Pay Cut, Furloughed, or Laid Off? What Employers and Employees Need to Know

The economic impact of the COVID-19 pandemic knows no bounds, and architecture has not been immune. In a mere few months, firms have gone from project backlogs and frenetic hiring to diminishing work and wage reductions, staff furloughs, and, most painfully, layoffs.

“For most organizations, employee costs are a significant part of their overall cost structure,” says Brian Clapp, the greater Philadelphia–based president of CCI Consulting, a human resources and talent management consultancy. “If revenue loss is significant, unfortunately most organizations have to look at the payroll and people costs.”

If employers or employees find themselves on the delivery or receiving end of an employment notice, they should keep several general guidelines and protocols in mind. Of course, to fully understand the laws applicable to their situation, they should consult an attorney with knowledge of their jurisdiction and circumstances.

Before making any rash staffing decisions, design firms should look beyond the immediate situation, says Dallas-based HKS principal and human resources director Michelle Carroll. “It’s important to balance any short-term cost containment needs with your longer-term talent strategy,” she explains. “Firms should … understand exactly what roles, expertise, and talent are needed not only to support current workload but, more importantly, what we expect our future to bring. … In some cases, it may even make sense to invest in new talent that deepen those areas now.”

Clear communication and documentation are ever more critical at this time. “Many employers are ambiguous and careless when communicating with and conveying expectations to employees,” says Grant Osborne, an Asheville, N.C.–based attorney at the law firm Ward and Smith. “Poor communication or miscommunication can account for an awful lot of legal disputes. Clear communication can avoid an awful lot of legal disputes.”

Support and empathy can also go a long way. “Employers should be providing support for all employees during times of crisis, regardless of their status,” Carroll says.

Clapp agrees. “Treat people as fairly as you can and with respect,” he says. “Try to bridge them in whatever ways possible given the economic situation. Hopefully, as an organization and as a society, we will rebound from this, and if you’re not doing [the most you can for your employees] now, you’re going to have a tougher time on the other side of this.”

And, in case this still needs to be said, discrimination or even the semblance of discrimination against any individual or group of individuals regarding employment decisions is grounds for legal action. “All employers need to bear in mind [that] the law is not about the truth,” Osborne says. “The law is all about the apparent truth.”

Wage Reduction and Work-Hour Reduction

Scenario 1: Less Work, Less Pay
Cuts to pay and hours worked are a cost-containment measure that firms can implement to keep their current staff intact to the extent possible. “You retain your ability to tap the resources—the people—that you have in place,” Clapp says, “and your likelihood of rebounding to ‘normal’ operation will be quicker and easier because you’ve maintained your workforce.”

Employers can help mollify employee concerns through clear communication: Who’s receiving wage or work-hour cuts? Why are the cuts being implemented? For how long will the reductions last? By discussing the measures they’re considering up front, firms may even find a few workers receptive to work-hour reductions due to other factors arising from the pandemic, such as the lack of childcare or the need to care for relatives. “Employers should also consider establishing a flexible work policy,” Carroll says. “Some employees may choose to voluntarily and temporarily reduce hours in order to manage their personal circumstances.”

However, the law in many states does not require an employer to explain why they’re implementing pay cuts, Osborne says. The employer can also change the terms, conditions, and compensation of any at-will employee prospectively. An at-will employee is someone who is “employed at the will and pleasure of the employer,” Osborne explains, and “has been provided with no promise of employment for a definite term.” Also key is the word “prospectively,“ meaning “with respect to work done from now forward as opposed to work done in the past,” Osborne continues. Employers attempting to retroactively lower their workers’ pay for work already performed had better check beforehand what the law says in their jurisdiction: That is, it’s probably illegal.

Two exceptions can restrict an employer’s ability to single-handedly change an employee’s pay. First, when the employer and employee have a contract that “prescribes compensation that limits the right of the employer to change compensation,” Osborne says. Second, when “a written personnel policy or an unwritten personnel practice prescribes limits on changes that employers may make to compensation.” These exceptions will generally not apply to a typical worker outside the C-suite, Osborne adds, because employers avoid making them: “Such contracts limit the right of the employers to treat the employment as they want.”

