A human resource manager or legal counsel tasked with reducing labor costs has many tools available to them. One of the first tools that companies should consider is furloughs. A major consideration involved with a furlough is whether the employees sought to be furloughed are exempt or non-exempt from overtime compensation.

It is easier to furlough non-exempt employees (generally hourly) than to furlough exempt employees (generally salaried). Under federal law, non-exempt employees may be furloughed for any period of time, including full weeks, full days or particular hours. For example, a non-exempt employee normally working a 40 hour workweek may be furloughed such that he orshe only works a 32 hour workweek, resulting in saved labor costs.

Exempt employees, however, must be treated more carefully. In order to qualify as an exempt employee from overtime compensation under federal law, that employee must be paid on a salary basis. The “salary basis test” provides that, in order to be considered an exempt employee, that employee must receive a predetermined amount of compensation for each week in which work is performed, regardless of the number of hours worked.

The salary basis test for exempt employees is complicated by the prospect of a furlough that is less than a week. Companies cannot involuntarily furlough exempt employees for a period of less than week and reduce exempt employees’ salaries accordingly; to do so would mean that the employee does not receive the same salary week to week. As a result, the salary basis test would likely not be met and the employee would lose their exempt status for purposes of overtime compensation. This could result in increased costs, not the decreased coststhat a company is seeking by implementing furloughs.

There are, however, ways in which a furlough can be applied to an exempt employee:

  1. Exempt employees can be furloughed for whole weeks at a time.
  1. Exempt employees can be forced to utilize paid time off benefits on days when the company does not require the exempt employee to work. For example, all exempt employees could be forced to take off, and use a vacation day, on every Friday of a month. The employee would receive the same salary in each of those weeks, meaning that the salary basis test is not jeopardized, and the company would realize some reduction in labor costs because of the reduction in vacation days outstanding in employees’ banks of paid time off.
  1. Exempt employees can be given the option, at their sole discretion and without any pressure from the company, to voluntarily take unpaid personal leave in full-day increments, even if it means that the exempt employee will receive less compensation than he/she usually receives.
  1. In some circumstances, a company could reduce exempt employees’ hours prospectively in conjunction with a reduction in salaries. The work week could be adjusted from 40 hours to 32 hours every week for exempt employees, with a corresponding reduction in salary. Such an adjustment, however, must not be made on an ad hoc basis. The Department of Labor will allow this type of arrangement, but only if the adjustment is made for a significant amount of time and is tied to a legitimate business reason such as a business slowdown. Generally, a reduced work week and corresponding salary reduction for exempt employees must be for a period of more than two months and may not be done multiple times.

Furloughs are an attractive tool, but may be complex when involving exempt employees. Managers and legal counsel must be aware of not only federal law, but also any applicable state laws, which may vary in significant ways from federal law. Done properly, however, furloughs are an effective tool in managing labor costs in a down economy.