As the March 1 fiscal cliff looms closer, Congress has given itself a week-long Presidents Day vacation, making the prospect of sequestrationi.e., massive automatic cuts to federal programsmore likely. Companies that are dependent to any significant degree on federal funding, whether through contracts or grants, now are thinking about furloughing some of their staff once sequestration takes effect.
Furloughing hourly workers is relatively simple, so long as any contracts and collective bargaining agreements are complied with. By law, if hourly workers dont work, they dont need to be paid. And, the U.S. Department of Labor (DOL) has even announced that the Worker Adjustment and Retraining Notification Act (WARN) wont apply to layoffs caused by sequestration.
But heres the problem: Most executive, administrative, and professional employees, and some so-called computer employees (DOLs term for programmers and certain other workers), need to be paid on a salary basis in order to be exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA). If employers dont comply with the salary basis test, they could end up owing overtime pay to previously exempt employees. This is not something to take lightly given that 8,000 new FLSA lawsuits are being filed in federal court every year.
DOL regulations say that to be paid on a salary basis means to receive a predetermined amount, which is not subject to reduction because of variations in the quality or quantity of work performed. The regulations add that an employee is not paid on a salary basis if deductions from the employees predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business; rather, if the employee is ready, willing, and able to work, deductions may not be made for time when work is not available.
Thus, if exempt employees of private employers are furloughed for a day here and a day there because of funding shortfalls, the effect would be to convert them to non-exempt employees and entitle them to overtime pay in weeks when they work overtime. So, whats an employer to do?
Of course, employers may reassign these employees to commercial work, if that is available, or to business development or privately funded research and development projects. But thats not necessarily practical. Here are three other solutions based on DOL opinion letters issued over the years:
- Employers can require employees to use any accrued vacation. DOL says that its okay for employers to deduct from exempt employees leave banks for full or partial days when those employees are instructed not to report to work because of budgetary constraints or lack of work, so long as employees weekly salaries are not reduced.
- The regulations make clear that exempt employees need not be paid for any workweek in which they perform no work. As such, if the workplace is closed for a full week, whatever the reason, including a furlough, employees need not be paid for that week. (Dont stop reading here; below we offer a cautionary note about what it means to miss work in the age of remote email access, iPhones, and the Blackberry.)
- DOL has said if a company decides in advance, and with no improper motive, to reduce costs by shortening the workweek, the company may also reduce the salaries of exempt employees by any amount it chooses. One caveat is that those salaries must remain above the minimum FLSA thresholds for exempt employees ($455 per week). In the case discussed in one DOL opinion letter, for example, the employer reduced the fourth workweek of each month from five to four days with no effect on its exempt employees status. DOL also has blessed reducing each workweek from five days to four days and reducing salaries by one-fifth as well. (But heres another very important caveat: In order to pass muster, such a furlough must not be ad hoc. It must be announced in advance and must be scheduled to last for at least two or three months. This type of reduction may not be used for occasional unplanned and transitory periods of low workload.)
In deciding which of these options best meets your companys needs, keep in mind the potential impact to other parts of employee compensation. For example, if a company has a pension that determines benefits based on an employees five highest salaries, then giving employees a pay cut now could affect them for decades to come. Also, check your health plans to see what obligations you may have during a furlough.
As noted above, an exempt employee must be paid for the full workweek if he or she performs any work during the workweek, unless the employees leave bank is charged for the time not worked. Therefore, it is important to remember that the definition of work under the FLSA focuses on whether the employee actually worked, not on whether the employee was at work. In this age of remote email access, prolific mobile phone use, and devices for checking email and voice mail on the go, an employer who furloughs its employees (or intends for any legitimate reason not to pay them) must establish a clear policy prohibiting work from home. It might even be prudent for employers to block remote email access for such employees if possible.
Two final notes: First, some states, notably California, may have their own laws on the subject, so be sure to check those as well.
Second, as mentioned, the suggestions in this article are based on DOL opinion letters. Under a law called the Portal-to-Portal Act, employers are shielded from certain types of liability if they rely in good faith on such government pronouncements, even if a court later disagrees with DOLs interpretation of the FLSAs requirements. And, it is almost inevitable someone, somewhere, will sue over this. Therefore, before taking any action, it would be wise to obtain copies of the relevant DOL letters addressing these issues and place them carefully in your files.
Shlomo D. Katz is a member of the litigation department at Brown Rudnick, where he focuses on the areas of government contracts/procurement and commercial law and litigation, including wage and hour law issues.