Every business, no matter its size, faces moments when cutting costs becomes unavoidable, but does that always mean layoffs?
Economic slowdowns, seasonal fluctuations, or sudden operational hurdles can sometimes put pressure on a company’s finances. In such situations, furlough leave can serve as a strategic tool, allowing businesses to reduce costs temporarily without permanently letting go of employees.
Furlough leave temporarily reduces costs while keeping employees on payroll—unlike layoffs. Understanding its impact on your team and operations is crucial for SMEs.
In this guide, we’ll break down furlough leave, explain how it works, explore its benefits and limitations, and provide key insights to help businesses and employees navigate this temporary leave arrangement with clarity and confidence.
Temporary Unpaid Leave: Employees are relieved of duties without pay but retain employment status.
Alternative to Layoffs: Helps companies cut costs without permanently losing staff.
Employee Benefits Retained: Job security and certain benefits, like health insurance, may continue.
Flexible Duration: Can range from a few days to several months, depending on business needs and external factors.
Key Considerations for HR: Legal compliance, clear communication, and planning for reintegration are essential, especially for SMEs.
Furlough leave is a temporary, unpaid leave granted by companies during periods of financial strain, operational slowdown, or other business challenges. Unlike layoffs, furloughed employees remain on the company’s payroll and retain their employment status, with the expectation that they will return once conditions improve.
Furloughs can take different forms. Some employees may be placed on full furlough (no work, unpaid for weeks or months), while others may experience a partial furlough, where hours or pay are reduced. Both approaches help companies cut costs while keeping employees connected to the organisation.
For SMEs, furloughs can be a practical alternative to layoffs. They reduce financial pressure without permanently losing skilled staff—an especially important consideration for smaller businesses where every employee plays a critical role. For employees, it offers reassurance that while income may be paused or reduced, their job is not permanently gone. But before you decide if furlough is the right step, it’s essential to understand what it really includes.
What Does a Furlough Leave Include (Key Characteristics)
Furlough leave can look different depending on how a company structures it. Here’s what you need to know before implementing a furlough.
Temporary Pause at Work: Furloughs are not permanent. Employees are expected to return once business conditions stabilise.
Unpaid or Partially Paid Salaries: Typically, employees do not receive wages during the furlough period unless the employer decides otherwise.
Retention of Benefits: In many cases, employees may continue to receive benefits like health insurance or retirement contributions.
Employer-Mandated: Furloughs are usually initiated by the employer as a strategic measure to manage costs while retaining talent.
For example, a retail store facing reduced sales during an off-season may furlough staff for a few weeks. Employees maintain their roles and benefits, and they return to work once demand picks up.
However, for many businesses, it’s easy to confuse furloughs and layoffs; the difference, though, is more than just terminology. Misunderstanding the two can lead to poor decisions that hurt both the business and its people. Here's a clear distinction that helps you make a better decision.
While both furloughs and layoffs are used to manage workforce costs, their implications for the business and employees are fundamentally different:
Aspect | Furlough | Layoff |
Nature & Duration | Temporary & reversible. Employees stay on payroll. Return expected once conditions improve. | Permanent. Employment ends, often with severance. |
Financial Impact | Cuts payroll costs without losing talent. Some benefits may continue. | Immediate cost reduction but hidden costs: recruitment, retraining, and lost knowledge. |
Employee Morale & Retention | Job security maintained. Engagement & loyalty remain high. | Job loss impacts morale, trust, and productivity of remaining staff. |
Legal & Compliance | Must follow labour laws, notice periods, and benefits rules. Errors can trigger disputes. | Must comply with retrenchment laws, severance, and mandatory notices. |
HR Strategy & Tech | Enables proactive workforce planning. HR tech (leave management, payroll automation, dashboards) streamlines tracking, benefits, and communication. | Limited flexibility. Rebuilding workforce culture and skills is costly and time-consuming. |
Why this matters: Choosing between a furlough and a layoff is not just about cutting costs. It’s about balancing short-term savings with long-term stability. If businesses get this wrong, they risk facing compliance penalties, culture breakdown, and talent loss. Get it right, and you protect both your bottom line and your people.
Once you understand the importance of a furlough, the next step is to see how it works in real business scenarios, allowing you to apply it effectively without disrupting your team.
Furlough leave involves structured planning, clear communication, and compliance management. Here’s how it typically works in practice:
Identifying the Need
The first step is determining why a furlough is necessary in the first place. Like we discussed earlier, common reasons include:
Temporary cash flow crunch: Startups experiencing delayed funding rounds or SMEs waiting on large client payments may need to reduce payroll temporarily.
