It seems like a logical solution for recession-buffeted employers: Rather than cut too deeply into the experienced workforce they will need once the economy rebounds, furlough employees instead–in effect cutting the payroll without losing the valued human assets.
It’s so logical that furloughs have multiplied this year. A Watson Wyatt survey of employers, released in April, reported that 17 percent of respondents have instituted furloughs. Employment attorneys are still being inundated with furlough questions, suggesting the numbers will climb. “Companies that never would consider furloughs before now suddenly have to look at it seriously because of the economic crunch,” says Paul Starkman, a partner at Arnstein & Lehr. “They’ve already reduced staff as much as they can, and they are struggling to survive.”
While furloughs once meant simply sending employees home for weeks or months when there wasn’t productive work for them, employers have extended the concept. Some now require employees to work four days instead of five with a corresponding cut in pay, or to take a day off every other week. They view it as a way to cut costs, continue operations, reduce layoffs and provide employees with something in return for reduced pay–additional time at home.
But employment attorneys warn that furloughs carry possible liability issues that can trip up even the most well-meaning employer. That’s because Department of Labor (DOL) wage and hour regulations are confusing, and few courts have yet interpreted them in light of the new furlough approaches.
“The most important message to employers is that anybody who thinks they have it figured out by looking at the regulations is asking for trouble,” says Robert Duty, a member of Dykema Gossett.
The biggest complications involve employees who are exempt from overtime under wage and hour rules. That’s because the “salary basis test” requires an employer to pay an exempt employee who performs any work in a given week his or her entire salary for that week.
A few points are clear: An employer can furlough an exempt employee for a full week or multiple full weeks, paying them nothing for those weeks and paying them their full salary for other weeks. In that case, it is important to stress that the employee should not work during the furlough.
“The real danger is that it’s difficult to get an exempt employee to step away from the BlackBerry,” says Paul DeCamp, who heads the wage and hour practice at Jackson Lewis. “Most exempt people take their BlackBerrys on vacation and sleep with them next to their beds. They’re neurotic about it.”
DeCamp, who formerly headed the DOL’s Wage and Hour Division, suggests temporarily taking away BlackBerrys and laptops and even terminating access to the company network–”anything that enables the employee to engage in productive work from home.”
While exempt employees may “volunteer” to work without pay during their furlough, the employer should firmly reject those offers.
“You absolutely do not want that to happen,” says Starkman. “If exempts are working and you know it, you have to pay them a full week’s pay.”
Ray of Hope
Programs tying a cut in an exempt employee’s salary to a reduced workweek–such as cutting pay 20 percent and the workweek to four days–raise the most red flags. While this is often called a furlough, some employment law experts argue it should be called a salary reduction. That’s because employers can reduce salaries, as long as they don’t do it too often and as long as the exempt employee’s pay does not drop below $455 per week. It’s not clear whether federal law allows tying the pay cut to a corresponding reduction in hours.
In a January opinion, the DOL said it was a violation of the salary basis test to reduce exempt employees’ work schedules with a corresponding reduction in pay to meet short-term business needs.
But Gerald Hathaway, a shareholder at Littler Mendelson, says the opinion contains “one ray of hope.” The DOL said that an employer may make a “fixed” and “permanent” decision to reduce the hours and pay for exempt employees.
“The linchpin of the distinction between this permissible approach and the impermissible [one] is the permanence of the acceptable schedule reduction as contrasted to a temporary reduction,” Hathaway says. “Unfortunately, what constitutes a ‘permanent’ change in work schedules has not been clearly defined.”
DeCamp advises keeping any such salary/hours change in place for six months to meet the permanence test. “You are not forever locked in to the new amount, but it must stay in place for at least several months,” he says.
While the DOL opinion suggests that reducing salary and corresponding hours for an extended period may be safe under federal law, that type of furlough apparently will not pass muster under California law. The California Division of Labor Standards has held that cutting an exempt employee’s workweek to four days with a 20 percent pay cut is not allowed.
One solution might be reducing salaries by a different percentage than hours are reduced, so there is not a one-to-one correlation. “It seems a little silly, but employers have to protect themselves,” DeCamp says.
By contrast, setting furlough policies for nonexempt staff is relatively simple. The employer pays them for the time they work and can reduce their working hours and corresponding pay without concern. However, nonexempt employees must not work “off the clock.”
“If nonexempt employees are doing work while on furlough status, it raises a huge liability question,” DeCamp says. “If the employer knew, or should have known, that the employee was working, the employer has to pay for that time.”
Thus, nonexempt employees’ BlackBerrys and laptops also should be confiscated, DeCamp says, and supervisors should be warned not to load on work with the implicit expectation that employees will do it at home. However if an emergency arises during the furlough, nonexempt employees can be required to work, as long as their time is tracked and compensated. Exempt employees called back during a furlough week have to be paid for a full week, even if they work only a few hours.