EXEMPT EMPLOYEES:  PAY AND HOURS FLUCTUATION

DUE TO ECONOMIC DOWNTURN

For many employers, reductions in force are an unavoidable first option in coping with declining revenues.  However, many companies have successfully avoided or limited lay offs by implementing temporary shutdowns of operations, four-day workweeks with corresponding pay reductions, and/or voluntary, or in some cases, mandatory unpaid leave programs.  While such cost-cutting measures are generally permissible from a wage and hour perspective, care must be taken in the manner in which such measures are carried out as to salaried, exempt employees. 

 

Under the Fair Labor Standards Act ("FLSA"), employees who are classified as “exempt” must satisfy not only a duties test, but also must be paid on a "salary basis."  An employee paid on a "salary basis" must receive a predetermined amount of pay on a regular basis (currently at least $455 per week), which is not subject to reduction based upon the quality or quantity of work.

 

Employers are not required to pay exempt employees when they perform no work during an entire workweek.  However, with few exceptions, employers are required to pay an exempt employee's full salary in workweeks during which any work is performed.  An employee is not paid on a salary basis if deductions from the employee's predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business.  If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.  Thus, employers may not reduce an exempt employee's salary when the employee's hours are reduced due to "short-term business needs." 

 

Employers may, however, shorten the workweek of exempt employees on a “long-term basis” and reduce salaries by a commensure amount, as long as the reduced salary does not fall below the statutory salary, currently $455 per week.  Although there is no bright line test for determining what will constitute a “long-term basis,” it is likely, based on existing Department of Labor opinion letters and case law, that a one-time salary adjustment that is implemented with advance notice to the exempt employees (prior to the employees working at the reduced rate) and will be in place for at least several months would likely be deemed “long-term”.   

 

The Department of Labor recently confirmed that "a reduction in [an exempt employee's] salary corresponding to a reduction in hours in the normal scheduled work week . . . is permissible if it is a bona fide reduction not designed to circumvent the salary basis requirement, and does not bring the salary below the applicable minimum salary."  DOL W.H. Op. Letter  FLSA2009-14, Jan. 15, 2009.  This opinion is consistent with earlier DOL opinion letters:  DOL W.H. Op. Letter (Feb. 23, 1998) (employer may reduce its salaried employees' workweek due to a temporary work shortage without defeating the FLSA's professional exemption); DOL W.H. Op. Letter (Mar. 4, 1997) (employer may reduce its workweek by 8 hours per week with a commensuare salary reduction to accommodate a cut in state funding); DOL W.H. Op. Letter (Nov. 13, 1970) (employer may, without losing the exemption, prospectively:  (1) reduce its current 52 workweeks per year down to 47, and (2) require employees to work five 4-day workweeks at the end of each year).

 

The recurring theme in each of these opinion letters is that the "salary basis" test is still met when prescheduled (and infrequent) adjustments are made to exempt employees' hours and pay because there has been no "deduction" from the employee's salary.  However, the "salary basis" requirement will not be met and the exemption will likely be lost when hours and wages are adjusted so frequently and randomly that the employee's salary is more like an hourly wage.

 

In addition to, or in lieu of, implementing a salary reduction on a “long-term basis” for exempt employees, employers looking for ways to cut costs might want to consider some of the following alternative cost-cutting measures which, under current FLSA regulations, are not improper salary deductions.

 

 

Since exempt employees do not have to be paid their salary for any workweek in which they do not perform any work (29 C.F.R. § 541.118(a)), there is no risk of improper salary deductions if an employer shuts down all operations for a full workweek, such as during a slow period or during the holidays.  However, the employer must make sure that the exempt employees actually perform no work at all during that week.  Supervisors should not be called at home for any reason and should be locked out from checking their e-mails at home in order to avoid claims that they worked during that week. 

 

 

The FLSA does not require employers to provide vacation or PTO time to employees.  Therefore, nothing prohibits employers who voluntarily offer vacation or PTO benefits to employees to require employees who are told not to come to work during a shutdown to use their accrued time off benefits.  An employer may order the use of accrued vacation or PTO time for full- or partial-day absences.  As long as employees receive the equivalent of their guaranteed salary, they will continue to satisfy the salary basis test required for exempt status.  It does not matter if the amount is part regular salary and part vacation or PTO pay.   

Employers have great latitude in setting the compensation of their employees, including reducing pay.  Thus, in the absence of a collective bargaining or other agreement to the contrary, an employer facing difficult economic conditions is free to implement a one time permanent pay reduction, such as an across-the-board 10% pay cut, for both exempt and non-exempt employees, with no reduction of their working hours, without violating the "salary basis" test (as long as exempt employees’ salary remain at the $455 or above level). 

 

For more information, or for answers to any questions you may have, please contact C. Mark Kingseed (kingseed@coollaw.com), Allison D. Michael (michael@coollaw.com), or Laura Wilson (wilson@coollaw.com) of the Labor and Employment Department of Coolidge Wall Co., L.P.A.