thing you can do is make sure you are informed and compliant every step of the way. These decisions affect real people, and getting them right matters.

If you have questions about how these situations apply to your business in Maine or the surrounding states, feel free to reach out to the team at Paper Trails. We are here to help you navigate the tough stuff so you can focus on running your business.

Written: March 2026

Written by: Jon Portanova