Layoffs or furloughs?

Shedding some light on the layoff versus furlough debate.

The economic crisis is certainly keeping human resources departments busy. Judging by the headlines, HR teams at corporations and banks cannot be taking many days off as they try to solve the problem of how to cut payrolls to save the organisation without losing their best people in the process.

For banks, layoffs appear to be the answer. "I don't know of a single person who is simply taking time off from their firm. Everybody is being laid off," said one unemployed banker.

If this is true, it would seem the financial services industry is in for a permanent change. According to HR research, layoffs are best suited for industries in the midst of change; the ones whose future prospects are unknown except for the fact that they will be significantly altered from the past.

Furloughs are another story. Varying in style from voluntary or mandatory unpaid leave to a reduced work-week -- of course coupled with a pro rata pay cut -- they allow an organisation to cut costs without necessarily reducing headcount. Research indicates that furloughs are best suited for industries which believe business will return to earlier levels after a prolonged slowdown.

"The concept of a job loss is paralysing," said Russell Huntington, Asia-Pacific director of the Human Capital Group at Watson Wyatt. He explained that layoffs hurt employees' trust in an organisation, impacting on productivity and morale, and leading potentially to the flight of the high performers they want to keep.

Furloughs are not necessarily the silver bullet though. "With a furlough there is no clear end. The increased uncertainty associated with time off work, not knowing what the future holds, can make it very difficult for an employee to deal with", said Graham Millington, a UK-based executive coach and leadership consultant.

In a blog, one senior banker said that he would not accept a pay cut or alternative cost cutting measure -- even if that meant losing his job -- because it "breeds resentment and will merely serve to postpone the inevitable".

However, for those who need the income, a furlough represents a reprieve, if only temporarily, from the immediate loss of income and security associated with a layoff. "For me personally, I think a furlough would have been a worse solution," said a laid-off UBS banker. "If I had more commitments, say a mortgage or dependents, then the furlough option would have been more relevant".

Complicating the whole issue is culture. "The Anglo/American way to deal with a crisis is a preference to axe jobs," said Huntington. "In Asia there is a sense of social responsibility, an assumption that we all suffer together rather than having some of us suffer the ultimate."

A good example is the airline industry. In the US, airlines cut a total of 27,500 jobs between February 2008 and February 2009. But when Mumbai-based Jet Airways announced 1,900 layoffs last fall, the airline was forced to rescind them after political and union pressure.

Earlier this year, after posting a 222% drop in its 2008 profit, Hong Kong-based Cathay Pacific Airways announced a voluntary unpaid leave scheme for all of its 17,000 employees. "Everyone in my department was expecting at least four weeks unpaid leave but it's only two," said one Cathay Pacific employee. "I'm happier today than over the past few weeks."

Interestingly, 85% of the Hong Kong-based ground crew have opted to take the unpaid leave scheme, while only 14% of pilots have signed on for the same scheme.

When asked why some banks operating in the region have resorted to layoffs despite Asia's preference for communal cost-cutting solutions, Huntington retorted, "And how many of those companies are headquartered in Asia?" Very few.

Both layoffs and furloughs have their pluses and minuses but neither is arguably better. "A redundancy is an opportunity to embrace the need to change and learn new skills," Millington said. "(But) you can also use a furlough to try out new ideas and see whether you'd rather be doing something different in your career."

As for the thousands of financial industry employees cut loose by the industry's contraction, many seem, ironically, to be doing better than expected. "I've found people's reaction to redundancy is split 50-50," said the former UBS banker. "Half find it a relief and half feel pressure to get back into the market. It gave me the opportunity to take a step back and get my feet on the ground. I travelled to 15 countries and have gone back to school for a masters in design studies," he said. "The redundancy is the best thing that ever happened to me."

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