Reduce Your Labor Costs Mandatory furloughs might not be popular--but they sure beat layoffs.

By Toddi Gutner

Making tough choices is a big part of running any business, especially during an economic downturn. And no decision is harder to face than that of laying off employees.

There can be a somewhat pain-free solution, though: implementing mandatory days off without pay (also known as furloughs).

That's what D.D. Ford Construction of Santa Barbara, California, did in response to the stock market tanking and the housing market collapsing in the fall of 2008. President Doug Ford, charged with significantly cutting his monthly expenses, was preparing for a round of layoffs when his human resources manager suggested the furlough alternative.

Ford went forward with the plan, and it allowed him to temporarily, but quickly, cut $60,000 off his monthly payroll while avoiding the permanent pain of layoffs and costs of rehiring and retraining. "We were also able to keep the employees' benefits in place," says Ford. In addition, some states, like California, enable employees to collect unemployment for those days they are furloughed.

And how did the employees respond? "They all decided that they didn't want anyone to be let go and wanted to share together in the burden of getting the company overhead down," says Ford. "It was great for team-building."

While the benefits of implementing furloughs are many, it's essential to understand the complex legal issues such a process entails. The rules vary for hourly-wage employees versus salaried professionals. With hourly workers, it's simple: Just cut back their hours.

For salaried, exempt employees, however, it's much more complicated. Under law, if salaried employees work any time during a given week, they are entitled to the salary for the week unless they choose to work less. And if a salaried employee works at all on a given day, he or she is entitled to salary for that day. "You will want to think through the end game before you pull the trigger on this kind of program," says Max Caldwell, managing principal and global leader of the workforce effectiveness practice at Towers Perrin. You'll also want to implement the process in a way that doesn't impede employee morale. Here is what to consider:

Consider your workflow. Labor laws require "that employers ask salaried employees to take off specific weeks rather than a day a week for several months," says Doug Christensen, a partner in Dorsey & Whitney's labor law practice in Minneapolis. So if your work flow is better suited to allowing employees one day off each week over a specific period of time, then you will need to implement a 20 percent salary reduction to get to a 32-hour workweek. Note, however, that if you do salary reductions, says Christensen, your employees need to make a minimum of $450 a week. That means if someone is earning $500 a week and you cut his workweek one day, then his salary falls to $400. "That wouldn't meet the labor law requirements," says Christensen.

Draft an agreement. Give your furloughed salaried employees explicit instructions not to work on those days off. "Do it in writing to use as a defense and prove down the road that you didn't want them to work," says Christensen. Of course, it gets a bit tricky with smartphones and computers, but an agreement will help keep the instructions clear.

Try to give options. To help employees maintain their sense of control, try to let them choose those days they take off. At D.D. Ford Construction, all the employees in one department took the same number of days off, either one or two, and also decided which days they would be. "The employees felt that had a certain amount of control as well," says Ford, who adds that some employees are back to full-time.

Communicate, a lot. Throughout the entire process -- from informing the employees of the need to cut costs to explaining the benefits process -- make sure you give your employees as much information as you can. You might want to run seminars to discuss the impact on benefits, if any, and to let them know the process is temporary and how long it might last.

Wavy Line

Toddi is an award-winning journalist, writer and editor and currently is a contributing writer covering career management issues for The Wall Street Journal.

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