Seasonal demand fluctuations: Retailers, tourism companies, or event management firms may face predictable slow periods, such as post-festival months or off-season, when business activity dips.
Industry-specific slowdowns or crises: For example, a logistics company during fuel price spikes, or an airline during a travel ban or global health crisis, may need to adjust workforce deployment.
Unexpected operational disruptions: Sudden supply chain breakdowns, equipment failures in manufacturing, or IT system outages can temporarily halt operations, necessitating furloughs in affected teams.
For SMEs, analysing workforce data using HR tools can help pinpoint departments, teams, or roles where a furlough would have the least operational disruption while maximising cost savings.
Defining the Furlough Terms
Once the need is established, the company sets clear terms:
Duration: Decide whether it will be a full or partial furlough.
Pay & Benefits: Specify what benefits continue (healthcare, retirement, allowances).
Work Expectations: Confirm if employees are completely relieved from duties or required to work reduced hours.
3. Communicating With Your Employees
Transparent communication is utmost important:
Explain the reason for the furlough, its expected duration, and how it will affect pay and benefits.
Outline what employees can expect in terms of returning to work.
Address questions about unemployment benefits, side work, or ongoing projects.
Pro Tip: Simple measures like an all-staff meeting, personalised emails, or one-on-one calls help maintain trust and reduce anxiety, and work best in such cases. Clear communication matters more for your employees.
4. Managing Legal and Compliance Considerations
HR teams must ensure that furloughs follow labour laws, employment contracts, and company policies. Key considerations include:
Formal Employee Notification: Communicate the furlough in writing, specifying the reason, expected duration, and any changes to pay or benefits. This helps avoid disputes and maintains transparency.
Payroll and Record Keeping: Maintain accurate payroll and attendance records, even for unpaid furlough periods, to ensure compliance and audit readiness.
Benefits Continuation: Assess which benefits (like health insurance or provident fund contributions) continue during furloughs. While not mandatory under all laws, some benefits may be contractually or ethically required.
Compliance with General Labour Laws: Ensure the furlough aligns with overarching labour regulations in India, including employment agreements, notice periods, and fair treatment of employees.
Tip for SMEs: Keep furlough periods short, documented, and communicated clearly. Even without industry-specific rules, following these best practices helps avoid disputes, maintain trust, and stay compliant.
5. Monitoring and Adapting During the Furlough
Furloughs are not fixed; things can change quickly. Here’s how SMEs can stay on top:
Check finances regularly: Adjust furlough duration if cash flow or demand improves.
Keep communication clear: Share updates on timelines and return-to-work expectations.
Support skill retention: Offer optional training to keep employees engaged.
Plan for staggered return: Bring back key staff first to match immediate business needs.
Pro Tip: Even small teams benefit from simple, consistent updates. Clear monitoring keeps employees informed and reduces disruption.
6. Reintegration and Workforce Planning
The goal of a furlough is a smooth return to normal operations. SMEs can make it simpler by:
Prepare a clear return plan: Define roles, responsibilities, and timelines before employees come back.
Prioritise critical staff first: Recall employees whose work is essential to immediate operations.
Communicate expectations: Ensure employees know any new processes or changes in workflows.
Gather feedback: Check in with returning employees to address concerns and improve future furlough planning.
Tip: A structured, transparent reintegration reduces downtime, keeps morale high, and ensures operations ramp up quickly.
Before you bring your team back, it’s important to understand what determines how long a furlough should last.
The duration of furlough leave depends on the specific reasons behind it, such as financial challenges, seasonal business slowdowns, or industry-wide crises.
Furloughs in India are generally rare, temporary, and can last anywhere from a few days to several months, depending on the business's circumstances. Here are the key factors that influence the length of furlough leave in the Indian context:
Circumstances and Industry Factors
The reason behind the furlough plays a significant role in determining its length. For example, if the furlough is caused by short-term financial challenges, like a dip in sales or cash flow issues, it may last just a few weeks. However, if the furlough arises from broader economic challenges, such as a recession or an industry-wide downturn, it could extend for several months.
For example, during the COVID-19 pandemic, many businesses, especially in hospitality and tourism, had extended furloughs, lasting for several months, due to the sharp drop in demand and operational restrictions.
Full Furlough vs Partial Furlough
Two types of furloughs may be used by businesses: full furlough and partial furlough.
Full Furlough: Employees are not required to work and do not receive pay for at least a month or more. This type is typically used when businesses face long-term financial constraints.
Partial Furlough: Employees may be required to work reduced hours or may be paid partially, typically for a portion of the month. This option is commonly used to ensure that businesses can maintain some level of operations while minimising labour costs.
