Companies Consider Furloughs to Reduce Labor Costs

 -  8/31/09

As a result of the recent economic upheaval, a growing number of companies have resorted to furloughs as a strategic cost-cutting measure.

As a result of the recent economic upheaval, a growing number of companies have resorted to furloughs as a strategic cost-cutting measure.

"A furlough is a tool an organization can use to reduce its labor costs; it typically associates reduced pay with a reduction in time worked," said Tom McMullen, U.S. reward practice leader for Hay Group.

"For most organizations, labor costs are typically the No. 1 or [No.] 2 item in an organization - particularly in service-intensive industries such as hospitality, retail, restaurant, etc.," he said. "So having some leverage in terms of how organizations can reduce labor costs without laying off good people and mortgaging their future is a real benefit to the organization."

In some cases, organizations use mandatory furloughs to save on labor costs.

"A classic example of this is a mandatory plant shutdown in the automotive industry, during which they might do a bit of retooling [and] conducting of safety inspections, but the significant majority of employees are off," McMullen said. "It's often around the Fourth of July or during end-of-year holidays when they shut the plant down. Everybody is required to take time off."

Another route companies can take is to implement a reduced workweek furlough.

For instance, companies may have a rotating schedule where they ask a certain percentage of the workforce not to work on certain weeks, or they ask all employees to take several days off a month. "This time off would also be commensurate with a reduction in salary," McMullen explained.

Most employers admit to using furloughs as a temporary solution, but their scope has expanded recently due to the cloud of economic uncertainty that hangs over many organizations.

"Furloughs used to be limited to manufacturing companies that have been shut down, but we've seen over the last year or more - with the downturn of the economy and companies struggling for actions that go beyond layoffs and restructuring - furloughs have become an attractive option to restructuring and layoffs as a way for organizations to keep the people they need but also [cut] labor costs down," McMullen said.



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