Employers may also be required by its state department of labor to provide a window of notice before implementing pay changes. In North Carolina where Osborne is based, for example, employers must give employees 24 hours’ notice.

The Fair Labor Standards Act, administered and enforced by the U.S. Department of Labor, does allow an employer to ask an exempt employee, who receives a fixed compensation regardless of the hours they work in a week, to switch to hourly pay, which does entitle the worker to receive overtime pay should their workweek exceed 40 hours.

Poor communication or miscommunication can account for an awful lot of legal disputes. Clear communication can avoid an awful lot of legal disputes.

Scenario 2: Same Work, Less Pay
Absent an employment contract or personnel policy as described above, an employer likely can change the wage of an at-will employee while expecting the same amount of work going forward. “If the employer wants to change the rate of compensation of an employee,” Osborne says, “the employer is free to do that and leave the employee’s job duties intact, make them greater, or diminish them.”

Just because an employer can ask employees to maintain or increase their responsibilities at a lower pay doesn’t mean that they should. “From an employer’s perspective, if they’re looking to retain employees but say, ‘I’m going to give you a 20% pay cut, then expect you to do more,’ that’s going to be tough when this all ends,” Clapp points out. Pay cuts are typically deployed to maintain staff numbers while responding appropriately to a reduction in workload.

Employers are not required by federal law to tell employees when they expect to restore their wages, Osborne adds.

For Employees
Employees who are asked to reduce their work hours should review with their benefits manager the potential impact to their non-wage benefits, namely their health care and retirement plans. The terms and conditions by which their benefits can be changed should be stated in their plan documents and employer-provided summary plan description.

Employees who decide the pay or work-hour cut is significant enough to compel them to leave their job might still be entitled for unemployment benefits, depending on eligibility requirements, which vary by state. In North Carolina, Osborne says, an individual may still be entitled to unemployment benefits if they are “unemployed through no fault“ of their own, are actively seeking work, and have left their work due to a “good cause attributable to the employer.“ In that state, a “good cause“ includes a reduction of an employee’s work hours by more than 50%, or a reduction of pay by more than 15%, as implemented by the employer.

Finally, if any employee is asked to work for no pay—to volunteer their time until some undefined uptick in the economy occurs—they should quickly say no, thanks. “That would be illegal,” Clapp says. “You can’t have people work for free.”

If any employee is asked to work for no pay, they should quickly say no, thanks.

Furlough, Full or Partial

Another course of action for employers looking to reduce expenditures is to furlough employees, or temporarily suspend their employment and most likely their pay. “A furlough would be more of a surgical thing where you’re identifying people or groups to temporarily release,” Clapp says. “And the operative word there is ‘temporarily.’” The advantage to the employer, he continues, is that they “still have the ability to pull people back when things turn around.” Unless, of course, the employees have moved on from their company.

Employer Prerogative
Though furloughs typically mean that the employee completely stops working, furloughs can “involve a partial cessation of work,” Osborne says, which is akin to reducing an employee’s work-hours. For example, an employer can furlough an employee for 25 hours of work a week, leaving them to work 15 hours; or furlough an employee on alternating weeks.

Again, employers should explain and document their decisions clearly and meticulously, Clapp says. “You can change [the conditions of employment] as long as you’re communicating it and you’re doing it equitably,” he says. “You can’t say, we’re going to furlough all the women, a minority group, or older people. As long as it’s across the board, you can do that with minimal paperwork.”

He also recommends maintaining an open line of communication with the remaining employees: “If you just furloughed 20% of the workforce, the 80% that are staying are scared that they’re next.” Though employers should not make promises about their future, they can let their staff know what happened and how their former colleagues are being helped. “There are things employers can, and should, do to help soften the transition for impacted employees,” Carroll says. “For example, it’s important to work with your benefits providers to safeguard or extend benefits, especially health insurance.” In many circumstances, furloughed employees would still accrue benefits, such as group medical benefits.

