Furlough vs. Layoff: What Is the Difference?

When employers need to reduce labor costs, they typically consider two options: furloughs and layoffs. A furlough temporarily stops or reduces pay, while a layoff permanently ends the employment relationship.

Both approaches tackle the same issue by reducing labor costs, but they carry fundamentally different legal and financial implications. Global employers face even more complexity, as international labor laws dictate employer obligations during layoffs and furloughs—and the rules change every time you cross a border.

Making the wrong decision between a furlough and layoff can have a lasting impact, weakening workforce confidence and creating serious compliance exposure. But the right choice can help employers navigate periods of uncertainty with clarity and control.

This guide defines furlough versus layoff, what sets them apart, and how global employers can decide the best course of action.

What is a layoff?

A layoff is an indefinite end to a worker’s employment at a company. But what does it mean to be laid off from an employee’s perspective, and how does it impact the employer?

Unlike a standard termination or firing, a layoff isn’t tied to performance. It typically happens due to broader business needs, such as financial challenges or a position becoming redundant due to automation or restructuring.

Approaching layoffs the right way is critical for maintaining a positive reputation, especially among your remaining workforce. That means giving employees adequate notice and complying with termination laws, which can vary significantly across countries.

In jurisdictions with at-will employment, such as the U.S., employers don’t need to provide advance notice, and termination for any non-discriminatory reason is legal. But mass layoffs or site closings trigger federal notification requirements under the WARN Act.

Other countries enforce stricter worker protections. For example, Germany requires employers to justify layoffs economically and to notify employees within statutory timelines that can range from four weeks to seven months.

As with any workforce decision, there are good and bad sides to layoffs.

What is a furlough?

A furlough is a company-directed period of temporary unpaid leave or a significant reduction in hours. Unlike a layoff, a furloughed employee maintains employment with the company and is expected to return to work once business conditions improve.

During a furlough, employees don’t receive their usual wages or salaries, but they typically stay on company payroll and continue receiving benefits. Employers generally take this route when they expect financial conditions to rebound in the near future or need to restructure temporarily.

But placing employees on furlough leave isn’t as simple as temporarily dismissing a worker. Employers have ethical (and often legal) obligations to maintain transparency and communication with employees, even when they aren’t actively working. If you don’t expect conditions to improve within a reasonable time frame, a layoff may be more appropriate, as it allows employees to pursue other opportunities.

Some countries offer government-funded support for furloughed employees. For example, Germany’s Kurzarbeit program can replace up to 60% of a worker’s wages during a furlough. Other countries, like the U.S., don’t have a dedicated short-time work benefit, but furloughed employees can often access unemployment benefits.

Like layoffs, furloughs come with both advantages and disadvantages.

What is the difference between furlough and layoff?

A few core factors differentiate a layoff versus a furlough. Both reduce labor costs, but understanding how they differ is the first step in making the right choice for your organization.

Employment relationship

This is the clearest distinction between these two labor reduction methods.

A furlough keeps the employment relationship intact. The employee stays on the books and can return to work without a formal rehiring process. Layoffs end the employment relationship permanently. Bringing an employee back requires a formal hiring process and a new contract.

Pay status

Furloughed employees see a reduction or cessation in wages directly, but they remain on company payroll. Compensation depends on how many hours they continue to work—if any. Reduced hours translate to reduced pay, while complete temporary leave is usually entirely unpaid.

Laid-off employees are removed from payroll and no longer receive any compensation from the employer. While they may be eligible to receive severance pay or compensation for accrued PTO, they can’t receive ongoing wages because the employment relationship has ended.

Benefits eligibility

Furloughed employees usually retain some or all employer-provided benefits, such as health insurance or retirement fund contributions. When a worker is laid off, employer-provided benefits cease, but individuals are often eligible for government-sponsored insurance programs.

Duration

Layoffs are permanent. While a company may choose to rehire the same employee later, there’s no set duration of leave and the employee is under no obligation to return.

Furloughs are designed to be temporary, and their exact duration varies based on the employer’s timeline or projected recovery. Most international HR teams recommend following the maximum limits set by government benefits schemes to reduce compliance risk.

But these programs differ widely across countries. For example, Denmark caps furlough benefits at 13 weeks (or 26 weeks with an extension), while Austria allows a longer duration of six months (up to 24 months with extensions).

When should employers choose a furlough vs. a layoff?

Neither option is inherently better than the other. The right strategy depends on your organization’s financial situation, long-term structural outlook, and anticipated recovery timeline.

Here are some criteria to guide your decision:

• Temporary downturns versus permanent business changes. Furloughs work better for responding to seasonal dips in demand or short-term economic pressure. Layoffs are more appropriate when a business is undergoing large-scale restructuring or replacing workers with automation.
• Short-term cash flow challenges versus long-term cost reduction. Furloughs help manage immediate cash flow issues by temporarily cutting labor costs. Layoffs are better for companies that need to reduce expenses indefinitely.
• Retaining specialized talent versus eliminating redundant roles. Furloughs allow companies to keep trained, specialized employees onboard even during extended periods of leave. Layoffs make sense when certain roles have become unnecessary due to automation or restructuring.
• Limiting rehiring costs versus reducing headcount costs. Furloughs help prevent costly recruiting and training processes down the line. Layoffs offer immediate cost reductions when financial conditions demand it.

Managing workforce changes across multiple countries with Pebl

Choosing between a layoff and a furlough is a difficult decision for any organization, and it’s even more complicated for businesses with employees across multiple countries. No matter which strategy you choose, you must comply with each country’s labor protections, notification requirements, payroll obligations, and benefit rules.

For global HR teams, noncompliance isn’t an option, which is why having the right workforce management partner is critical.

Pebl’s Employer of Record helps global employers manage a distributed workforce across more than 185 countries without having to set up local entities. With automation and in-country legal experts, we reduce your compliance risk across borders. You can navigate furloughs and layoffs with accurate payroll and clear HR protocols that keep your international operations strong.

Contact Pebl today to schedule a meeting with our global employment experts.

FAQ

Can an employee be terminated while on furlough?

Yes. You can terminate an employee’s contract while they’re on furlough. But you must continue to follow termination laws in the country where the employee works.

Is it better to be furloughed or laid off?

For employees, it’s typically better to be furloughed, as they maintain their employment status and usually continue to receive benefits. However, some employees may prefer to be laid off, as it allows them to look for another job and may include severance pay. It depends on the state of the relationship and whether business recovery is likely.