How to Manage Employee Payroll During Furloughs and Layoffs

Layoffs and furloughs have become more common in recent years due to economic factors like inflation, higher interest rates, and corrections from pandemic overhiring. The growing use of AI has also led to shifts in team structures, increasing efficiencies resulting in lower headcount.

These changes can be challenging for everyone involved, from the affected workers and colleagues to the payroll and HR teams managing the offboarding process.

How payroll is managed during furloughs and layoffs varies by region, depending on labor laws, contracts, and cultural expectations. Payroll managers can help ease financial stress during this time by ensuring accurate payments and staying compliant with local regulations.

Here's a closer look at managing payroll during these situations and how Deel can help streamline the process.

Managing payroll during furloughs

A furlough is a temporary leave of absence from work, often without pay, imposed by an employer due to economic conditions.

Unlike a layoff, where employment is permanently terminated, furloughed employees typically retain their jobs and benefits but may have reduced hours or be required to stop working for a set period. The goal of furloughs is to cut labor costs while allowing employees to return to their positions once the company is financially stable.

Labor laws can complicate this process in certain countries. These regional differences are often tied to local labor laws, so it's essential to understand the regulations in your jurisdiction to avoid costly legal issues. Below are some key regional variations for furloughs:

US

• Salaried employees retain benefits, but cannot work unless paid in full
• Workers can be selectively furloughed
• Non-exempt employees, as defined by the Fair Labor Standards Act (FLSA), usually have the option to work reduced hours

UK

• Referred to as lay-offs and short-time working
• Lay-off if when you’re off work for at least one working day. Short-time working refers to a cut in hours
• “Furlough” is typically used in reference to the Coronavirus Job Retention Scheme

Germany

• The Kurzarbeit program provides short-term government assistance to workers
• Furloughed employees can work fewer hours at their normal rate
• Kurzarbeit subsidizes 60% of lost hours for up to 6 months

France

• Furloughs in France must have a serious and genuine economic basis
• Companies can apply for government-funded wage subsidies to retain employees
• Employees with reduced hours or full suspension may qualify for government support

Australia

• Furloughs are referred to as “stand downs”
• Employees don’t need to be paid, but will be paid for any public holidays and can accrue leave based on normal hours worked
• Specifics will be covered by their employment contract and/or the Fair Work Act

Philippines

• Furloughs are known as “temporary lay-offs” or putting employees on “floating status”
• Temporary layoffs cannot exceed six months—employees must eventually be recalled or permanently laid off (retrenched)
• Philippine law does not require employees to pay floating status employees, though certain benefits should be remitted if possible

Handling benefits and income tax during furloughs

Employees on furlough are typically permitted to seek other employment, either as a replacement or to subsidize their reduced income.

Furloughed and laid-off employees are usually eligible for continued benefits, such as the Consolidated Omnibus Budget Reconciliation Act (COBRA) in the US, or unemployment benefits, such as the Jobseeker’s Allowance in the UK.

Regulations on how to handle income tax and other contributions, like social security, will vary by region, but in general:

• Taxes and social security contributions continue as a ratio of income
• Reduced income will reduce these contributions accordingly
• If no work is performed, there is no income to deduct from

Essentially, taxes and other contributions like social security or national insurance continue as they normally would. The amount contributed would simply be adjusted down according to the new income amount.

Managing payroll during layoffs

Permanent terminations are usually a last resort and not without challenges—especially if visas are involved.

For example, many countries don’t allow companies to simply terminate employees without cause. This is the most significant difference between being “laid off” versus “fired.” If a company is forced to implement layoffs due to financial hardships, it is no fault of the employee, and the company must operate within the relevant labor laws.

In some countries, employee contracts guarantee employment for a set period of time and are renewed on an annual basis. Ideally, a company would simply not renew contracts in order to reduce their payroll budget, though this isn’t always possible or clear-cut. In other cases, such as the United States’ Worker Adjustment and Retraining Notification (WARN) Act, sufficient notice must be given before layoffs can occur.

Here is a breakdown of layoff expectations by region:

US

• The WARN Act requires employers to provide 60-day notice before mass layoffs or plant closings
• Laid-off employees are generally eligible for unemployment benefits
• Layoffs are through no fault of the employee, as opposed to being fired

UK

• Employees are “made redundant” when they are dismissed due to their job no longer existing
• Redundancy pay may be claimed by employees
• Employers must give approximately one week of notice per year worked

Germany

• Employees cannot be laid off without reason under the Protection against Dismissal Act (KSchG)
• Must provide one month’s notice after two years, two months notice after five years, and three months after eight years
• The employer must explain the reason for termination and offer consultation

France

• Employers must consult employee representatives before conducting layoffs
• Employers must offer severance pay and a social plan
• There must be a financial reason, such as bankruptcy or restructuring

Australia

• Must provide written notice based on age, employment type, and years worked
• Employees are entitled to be paid out within a week, including earned annual leave
• Employees may qualify for redundancy pay and need a valid reason for termination

Philippines

• Also known as retrenchment
• Must be necessary to prevent significant business losses, with written notice provided to the employee and the Department of Labor and Employment (DOLE) at least one month in advance
• Employers must provide separation pay, follow fair criteria for selecting employees to be retrenched, and act in good faith

Severance pay during furloughs and layoffs

In many countries, severance pay, unemployment benefits, or contractual penalties apply during layoffs. Beyond the written law, some countries have expectations above and beyond what is required.

For example, even in localities where it isn’t legally required, severance pay is often a common practice. This may seem counterintuitive for a company facing financial hardship but can be important to maintaining a positive reputation and the well-being of its employees.