For example, a fruit-packing facility might reduce staff hours during the off-harvest season (partial furlough), while an IT company might implement a full furlough during a project freeze.
External Factors and Government Regulations
In certain cases, external factors like government policies or regulatory changes can influence the duration of furloughs. For example, during a state or national lockdown, businesses in India may furlough workers temporarily until restrictions are lifted or the industry recovers.
For example, during the COVID-19 lockdowns, many businesses across India furloughed their workers as part of cost-cutting measures, with the understanding that they would return once normal operations resumed.
Employer's Discretion
Employers in India have flexibility in determining the length of furlough based on their business needs. Companies must evaluate the financial impact and recovery timeline to decide how long employees should be furloughed.
For example, a retail business might furlough its employees during the off-season, planning to bring them back when demand spikes during festivals or the holiday season.
Suggested Read: Navigating Labour Laws for Interns, Trainees, and Apprentices
Once the timeline is set, it’s equally important to consider the benefits and potential drawbacks of furlough leave for both employers and employees. This helps you make informed decisions that balance cost management with workforce well-being.
Furlough leave isn’t just a cost-cutting measure. It’s a strategic lever for workforce management.
For SMEs, it matters because it:
Protects Key Talent: Retaining skilled employees during slow periods avoids the cost and disruption of rehiring and retraining later.
Controls Costs Without Permanent Layoffs: Businesses can navigate temporary revenue shortfalls while keeping the workforce intact.
Supports Employee Confidence: Even unpaid furloughs signal that the company intends to rehire staff, reducing uncertainty and preserving loyalty.
Enables Operational Flexibility: Furloughs allow companies to scale down quickly and scale up again without long-term commitments or legal hurdles.
Despite its advantages, furloughs carry risks that need strategic management.
Here's What Can Go Wrong During a Furlough:
Even with the benefits, furloughs come with significant risks that businesses cannot ignore. For SMEs, these risks can impact not just finances, but also workforce stability and long-term growth:
Talent Attrition: Extended furloughs may push employees to seek other opportunities, leading to the loss of skilled and experienced staff. This can create a costly talent gap when business picks up again.
Productivity Challenges: Employees returning from furlough may need time to catch up on missed projects, learn updated processes, or adapt to operational changes, slowing business momentum.
Morale and Engagement Decline: Uncertainty during furlough periods can decrease motivation, reduce loyalty, and negatively affect the morale of both furloughed and remaining employees.
Key Insights for SMEs: To minimise these risks, furloughs must be planned, communicated, and monitored carefully. Transparent updates, clear return-to-work plans, and support for employees during the pause can preserve both trust and operational efficiency.
Furlough leave is a strategic tool that allows businesses to manage costs, navigate temporary slowdowns, and retain valuable talent without resorting to permanent layoffs. For SMEs, understanding the nuances of furlough—its duration, financial implications, and impact on employee morale- is essential to make informed decisions that protect both the company’s stability and its workforce.
While furloughs offer clear advantages, they also carry risks such as talent attrition, reduced productivity, and potential morale issues. Careful planning, transparent communication, and ongoing monitoring are key to balancing these risks with the benefits. By approaching furloughs strategically, businesses can maintain operational flexibility while ensuring employees feel secure, supported, and ready to return when conditions improve.
1. How does furlough leave affect employee benefits?
Furloughed employees may retain some benefits, such as health insurance, depending on the employer's policy. While they may not receive regular wages, many companies continue offering certain benefits during furloughs, providing a safety net for employees during their leave. It's essential to check with your employer to understand the specifics.
2. Can employees work during a furlough?
No, employees on furlough are typically not required to perform any work. Furlough is intended to be a temporary, unpaid leave, allowing the employer to reduce labour costs without permanently laying off employees. If you are furloughed, you are expected to refrain from working until your employer calls you back.
3. What happens if a furlough extends beyond six months?
In India, prolonged furloughs (beyond 3–6 months) may be treated as layoffs or retrenchment under the Industrial Disputes Act, 1947. Employers may then need to follow due process, such as notice or compensation. SMEs should consult legal experts and communicate clearly with employees if a furlough risks extending that long.
4. Is furlough leave the same as paid time off (PTO)?
No, furlough leave differs from PTO. PTO is paid time off, where employees continue to receive their wages while away from work. Furlough leave is usually unpaid, and employees are not required to work during the furlough period, making it a distinct form of leave focused on cost reduction.
5. How do furloughs impact employee morale?
Furloughs can lead to uncertainty and stress for employees, as the lack of pay and the temporary nature of the leave can negatively affect morale. Clear communication from employers about the reason for the furlough and when they expect employees to return is crucial to maintaining trust and minimising negative emotional impacts on the workforce.
