The continuing economic downturn has led employers to seek various ways to reduce labor costs without losing trained and talented employees. Temporary layoffs, voluntary time off, required use of vacation or paid time off, and reduced work schedules have all been considered in a number of workplaces as alternatives to permanent layoffs and cut-backs.
A short-term layoff or reduced workweek generally does not create any wage and hour issues related to hourly non-exempt employees. When the non-exempt employee does not work, he is not paid, and the employer enjoys the resulting savings in labor costs. Accordingly, employers generally have not hesitated to use these cost-saving measures with their hourly non-exempt employees when circumstances warrant.
Employers seem to be far less certain of their rights with regard to salaried exempt employees. Employers generally are aware that there is no obligation to pay exempt employees for weeks in which they perform no work. See April 30, 1975 DOL Opinion Letter, 1975 WL 351785. It appears, however, that employers are apprehensive to reduce, rather than completely eliminate, the salary or hours of work for salaried exempt employees for fear of destroying the salary basis of compensation and thereby undermining the employees’ exempt status under the Fair Labor Standards Act (“FLSA”). This apprehension is not necessarily warranted. Under certain circumstances, the FLSA permits employers to reduce the hours and weekly salaries of exempt employees without affecting their exemption status under the statute.
The Wage and Hour Administrator of the Department of Labor has issued a number of opinion letters that clarify when and how an employer may reduce the pay of salaried exempt employees without destroying the salary basis of compensation. Here is a brief summary of the key points to keep in mind in making such decisions.
First, employers should be aware that there is a limitation that applies to all lawful reductions of salaries. The exempt employee must still receive the current minimum weekly salary of $455. Any employee who receives less than this minimum amount is no longer considered exempt for the weeks in which the minimum is not met. See November 13, 1970 DOL Opinion Letter, 1970 WL 26462.
Second, an employer may make a salary deduction if the employee is absent from work for one or more full days for personal reasons other than sickness or accident. Thus, if there is inclement weather that prevents an employee from making it to work, but the employer is open for business, the employer may deduct the missed day(s) from the employee’s salary. See October 24, 2005 DOL Opinion Letter, 2005 WL 3308612.
Third, an employer may reduce the salary of an exempt employee on a long-term or indefinite basis so long as the reduction is not simply an effort to avoid the purpose of the FLSA. Typically, such indefinite salary reductions are caused by long-term budgetary or operational reductions. See, e.g., February 23, 1998 DOL Opinion Letter, 1998 WL 852696 (reductions part of indefinite three-part plan to stem layoffs and enhance job security); see also March 4, 1997 DOL Opinion Letter, 1997 WL 998010 (reductions caused by long-term cut in state funding). It should be emphasized, however, that employers are not permitted to make salary reductions caused by short-term fluctuations in the business. Indeed, the DOL has stated that “deductions from salary due to day-to-day or week-to-week determinations of the operating requirements of the business are precisely the circumstances the salary basis requirement is intended to preclude.” January 15, 2009 DOL Opinion Letter, 2009 DOLWH LEXIS 18.
Fourth, the reduction of an exempt employee’s salary can be associated with a reduction in the workweek. For example, if an employer reduces the schedule of all exempt employees to a four-day workweek, and that new schedule will remain in effect for an indefinite period for the duration of the economic downturn, the employer lawfully can implement a 20% reduction in the salary of exempt employees during the duration of this new schedule. See March 4, 1997 DOL Opinion Letter, 1997 WL 998010 (approving permanent reduction of workweek from 40 to 32 hours, along with corresponding reduction in pay, where budget restrictions compelled employer either to make salary reductions or lay off employees). It should be noted that, so long as the exempt employee is receiving the more than the minimum $455, he can be required to work more than the four-day week without additional compensation. In other words, while the corresponding workweek reduction makes the salary reduction easier to accept, it is not a required condition for the reduction.
Fifth, an employer can require that exempt employees use vacation or other paid time off during any shutdown or short-term reduction in scheduled hours where the shutdown or schedule reduction results in absences of less than one full workweek. However, if the employee has no remaining vacation or paid time off, the employer cannot reduce his salary for reductions of less than a full workweek required by the business of the employer. See January 14, 2009 DOL Opinion Letter, 2009 DOLWH LEXIS 2; see also October 24, 2005 DOL Opinion Letter, 2005 WL 3308612.
Sixth, if an exempt employee chooses to participate in a voluntary layoff or reduced schedule, there is no obligation to pay the full salary, even if the voluntary layoff or reduced schedule is for less than a full workweek. However, the choice must be truly voluntary. See January 15, 2009 Opinion Letter (citing 29 C.F.R. § 541.602(a)). It is advisable that such election be documented in a writing signed by the employee.
There are two final caveats to be considered in dealing with exempt employee compensation during an economic downturn. First, when the workforce changes, job duties may be redistributed or changed, which may in turn result in a change of the employee’s exempt status. To be exempt, employees must be paid on a salaried basis and their primary duties must constitute exempt job duties. Occasionally employees lose their exempt status because of changes in their job duties. For example, a supervisor who previously satisfied the requirements of the executive exemption will lose the benefit of that exemption if subordinates are laid off and she no longer supervises two or more employees. Similarly, the exempt status may be lost when an employees assumes significant non-exempt duties in a reorganization. Accordingly, employers must be sure to periodically reevaluate the duties actually performed by their exempt employees to ensure they still qualify as exempt under the FLSA. Second, if an employee is furloughed, not working, and not being paid, the employer should make sure that no work is occurring away from work via the internet, email or other device.
In sum, employers have options under the FLSA short of permanent lay off to reduce the salary costs associated with exempt employees. However, employers should not neglect consideration of applicable state laws and regulations that may impact these issues.
Paul Prather and Alex Boals
Kiesewetter Wise Kaplan Prather PLC