It’s also common, via contracts or labor laws, that employees receive any unused paid time off or other accrued bonuses when laid off.

For example, if Employee A used their two weeks of paid vacation time before layoffs, but Employee B did not, Employee B should be paid an additional two weeks’ worth of PTO in their final check (or over the course of the next two weeks after they are laid off as if they were on paid holiday).

Here are some other examples of local variations in severance pay, by labor law or societal norms:

US

• Severance pay is less common in the US than in other countries
• There are no government regulations regarding severance pay
• Severance pay may be part of a hiring package or employment contract

UK

• Employees are entitled to redundancy pay if they've been employed continuously for at least two years by the same employer
• Based on age, length of service, and weekly pay (capped at a maximum)
• Employees must claim their redundancy pay within six months of their dismissal

Germany

• Under the Employment Protection Act, employees on permanent contracts are entitled to severance pay if dismissed for operational reasons, provided they do not contest the dismissal within three weeks
• Typically half a month's wage per year of service, with a maximum of 12 months' salary
• In cases of collective dismissals, a social plan negotiated by the works council and the employer includes redundancy compensation

France

• Required as long as the termination is not due to misconduct
• Starts at 0.25 month’s salary depending on years of service
• Benefits must be provided through the notice period

Australia

• Employees laid off are entitled to severance pay after one year of employment
• A minimum of 1 week’s pay per year worked up to 16
• Small businesses under 15 employees are exempt

Philippines

• One month’s salary, or one-half month’s salary for every year of service, whichever is higher
• The amount is typically one month’s salary higher than the statutory requirements in exchange for a waiver of future liabilities
• Benefits must be provided through the notice period

Unemployment benefits and payments

Layoffs are also usually the time when unemployment insurance comes into play. Unemployment insurance is essentially a tax paid by employers that laid-off employees can collect while they look for a new job.

How unemployment payments work varies significantly by location—even within a country—but the basic idea is the same: Laid-off employees receive a percentage of their normal pay for a set period, until they find a new job.

In most cases, unemployment and social security deductions come out of severance payments as they normally would. If the final paycheck is smaller or larger than normal, the contribution amount may scale accordingly but typically occurs as it would with any amount of income.

There are many rules about who is eligible for unemployment payments, how much they are entitled to, and requirements for pursuing new employment. These rules vary considerably in effect and terminology depending on the location. For example:

US

• Unemployment insurance or benefits are usually simply referred to as “unemployment”
• Must be laid off (not fired), and typically provide proof of seeking new employment
• Specifics vary by state, but usually, a percentage of income can be claimed for up to 52 weeks

UK

• Unemployment insurance can be purchased privately
• Government-provided New Style Jobseeker’s Allowance offers limited support
• Pays £71.70 weekly to those under 24 or £90.50 if you’re 25 or over

Germany

• Must register with the Arbeitsagentur (federal employment agency)
• Based on previous income and contributions to social security
• Usually provides assistance for 6-12 months, or up to 24 months if over the age of 50

France

• Must be a registered job seeker who is involuntarily unemployed
• Must have worked six months in the last two years to apply for unemployment benefits
• Entitled to roughly half of historical daily earnings

Australia

• Unemployment insurance is known as JobSeeker Payment
• Must be between 22 and 66 years old, and unemployed, underemployed, or stood down
• Entitled to roughly half of historical earnings, capped at around $400 per week

Philippines

• Cash benefits granted to covered employees, including Kasambahays, and Overseas Filipino Workers
• Employees must have paid at least 36 monthly contributions,12 months of which should be in the 18-month period immediately preceding the month of involuntary separation
• Employees can only claim unemployment benefits once every three years starting from the date of involuntary separation

Best practices for global payroll teams

Make timely, data-driven decisions

When facing furloughs or layoffs, delaying action can have serious financial and operational consequences. Waiting too long can lead to cash flow shortages, making it impossible to pay employees on time, which can result in legal ramifications and damage to your company’s reputation.

Proactive decision-making, based on real-time financial data, allows you to act before the situation worsens, keeping your obligations on track while minimizing disruption to your business.

Maintain strict compliance with local labor laws

Global payroll compliance is complex, particularly when dealing with legal requirements for layoffs and furloughs across different regions.

Each country has unique regulations regarding notice periods, severance pay, and benefit entitlements. Failing to comply with these laws can lead to significant fines, employee lawsuits, or penalties from labor authorities.

To reduce this risk, use Deel’s Compliance Hub, which provides real-time updates on local regulations to strengthen your workforce’s alignment with laws in each country of operation.

Handle taxes, contributions, and benefits with precision

A major challenge during workforce reductions is managing tax filings, contributions, and benefits correctly, even for furloughed employees. Missteps here—such as underreporting taxes or neglecting statutory benefits—can lead to audits and further financial strain.

Deel's automated payroll platform simplifies these processes, allowing you to meet tax reporting requirements and manage employee benefits throughout the employee lifecycle.

Compliantly offboard and pay global employees with Deel

With Deel, you can confidently manage workforce reductions while staying fully compliant with international labor standards, keeping your business on solid ground even in challenging times.

Deel Global Payroll provides the tools to manage these processes efficiently and compliantly, reducing the risk of penalties and ensuring accurate payments. Whether you’re facing temporary furloughs or permanent layoffs, Deel’s platform automates payroll adjustments, manages benefits obligations, and helps you stay compliant across multiple jurisdictions.

Book a demo today to speak with an excerpt.