The dire announcements follow one another like tumbling dominoes: FedEx cuts pay for salaried personnel. Sears stops matching contributions to its workers’ 401(k) plans. Dell extends unpaid holidays. The Seattle Times rolls out unpaid furloughs. Window manufacturer Pella institutes four-day workweeks.
Few companies, large or small, are immune to the grim economic reality gripping the country, and those that want to avoid ravaging their workforces through layoffs are employing less traditional strategies to keep their heads above roiling financial waters.
“Alternatives to layoffs have always been around, but now we’re seeing them with increased frequency,” says Caroline Austin, a partner at WolfBlock. “Employers are becoming more creative rather than just lopping off people who are valuable employees and have skill sets the company needs.”
With those creative cost-cutting strategies, however, come risks for employers who fail to do their legal homework.
“There is a notion that common sense sometimes will dictate and that the laws would favor an employer wanting to preserve jobs with reduced schedules or temporary furloughs over layoffs,” says Eric Bellafronto, a shareholder at Littler Mendelson. “But sometimes common sense doesn’t spill over to the way the law actually applies.”
With little significant case law yet, labor experts suggest that employers let the Fair Labor Standards Act (FSLA) guide them and that they re-examine existing collective bargaining agreements (CBAs), the exempt or non-exempt status of employees and discrimination laws when weighing cost-cutting measures. Employers may be obligated to negotiate any changes in employment status or salary with employees covered by a CBA.
“The quickest way employers get into trouble is by assuming they can do these things in a vacuum, by not talking to counsel about limitations under the FLSA and comparable state laws,” Bellafronto says.
There are caution lights to heed when implementing today’s most prevalent layoff alternatives: unpaid furloughs; reduction of salaries and/or hours; and reduction of benefits such as health insurance and pensions.
Furloughs: “According to the Bureau of Labor Statistics, roughly 12 percent of the 10 million unemployed people in November were on temporary layoffs, or furloughs–the highest number in more than a decade,” Bellafronto says.
Which means plenty of opportunity for employers to stumble into a furlough pitfall, particularly with exempt employees. Federal regulations provide that an exempt employee must receive full salary for any week the employee performs any work, regardless of the number of days or hours worked. That work could include simply sending messages from a BlackBerry. If an exempt employee does not receive a full salary for every workweek he performs work, the employee could lose his exempt status.
Whether a company furloughs one employee or 100, for a week or a month, Austin says it should monitor them to make sure they do no company work–period–during an unpaid furlough.
Reduction of salaries and/or hours: “The real danger I see in salary reduction is you may reduce people below the level where you get a favorable test as to whether they are exempt,” says Patrick Stanton, a shareholder at Ogletree Deakins. “In other words, don’t go too far with people who are close to that magic number for exempt versus non-exempt status.”
According to the FSLA, the minimum weekly salary at which an employee is still considered exempt is $455. The courts have tended to look favorably, however, upon employers reducing exempt employees’ work week, with a commensurate reduction in pay, without losing the exemption, Bellafronto says. That became a multimillion-dollar issue in 1995 when Wal-Mart reduced the summer salaries of 6,000 pharmacists (see “Summer Wages”).
Benefit cuts: In general, across-the-board cost cutting is the safest bet for employers. However, when employers target the benefits of certain segments of the workforce, such as retirees, they must be careful about which groups are negatively affected, particularly in union workplaces.
“The 6th Circuit in the  Yard-Man case (UAW v. Yard-Man Inc.) still buys into the idea that if retiree medical benefits were established through collective bargaining, those benefits can’t be taken away,” Stanton says.
The reduction of benefits, from health coverage to retirement contributions, might be best avoided altogether.
“When you start messing around with people’s health or retirement benefits, they react more negatively than to changes in salary,” says Brian LaFratta, an associate at Fisher & Phillips.
The biggest legal pitfall of all–whether furloughing workers, slashing hours or reducing benefits–is failing to identify potentially discriminatory patterns in those actions, labor experts say.
“If you’re going to make changes, you have to be sensitive to doing it without regard to an employee’s age, race, national origin, any disabilities they may have or any other protected characteristic an employee may fall into,” Austin says. “The perception may be that the decision was made in a discriminatory manner unless you are consistent about how you implement those changes.”
For example: An employer announces it will cut the salaries of secretaries, most of whom are women, by 20 percent, but the salaries of IT workers, most of whom are men, will not be cut.
“That’s when there’s some risk that you’re selecting a portion of the workforce, or it appears you are, based on gender,” LaFratta says.
Experts suggest that employers conduct a statistical analysis of planned reductions to avoid even a hint of discrimination against an individual or group and to document the business reasons for employment-related decisions.
It really comes down to a matter of dollars and sense, so none of these cost-cutting decisions should be
made in haste due to fear over the sagging economy.
“These decisions can’t be done in a rash manner,” Austin says. “They require time and forethought. Identify potential problems, and then think through all the permutations and the impact of that decision, including the human side. You cannot ignore the decrease in morale and the angst that resonates throughout the workforce when costs are reduced.”