Workforce.com

Furloughs Finding Favor Among Employers

March 25, 2009
In recent decades when companies had to cut costs, they quickly shed jobs. Employers seldom considered furloughs because they feared employees would return to the job embittered and unproductive, or worse.

Those conditions are history.

"Now, no company is overstaffed," says Steve Gross, Mercer Consulting’s global leader for broad-based performance and awards consulting. "They’re running very lean, so there is little opportunity for flexibility."

As for cutting jobs, "Companies have learned from layoffs that people aren’t interchangeable and new people don’t have company-specific knowledge," says John Challenger, CEO of Challenger, Gray and Christmas. "Companies are pulling out all the stops to survive this recession. They know if they lay people off, it will cut into their ability to do the work. And if the layoffs go too deep, the company can’t handle the rebound."

Today, state and local governments, educational institutions and businesses are furloughing thousands of employees. Some organizations are cutting workweeks to four eight-hour days and some are asking employees to take off a day a month without pay. Others with greater cost-cutting needs let people go for one week, several weeks, or a month or more.

Before they institute furloughs, organizations are trying everything they can to survive.

"No one has a crystal ball," Gross says, "so they’re taking out 2 percent to 5 percent of their workforce, freezing some wages, reducing 401(k) matches. One of our clients gave salary increases to everyone, but raised the cost of health insurance and eliminated the 401(K) match."

Challenger sees similar trends. "I’ve never seen pay cuts like I’m seeing now," he says. "One company has cut pay by 53 percent now and plans to cut it by 80 percent in the summer."

Tire manufacturing giant Michelin for years has focused on cutting costs through various methods. More recently, the company has gone further.

"Holiday shutdowns are a normal part of the business. However, in 2008, we extended those shutdowns to adjust our inventories," says Lynn Mann, director of external communications for Michelin North America.

Winnebago Industries, makers of the iconic recreational vehicles, has taken multiple steps to cut costs.

"We’ve worked four-day weeks since May," says Robert Olson, the company’s president, CEO and chairman. "We’ve had several production shutdown weeks. We’ve idled our C-body plant. We’ve taken $19 million out of our 2009 budget and reduced the number of model offerings from 92 to considerably less than that."

The company also canceled this year’s four-day dealer convention in Las Vegas, cut the number of assembly lines from three to one and laid off 48 percent of its workforce, going from a high of 4,200 employees in 2004 to between 1,600 and 1,700 now.

"You can’t cut your way to prosperity," Olson says. "We believe the market will turn around, and we want to be poised for that. We’re trying to look at alternatives to keep the employees we have left."

Winnebago’s four-day workweeks and no-production weeks in 2008 applied to hourly workers. Then, on January 19, everyone went on furlough for a full week—even the CEO. "Everybody gets to feel the pain," Olson says. "[Furloughing employees] has been one of the last things we’ve done to preserve cash and reduce overhead expenses."

Productivity effects at the RV maker were minimal, mainly because there was no attempt to make up lost time. Employee morale is good, despite the circumstances.

"The employees understand and know decisions must be made," Olson says. "Salaried and hourly people have responded unequivocally positively. The support and loyalty the employees have is unbelievable."

Olson is hopeful that things will change soon. "The spring market is just around the corner," he says. Winnebago has tried diversification to create more revenue, "but that’s a tougher nut to crack than I thought," Olson says. If the spring doesn’t bring economic improvement, he says the company will find new cost-cutting measures.

In mid-November, Michelin North America furloughed 240 direct employees at its Ardmore, Oklahoma, plant. Employees with least seniority drew the short straw for the eight-week work hiatus.

"Michelin’s primary goal for the furlough was to adjust tire production to the level of market demand, which had decreased significantly," Mann says. "Vehicle manufacturers are manufacturing fewer cars and consumers are driving fewer miles."

Michelin met its goal of reduced tire production, but that may not be enough. "We continue to watch the market conditions and are prepared to take other actions, if necessary," Mann says, but did not add details.

"In this environment, everyone has reached the same conclusion," Challenger says. "Companies are fighting for survival. Also, management knows they’re in the same boat with the rank and file. Neither side wants to see people go. Companies are getting a reception from employees that they’ve never gotten before. They are putting programs in place—like furloughs, four-day workweeks and pay cuts—to cut back on payrolls to bridge until the time when business is better."