Prior to COVID-19, Osborne says, “the reduction of an employee’s working hours below the threshold prescribed by the insurance policy would disqualify the employee from coverage.” Now, he continues, “many group health insurance carriers have waived those thresholds for the time being.” He advises employers to check their group health insurance policy to determine how much work is required to maintain coverage, and then to follow up with their carrier as needed to see whether the carrier is willing to waive the requirements.

Employee Prerogative
A furloughed worker needs to understand what the change to their employment status means. Will they be completely or partially furloughed? Paid or unpaid? Are their company’s non-wage benefits continuing? Does the company have an estimated time frame for ending the furlough? Specific timelines will be hard to nail down during this time, but if employees get can an idea of whether the furlough will last one week, one month, or six months, and they’re not receiving paychecks, they can better “understand the implication and if they need to make other decisions, or look for other employment,” Clapp says.

In the meantime, furloughed employees can apply for unemployment benefits, which carry a $600 weekly bonus through July 31, 2020, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act from the federal government. Unemployment benefits vary by state and are based on several factors, including worker pay history. Even partially furloughed employees can “apply for partial benefits for the time that you’re not working that you’re available to work,” Clapp says.

Good organizations look to [their core values] to say if they value people, how do they make these tough decisions in a way that respects the people who are impacted?

Furloughed individuals, particularly if they want to stay with their firm, should confirm that their company allows them to hold outside employment while they’re on the staff roster—something a high-level, highly visible executive may not be able to do without explicit company consent, Osborne says. Two other potential reasons to pause the job search: First, if the employer imposes a condition on the employee, which does not necessitate a formal contract; for example, Osborne says, an employer might say, “I want to bring you back, and in exchange for my express hope to do so, I ask you not to work for my competitor.” Because a relationship technically still exists between the employer and furloughed employee, an employee should notify their employer if such an opportunity does arise. “That’s not to say that the employer, as a result of that condition, can prevent the employee from working for the competitor,“ Osborne adds. “All that the employer can do, generally speaking, is refuse to reinstate the non-compliant employee“—unless a contract exists that states otherwise.

A second condition for consideration would be if the employer is continuing to pay the furloughed employee in order to meet the loan forgiveness conditions stipulated under the Paycheck Protection Program, also established by the CARES Act. As a result of the PPP, Osborne says, “you have many employers who are suspending the work of their employees, but continuing to pay them as long as they can.”

Layoffs and Termination

If a company has determined that the impact of this pandemic will be significant and long lasting to its business, Clapp says, it may be forced to consider restructuring. Now is a good time for a firm to revisit its core or stated values, he adds. “Good organizations look to those to say if they value people, how do they make these tough decisions in a way that respects the people who are impacted?”

Employers’ Rights
Depending on state law, employers may not be obligated to tell an employee why they’re being laid off, and they can do so with little or no notice, Osborne says. But he recommends against that. “Even though it’s lawful for the employer to discharge or … fire an employee at-will for [whatever or no] reason, there are a lot of unlawful reasons why employers discharge employees.”

The law is not about the truth. The law is all about the apparent truth.

The situation becomes particularly tenuous if an employee was on a protected leave of absence, such as that provided by the Family and Medical Leave Act and the temporary Families First Coronavirus Response Act. Though an “employer can lawfully fire” someone on maternity leave, Osborne says, they cannot do so “in whole or in part because she’s on maternity leave, because that is seen as retaliatory.” Unless an explicit, obvious reason exists, such as a wholesale reduction of the workforce, the decision to lay off someone on protected leave should be weighed carefully.

Employer Responsibilities
Because many offices are still operating remotely, discharging workers can be even more painful and awkward than during typical working conditions. Before an employer delivers notice to their staff, they should coordinate with their HR and IT departments to prepare the necessary paperwork and to time the revocation of employee access to work servers, telephone numbers, and files. “You don’t want to shut off somebody’s access before you have a conversation with them,” Clapp says. “These things, in the best of times, can be challenging to think through and to orchestrate.”

