1620s, vorloffe, "leave of absence," especially in military use, "leave or license given by a commanding officer to an officer or a soldier to be absent from service for a certain time," from Dutch verlof, literally "permission," from Middle Dutch ver- "completely, for" + laf, lof "permission," from Proto-Germanic *laubo-, from PIE root *leubh- "to care, desire, love." In English, the elements of it are for- + leave. The -gh spelling predominated from 1770s and represents the "f" that had been pronounced at the end of the word but later disappeared in English.
The spelling furloe occurs in the 18th century, but furlough appears to be the earliest spelling (as in Blount's Gloss., ed. 1674). As the spelling furlough does not follow that of the orig. language, it was prob. intended to be phonetic (from a military point of view), the gh perhaps as f and the accent on the second syllable .... [Century Dictionary]
By 1946 in reference to temporary layoffs of workers (originally of civilian employees in the U.S. military); by 1975 applied to conditional temporary releases of prisoners for the purpose of going to jobs (work-release).