Work is less? Furlough the staff!

A look at the practice of giving mandatory leave without paychecks to employees when the business is slow.

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Businesses cannot produce same results consistently. They go through cycles of high to low profits, and vice versa. And as they cannot run in isolation, their success is impacted by the changes in the economy. Add to this the various factors that force businesses to scale down operations, and there is no doubt that the challenges are many. Irrespective of what the cause is, it is not uncommon for organisations to discontinue a part of their business at some point.

While a downturn in the business is part and parcel of every organisation’s fate, for some, such phases are an annual affair. These companies plan ahead for these periods and have policies and practices in place to help them sail through these tough times. Giving furlough to employees in months when the business is slow, is a practice followed by many organisations to survive the sluggish periods.

‘Furlough’ is a term often used in business to refer to the mandatory leave given to employees without payments. Employees are asked not to report to work for weeks, in some cases even months, so that the employer can save money by reducing costs.

The questions that arise are— In the pursuit of cost reduction, are employees being made soft targets? Is human capital easy to liquidate than other assets?

Varun Updhayay, group head HR, Wockhardt, says, “Conventional industries, such as manufacturing, will not look to reduce manpower to bring the costs down, as human capital forms a very small proportion of the costs. On the other hand, in information technology (IT), the costs of manpower make a large chunk of total expenses.”

Employers give furlough to an employee or a bunch of them when the tide changes for the business. Once a decision is taken to give furlough, it can be acted upon very fast, unlike selling of a plant, machinery or real estate.

Some furloughs are planned in advance and become an annual affair, for firms that are into seasonal business. Here, furlough is a regular feature and not part of a downsizing initiative.

Drawing a parallel in the Indian context, a senior leader from the HR industry points out that the popular drink, Frooti, sees very high consumption in the summer season, but the demand falls drastically after the season ends. This widely popular mango drink, owned by Parle Agro, uses the furlough strategy to cope with the slack seasons.

Furlough is a common phenomenon in the gig economy, where employees are more in demand during certain times of the year, when the business is peaking. Organisations that employ contractual workers annually, give furlough to them for short periods, such as two-three weeks when work is less, and their services are not required.

Ashish Anand, CHRO SAR Group, says, “This is common for the companies that provide last-mile servicing to various e-commerce brands. During festivals or peak seasons, such as new year, and during sales, there is a spike in load, when they require a lot of manpower.”

For some periods in the year not many riders are required, as there are fewer sales. These companies can give furlough to employees when purchases are low. Generally, March to May is a laggard season for retail e-commerce.

“I have not seen furlough practised in financial services. In case of seasonal business, some organisations employ contractual workers,” says Jitesh Bawa senior VP HR, Tata AIG General Insurance.

Although employees do not receive salaries during the furlough period, at least they have a job guarantee. The thought of remaining employed in the future is more assuring than not having a job at all. Unlike layoffs, a furlough is a temporary phase— a short break that provides comfort to employees who are able to rest assured that after a short period of time they can resume work.

For the employers, furlough is a better strategy than layoffs. As soon as the tide changes, they can call back the employees without incurring any cost in trying to hire new ones. After all, recruiting new employees is not only expensive, but a rather time-consuming exercise. After all, the new hires will take their time to settle in and begin to actually perform.

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