Considering a Furlough?

US employers are considering many alternatives to address the significant economic hardships caused by the COVID-19 pandemic. One such alternative is putting one or more groups of employees on furlough—a low paid or unpaid leave of absence. However, now more than ever, employers must carefully address health plan coverage during a furlough. Issues US employers will need to consider include the following:

• Payment of Premiums. An employer must consider how to handle the employee portion of the cost for medical coverage during the furlough. Normally, the employee portion of the cost is paid by payroll deductions and often on a pre-tax basis through a cafeteria plan (governed by Section 125 of the Internal Revenue Code). Putting an employee on furlough may—but does not necessarily—trigger a participant’s ability to change one or more of his elections under a cafeteria plan. An employer must carefully review the terms of its cafeteria plan, as well as the proposed terms for the furlough (including how/whether medical coverage will be provided during the furlough), to determine to what extent a participant may have the ability to change his or her elections. In addition, if an employer decides to continue coverage during the furlough and the plan is insured, the employer will need to consider how the employee portion of the premiums will be paid to the insurer for the furlough period (including issues surrounding the advancing of those amounts by the employer).
• Discrimination. An employer must ensure that any health plan coverage offered during a furlough period complies with nondiscrimination laws applicable to health plans. Generally, this means that it should not be offered on a more favorable basis to highly-compensated individuals, including offering larger subsidies to highly compensated individuals, or discriminating against individuals based on their health status.
• Affordable Care Act. Employers need to consider the impact of the Patient Protection and Affordable Care Act (the “ACA”) on any changes to employment status and/or health plan coverage in order to limit the application of costly (and non-deductible) employer shared responsibility payments. Among these considerations:
  • Affected employees should be analyzed to determine whether they are in a stability period or considered “full-time” under the ACA such that failure to provide coverage may result in an employer shared responsibility payment.
  • Applicable large employers should consider whether they will continue to subsidize coverage so that it qualifies as “affordable” under the ACA.
• COBRA. Continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) must generally be offered based on certain qualifying events that result in a loss of coverage. A termination of employment is a qualifying event and a reduction in hours may also be a qualifying event assuming, in each case, that coverage is lost under the plan as a result of the event. In the case of a COBRA qualifying event, affected employees (and their qualified beneficiaries) should be given notice and an opportunity to elect coverage under COBRA.
• Other Leaves. Employees on furlough may be eligible for paid and/or unpaid leave. For example, on a federal level, the Emergency Family and Medical Leave Expansion Act and the Emergency Paid Sick Leave Act require certain employers to provide leave, including paid leave, for employees who are impacted by COVID-19.¹ In addition, some states, such as New York, have enacted emergency paid leave laws of their own that are, in some respects, broader than those set forth under the federal legislation. These new laws, while specifically directed at COVID-19 and its impacts, do not extinguish an employer’s existing obligations under the Family and Medical Leave Act (“FMLA”) and related state leave laws (including, in some circumstances, an employer’s legal obligations to maintain the employee’s health coverage).
  • Interaction with Other Leave Policies. Some companies permit employees to use vacation, sick leave and/or PTO during a furlough, and others do not. This should be made clear from the beginning of the furlough announcement, and it is important to confirm the approach is consistent with the existing leave policies. In addition, some state laws and the FMLA may restrict the company’s ability to entirely prohibit the use of paid leave during a furlough.
  • New Coronavirus Paid Leave Laws. The Families First Coronavirus Relief Act (“FFCRA”) only applies to employers with less than 500 employees, but the paid leave requirements will likely be reflected in more broadly applicable federal and state laws, such as the recently implemented New York Emergency Paid Sick Leave law. This will have to be carefully considered as a furlough policy and the laws develop. Some initial comments suggest that employees may be entitled to use paid leave before or during furlough, so this will have to be examined on an ongoing basis as interpretations and laws develop.
• Plan Documents; Coordination. If an employer intends to implement a furlough, all plan documents and policies should be closely reviewed to confirm that they provide the desired result. If not, plan amendments should be adopted. Employers sponsoring insured plans should coordinate with their brokers and insurers before making any changes, including as it relates to changes to eligibility requirements and changes to contribution levels. Stop loss policies should also be reviewed to ensure that coverage will be provided for claims incurred by furloughed employees.

US employers considering their options should be aware that the federal government and relevant agencies are providing guidance on COVID-19, including health plan matters, on a near-daily basis and that legislation relating to COVID-19 is also expected (including the pending Coronavirus Aid, Relief and Economic Security, or CARES, Act). Some relief for employers and health plans may be provided, particularly to help ease administrative burdens. The US government may also provide some relief or support for impacted employees and plan participants—for example, extended and/or subsidized COBRA, as was provided under the American Recovery and Reinvestment Act of 2009 to provide assistance to those affected by the 2008 recession. Updates on developments, as well as other COVID-19-specific resources, will be available on the Mayer Brown COVID-19 web portal.

¹ A summary of the Emergency Family and Medical Leave Expansion Act and the Emergency Paid Sick Leave Act is available at https://covid19.mayerbrown.com/employment-us-employers-should-pay-close-attention-to-new-legislation-requiring-paid-leave-related-to-the-covid-19-pandemic/.