It was a careful calculus. After years of effort to secure talent in a tight labor market, many finance chiefs responding to the shock of the coronavirus pandemic have so far preferred to furlough workers instead of severing ties completely, even if it means spending a little more.
“Our employees are long-term investments for us and they’re a precious resource, so we needed to do what we could," Mr. Sheehan said.
Other finance chiefs made a similar choice as the coronavirus pandemic shut down businesses across the country. Of the 87 firms in the S&P 500 to announce staff reductions from early March through the end of June, 65 chose to furlough workers, according to an analysis of securities filings by data provider MyLogIQ.
In June, 10.6 million workers were temporarily laid off, meaning they expected to be recalled to their jobs, down from a peak of 18.1 million in April, according to the US Labor Department. The jobless rate fell to 11.1% from 13.3% a month earlier, the department said.
“Think about the uncertainty that was hitting everybody. Unemployment was going through the roof," Mr. Sheehan said. He wouldn’t give exact figures, but said Hormel spent a significant amount of money to continue paying benefits for furloughed employees and to move production to different locations so that the company could prevent additional furloughs. Roughly 300 of Hormel’s furloughed employees have since returned to work.
Even though a furlough is a continuing expense, the costs of one-time layoffs can add up quickly, outweighing the intended benefit, said Richard Cardillo, principal for the Hackett Group, a consulting firm. A layoff takes time to execute and typically involves some lump-sum severance payment to terminated workers. And if the company has to rehire staff a few months later as demand ramps up, those recruiting and training expenses add to the cost of the layoff, Mr. Cardillo said. In such instances, a furlough is more cost-effective, he said.
“A furlough basically says hit the pause button," Mr. Cardillo said. “And I don’t have rehiring costs, I just have the cost of paying benefits."
Furloughs are also treated differently under US labor laws. A furlough is considered a temporary action and can be executed with little delay. By contrast, federal and state laws require companies to give workers 60 days of notice or more before a layoff under certain circumstances.
This made layoffs a less effective tool for finance chiefs seeking nimble responses to the slump in demand when lockdowns put much of the economy into hibernation. But that calculation can change over time—and has already begun to for some finance chiefs.
A company’s cash balance ultimately dictates whether workers are furloughed or laid off, Mr. Cardillo said. Companies that don’t expect revenue to recover to pre-pandemic levels may be forced to lay off employees who were temporarily furloughed, he said.
When lockdown orders were first imposed, Cars.com Inc furloughed 250 employees, or 16% of its workforce, Jandy Tomy, interim chief financial officer of the Chicago-based auto marketplace, said during a May 6 earnings call. The company permanently terminated 170 of its furloughed employees in an effort to reduce expenses, Ms. Tomy said. The company has brought back 50 of its furloughed employees since its May earnings call, a spokesperson said.
La-Z-Boy Inc permanently cut 10% of its workforce and closed a manufacturing facility in response to the pandemic, CEO Kurt Darrow said during a June 24 earnings call. The job cuts followed the Monroe, Mich, furniture maker’s initial decision to furlough about 6,800 employees, or about 70% of its workforce, Mr. Darrow said. The company brought back 6,000 of its furloughed employees, he said.
Finance chiefs must also contemplate what signal a furlough or layoff sends to investors and other stakeholders, such as suppliers, customers and other employees, said Michael Heric, a partner who leads the corporate support team and advises CFOs for consulting firm Bain & Co. Since furloughs are temporary, and workers can be called back at any moment, they telegraph an optimistic message about the company’s prospects.
By contrast, a permanent reduction to staff through a layoff can sow doubts about the company’s current financial position as well as its ability to recover in the future, Mr. Heric said.
But stretching out furloughs over an extended period, beyond six to 12 months, also has a downside.
“People become more anxious, they become frustrated, and start to look for other opportunities," Mr. Heric said.
Companies watching the resurgence of coronavirus cases in states such as Florida and Texas may hesitate to keep paying benefits for furloughed employees, Mr. Cardillo said.
“I think the stark reality of ‘Gosh, this is not as temporary as we had hoped,’ is now causing companies to take a look a this and say, ‘Furloughs were a nicer idea, but the financial reality is we’re really looking at a layoff,’" he said.