What does being furloughed mean, and what is the impact for workers' compensation exposure?

Prior to the COVID-19 pandemic, being furloughed was something that happened to only a limited portion of the economy or federal employees during government shutdowns over failed budget negotiations. As a result, it is not a common term that enters into the discussion for most employers. However, in current times, many businesses have been forced to shut their doors entirely, or modify their operations instantaneously, and furloughing employees is happening or being contemplated across many industries. This creates new considerations and complications to consider surrounding the exposure base of workers' compensation insurance—which can be a significant expense for employers. Due to the ongoing economic challenges that businesses are facing due to COVID-19, staffing needs and levels have changed, at least for the short term, and modifications might be needed for the tracking of workers' compensation exposure depending on the level and type of furlough. Rating bureaus have already begun to respond in different ways to this issue, which will affect how businesses move forward in reporting payroll information for paid furloughed employees.

For many businesses, a precipitous drop in income has left them unable to support their entire current payroll, leading to difficult choices in staff reductions. As a way to minimize business disruption, maintain staff for returning to business as normal, and help staff to the extent they can in a cost-effective manner, employers are looking for alternatives to laying off employees. They have built relationships and invested in their employees. When these businesses are able to reopen, having experienced workers available to step back in without needing training will be crucial to getting income flowing again. Instead of simply laying off their workforces, these employers may choose to furlough staff.

What is the distinction between "laying off" and "furloughing?" How does this affect the employer’s workers' compensation costs and exposure? Furthermore, there are multiple ways that an employee can be furloughed. Do these different ways require more careful handling when considering an employer’s payroll information?

When an employee is laid off, the employee’s salary and benefits cease. As a result, that employee will no longer be counted in any payroll measure provided to the insurer. Although layoffs can be temporary, when an employee is laid off, the employee-employer relationship ends and there may be no intention of rehiring. When an employee is furloughed, however, they are still considered an employee of the company even though they are not working. There are several types of furlough currently being used as COVID-19 develops. Employers are trying to control costs as well as retain and support their staffs in a cost-effective manner to maintain the future viability of the business. The type of furlough arrangement employers implement may affect raw payroll data in different ways.

Generally, the basis of premium for workers' compensation insurance is payroll—initially on an estimated payroll at the beginning of an exposure period, which is then trued up at the end of the period when actual payroll is known. It is anticipated that, throughout the year, employees will come and go from the employer in the normal course of business. Each one's payroll will either be added to or removed from the employer's workers' compensation policy.

The different furlough scenarios create different considerations when thinking about the payroll of the company and any modifications needed to the traditional workers' compensation exposure measure of payroll:

• Benefits only: This is the most common form of furlough. The employee no longer has any work responsibilities on a day-to-day basis; however, the employer continues their health insurance benefits. In this situation, no adjustment to traditional payroll is necessary. Because the employee is not working or collecting a salary, there is no disconnect between payroll and workers' compensation exposure.
• Rotating furlough: For those workplaces that have remained open on a more limited basis, a full staff may not be necessary, and a rotating furlough may be instituted. In this situation, all employees receive full benefits continuously and salary payments only when they are at the workplace, or actually working. To be sure payroll and workers' compensation exposure are in harmony, it should be verified that an employee’s salary was only paid when they were actually "on the job." Once this is done, no adjustment is required because these payments would correspond to workers' compensation exposure.
• Benefits and full or partial salary: In our current reality, where many workplaces have closed and many jobs cannot be done remotely, employers may be able to maintain full benefits and some level of salary continuation to their workforces. The CARES Act makes this type of furlough more achievable for employers. However, these salary payments do not correspond to any sort of workers' compensation exposure because these employees are not working. One way to address this in any future analysis would be to identify and remove the pay related to furloughed employees from the payroll used for the workers' compensation basis of premium. Without adjustment, this could result in:
  • The overpayment of current workers' compensation premiums, where no coverage is actually needed.
  • The distortion of the frequency indications of the current year as premium will be paid, but there will be no losses incurred. This could affect future experience-based rating and resulting charges.

The National Council on Compensation Insurance (NCCI) and some state rating bureaus have already begun to address whether payroll continuation for furloughed employees related to COVID-19 should be included in workers' compensation premium calculations. The guidance and requirements for how to report furloughed employee payroll continues to evolve and could vary by jurisdiction. It is important that employers and insurers note the specific response of the agencies that affect them to be sure that they are tracking and reporting the payroll exposure correctly. Here are some specific actions worth noting:

• The Wisconsin Compensation Rating Bureau (WCRB) has enacted changes to its Unit Statistical Plan Manual to add new catastrophe codes related to COVID-19, and has added a new statistical code specifically for furloughed workers who are receiving pay during the statewide emergency.¹ This will allow it to identify and remove this exposure from the basis of premium.²
• NCCI has issued guidance related to the reporting of furloughed workers who are still being paid.³ The NCCI’s Basic Manual addresses wages for time not worked, also termed “idle time,” and states that this is to be included with payroll. Given the pervasiveness of the current crisis, it remains to be seen how NCCI might respond in its future reviews of the data for 2020.
• The Workers’ Compensation Insurance Rating Bureau of California (WCIRB) is currently reviewing potential regulatory changes to address the increase in paid furlough and how to report.⁴
• Several other rating bureaus have established catastrophe event codes and the nature of injury codes relating to the COVID-19 pandemic. However, to date they have not directly addressed the issue of how to classify salary continuation for furloughed employees. We expect that this issue will be reviewed in the future as the extent of the issue becomes better known within the jurisdiction.

The survival of the business and the safety of employees are at the forefront of employers’ minds, and workers' compensation payroll implications are not a high priority. However, if furloughing employees is an approach taken to protect the future of the business, it is important to create mechanisms for tracking the portion of payroll that corresponds to true workers' compensation exposure. If this is not done correctly, it could result in overpayment of workers' compensation premiums at a time when reducing expenses is crucial.

¹WCRB (March 30, 2020). CIRCULAR LETTER 3209.

²WCRB (April 6, 2020). Covid-19 and Wisconsin Worker’s Compensation: Paid Furloughed Employee Updates and FAQs. Retrieved on April 9, 2020, from https://www.wcrb.org/misc/WCRBCovid19.pdf.

³NCCI (March 26, 2020). COVID-19 and Workers Compensation: What You Need to Know: Frequently Asked Questions. Retrieved on April 9, 2020, from https://www.ncci.com/Articles/Pages/Insights-Coronavirus-FAQs.aspx.

⁴WCIRB. Payroll or Remuneration: Special Announcement Regarding Payroll and COVID-19. Retrieved on April 9, 2020, from https://www.wcirb.com/guide-to-workers-compensation/standard-classification/pay-remuneration.