Furlough or sever? A financial hardship for employees, owners

Sadly, given the state of the industry, on-property hotel teams in most locales have been reduced to a skeleton crew, with the balance of staff “furloughed”. By its very definition, a furlough is a mandatory temporary leave of absence from which the employee is expected to return to work or to be restored from a reduced work schedule.

This seemed like a logical approach in mid-March, when planning assumptions were based on what was expected to be a two-month event with a “V-shape” recovery. Roughly 60 days later, with rose-colored glasses firmly in hand, we have more visibility into the severity of the impact on hotels, and a likely recovery scenario which will be slow, prolonged and include periods of contraction along the way (think the Nike “swoosh”).

As the industry comes to a collective grip on the new reality of what’s to come, one thing has become crystal clear: Hotel owners should expect cash needs to increase significantly, even in the event of a permanent staff reduction.

Getty Images
Getty Images

The savings are temporary

Furloughing employees has created temporary savings, although in many cases benefits are still being paid, with many brands suggesting that this may continue through the end of the year. The hard reality is that hotels will not be able to support a full-loaded staff for quite some time, so the decision facing most operators will be shifting from furloughs to layoffs, which in many instances will trigger severance pay.

So, while furlough was the emergency short-term strategy, owners may be left with a ballooning expense in the not-too-distant future that could easily eclipse any savings achieved from right-sizing the team, as business slowly returns. Likewise, the decision to maintain staff on furlough will bring with it a much higher price tag due to the elongated prevailing view on recovery.

Owners are anxiously awaiting staffing plans and recommendations from operators, with an analysis on the costs to maintain furloughed staff against a plan of termination and severance (and likely a combination thereof) … and in short, determining if owners can “afford” to permanently reduce their staff in the near term.

This issue also begs a host of other questions, such as staff seniority with brand/operating companies relative to how long they have actually been at a specific property. And how owners may be straddled with costs to sever that far exceed what might reasonably be attributed to an “asset” versus a “company” obligation. What costs should be shared by operators given their relationship to employees? The list goes on … and we’re in uncharted territory, folks, as HOAs do not offer guidance here.    

There is a careful balancing act in play – compassion for staff and their livelihood; operators formulating plans and making decisions that will impact owners in ways that are difficult to predict or control; and a mounting need for future cash, even as business resumes, regardless of whether staff is furloughed or severed.

This creates considerable future risk for owners, particularly as deferred debt payments, fees and other relief starts to fade. Believe it or not, the economics for owners will likely get worse before it gets better. There are many strategies to consider here, but this puzzle is complex and needs to be addressed thoughtfully and quickly, especially as time is ticking on soon-to-expire MOAs.

Perhaps the U.S. HEROES Act will come to the rescue, affording operators and owners some additional runway on utilizing PPP loan proceeds, and give us much-needed time to be strategic around decisions that impact all stakeholders. We shall see.