Exempt Employees not Exempt from Furloughs

In these tough economic times, many employers are looking for ways to save money and streamline their business operations. One way employers are accomplishing this goal is by implementing furlough days for some employees. However, this raises some legal concerns regarding the impact of a furlough day for exempt employees. This question has been considered on both the state and federal levels, and the consensus is that a prospective, temporary reduction in the work schedule of exempt employees, coupled with a reduction in their salaries, is permissible under California and Federal law as an effort to reduce or limit the need for layoffs in difficult economic times.

Who is an Exempt Employee?
To qualify as exempt, an employee must meet both the salary basis test and the duties test. To satisfy the salary basis test, an employee must earn a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment (i.e., 40 hours per week). The duties test requires the employee to be engaged in the capacity of an executive, administrative or professional employee and to regularly exercise discretion and independent judgment.

Furlough of Exempt Employees 
The Division of Labor Standards Enforcement (DLSE) recently issued an Opinion Letter which laid out the conditions under which an employer could reduce the work schedules and salaries of exempt employees in order to avoid layoffs. Specifically, the DLSE concluded that an employer may reduce the number of its exempt employees’ scheduled work days and make a corresponding reduction in the employees’ salaries if the employer has experienced a significant economic downturn, the reduction is anticipated to be temporary and the employer intends to restore the employees’ work schedules and full salaries as soon as economic conditions permit. The DLSE pointed out that exempt employees whose work week and salary are reduced must still be paid at least two times the minimum wage so that they meet the salary basis test. Each employee must also continue to satisfy the duties test. The DLSE cautioned that the temporary reduction in hours and pay should be a one-time event. The DLSE noted that its opinion letter was in conformity with federal law, which also allows a prospective reduction of exempt employees’ hours so long as such reductions do not occur with such frequency that the employees’ status as salaried employees is a sham.

The DLSE’s new opinion is in notable contrast to a prior opinion issued by the DLSE, which concluded that an employer could not reduce the salary of an exempt employee during a period in which the company operated a shortened work week due to economic conditions. The DLSE stated that its prior opinion letter predated important federal cases and that it could no longer be considered persuasive.

Take Away 
Given the DLSE’s recent opinion letter, a California employer is not prohibited from implementing a one-time, temporary reduced workweek with a corresponding reduction of the salaries of exempt employees so long as the employees still meet the salary basis test by earning a monthly salary of at least twice the state minimum wage for full time employment. Such a reduction should only be made due to economic necessity and the employees’ hours and salaries should return to their pre-reduction status when the economic crisis has passed.