The ideal, but currently impossible, way to notify an employee would be in-person and face-to-face. The next best option would be a phone or video call. “If a company is going to do that,” Clapp says, “they need to make sure they have a second person on the call as a witness to make sure that it’s clear what was said and what wasn’t said.” Paperwork can be completed virtually through software such as DocuSign.

The rapid transition to remote work poses other awkward situations: retrieving employer-owned equipment or hardware from the employee, and returning any laid-off employee’s personal belongings from the office when it reopens. Employers can consider sending a prepaid shipping box to the employee’s residence, or creating a window of time for the employee to recover their items at the office. “It matters less what the strategy is,” Clapp says. “It matters more that you thought it through and are addressing that need.”

Employee Rights
Individuals who are laid off, or terminated, should expect to see a release or waiver among their employer-provided paperwork that, among other things, forfeits their right to sue the company. If an employee is receiving a severance package, their severance will likely be contingent on signing the release within a prescribed window of time, Clapp says.

Despite the widespread revenue declines, employees should negotiate their severance package, Clapp advises: “A reasonable ask may not be fulfilled, but it usually will be considered.” He recommends employees try to assess what a typical severance package looks like at their firm before signing anything. Hiring an employment lawyer to review documents beforehand will help ensure that the employee understands what they’re signing, what they get for signing, and what rights they’re giving up, he adds—though attorney fees are a consideration. Osborne recommends hiring a lawyer if the employee has a “genuine reason to believe that the employer has breached an agreement made between the employer and employee, or [the employer] has breached the personnel policy on which the employee had the right to rely.”

A reasonable ask [during severance negotiation] may not be fulfilled, but it usually will be considered.

If an employee is not initially offered or entitled to a severance package, they can still request one. “It’s not uncommon for an employer and employee to engage in a settlement and release agreement providing for severance pay, the result of which the employer and the employee get something in the agreement,” Osborne says.

From an employee’s perspective, Clapp says, “I would expect to be treated with dignity and respect.” He also hopes that employers would continue to support team members who were made redundant, and perhaps even more so because of unemployment figures across industries. “Employees need that,” he says. HKS’ Carroll notes that firms can also provide “outplacement support, including résumé and LinkedIn guidance, and networking assistance.”

Move On or Hold On?

Even during the best of times, designers should continually update their résumés, profiles, portfolios, and websites. If an individual does find themselves on the receiving end of a cost-cutting measure, they shouldn’t think that their options are limited due to the high unemployment rate, Clapp recommends: “That puts you at the back of the pack instead of the front.” Make clear to prospective employers that their furlough or layoff was not the result of worker performance—assuming this is true—and that they were “swept up in the impact of COVID-19 … along with a lot of other people.”

If demand for design is down across the board in the region, finding a similar job can be difficult. “In this environment, be active and aggressive, try to figure out how to transfer your skills, background, education, and experience [to] use them in a little different way, or in a much different way,” Clapp says. “You are going to fare better than those who don’t.”

In this environment, be active and aggressive, figure out how to transfer your skills, background, education, and experience [to] use them in a little different way, or in a much different way. You are going to fare better than those who don’t.

The thought of a previous employer imploring your return when the economy stabilizes can be seductive and not entirely unfounded. HKS has “welcomed back many former employees after previous downturns,” Carroll says. “The economic and market outlook will determine how quickly any firm can reinstate reduced team members.” That possibility makes it even more important for individuals to stay in touch with their current and former colleagues and supervisors.

But people also have to be realistic about their career. Companies will do what they can to bring furloughed workers off the bench, but they’re not legally obligated to, unless a binding contract states otherwise. So terminated employees shouldn’t “just wait for the company to invite you back,” Clapp says. If a worker has been laid off and/or the firm has restructured itself, the message the firm is “sending is that your job and your employment here as it [existed] is no longer viable.” And though the economy will come slowly or roaring back, everyone should “be active, be focused, and be your own best advocate,” Clapp notes. “Look out for yourself.”