Legal Issues TOM WILDE & JOE MULHERIN Perils of layoffs, reduced workweeks and other payroll reductions measures

oday’s difficult economic and important to ensure that any payroll or quantity of work performed. financial climate has many com - reduction measures comply with the Making certain deductions or reduc - T panies considering various cost- Fair Labor Standards Act, as well as tions to the employee’s salary can cutting measures, including layoffs, state wage and hour laws. result in the exemption being lost, reduced workweeks, pay reductions The main wage and hour risk not only for the affected employee, and voluntary furloughs. These associated with these cost-saving but also for other employees in the actions raise wage and hour ques - measures relates to exempt employ - same job classification. tions that often are overlooked. The ees. Employees who are classified as There are seven exceptions unwary employer may reduce pay - exempt under the executive, admin - where salary deductions may be roll costs but wind up with a wage istrative, and professional exemp - taken without jeopardizing the salary and hour lawsuit as a result. The tions generally must be paid on a basis of pay and, hence, the exemp - good news is that a well-informed “salary basis” to remain eligible for tion. These exceptions were employer can avoid such risks. the overtime exemption. This means explained in the July 2006 edition of What payroll reduction measures that the employee must receive the FLSA Focus . They include full-day are available? same amount of pay each pay peri - absences for personal reasons, sick - Reducing payroll costs can take od (at least $455 per week under ness or disability. many forms including: the FLSA) regardless of the quality see REDUCTIONS page 14 • Involuntary layoffs, job elimina - tions and workforce reductions • Temporary shutdowns during summer, holidays or other sea - sonal slow periods • Voluntary furloughs • Reduced workweeks • Temporary or permanent reduc - tions in salaries or hourly pay rates • Elimination of bonus programs or other incentive compensation What are the legal considerations and risks? Employers contemplating any of these measures must carefully con - sider EEO implications to ensure that no protected class is singled out or disparately impacted. The WARN Act and similar state laws must also be considered. Employers should ensure compliance with any individ - ual employment agreements and applicable company policies. Unionized employers must consider applicable collective bargaining agreements and bargaining obliga - tions. Of course, employee relations issues must also be evaluated. What often gets overlooked, how - ever, are wage and hour considera - tions. As the storm of wage and hour litigation continues, it is extremely

Thomas Wilde is Chair of the Labor and Employment Practice Group and Joseph Mulherin is an Associate at Vedder Price P.C. Tom can be reached at 312-609-7821 and Joe can be reached at 312-609-7725.

13 adjust exempt employees’ salaries employees generally must be paid a REDUCTIONS commensurately. While the salary salary of at least $455 per week. Cont. from page 13 basis rule requires payment of the Beyond those minimum thresholds, exempt employee’s full salary in employers have wide latitude in set - As a general rule, an exempt workweeks where work is per - ting (or reducing) pay. employee’s salary cannot be docked formed, it is permissible for employ - Thus, an employer faced with for an absence caused by the ers to implement a reduced work - difficult economic conditions may employer or the operating require - week schedule and lower salaries implement pay reductions affecting ments of the business. The Depart - accordingly. For example, an both exempt and nonexempt ment of Labor’s (“DOL”) regulations employer may announce to employ - employees. For example, an interpreting the FLSA put it this way: ees in November that it will be employer may announce to employ - “If the employee is ready, willing and implementing four-day workweeks ees that pay is being reduced by able to work, deductions may not be for the months of December and five percent across the board, due to made for time when work is not January due to slow operations, and difficult economic conditions. available.” So, if the operation is slow at the same time inform exempt Obviously, this won’t help to win due to a struggling economy, the employees that their salaries will be any “employer of the year” awards, employer cannot tell exempt employ - lowered commensurately. and there are significant employee ees to stay home on Friday and then On the surface, this may seem relations and employee retention deduct a day’s worth of pay from the akin to an impermissible salary issues to consider. But it is lawful. exempt employee’s salary. deduction due to operating require - Require employees to use Nonexempt employees do not ments of the business. After all, the vacation time and paid time off. pose the same problem. They have employee is ready, willing and able A common question employers ask to be paid only for hours worked. to work — the employer simply is is whether they can force employees So the employer may direct them to not making work available one day to use their earned vacation and take Friday off, and the nonexempt per workweek. Nevertheless, the paid time off (“PTO”). The answer em ployees need not be paid for the DOL has approved this practice in a under the FLSA is yes. time off. series of opinion letters, and courts For example, if the employer The prohibition on salary deduc - have also upheld the practice. The decides to impose a one-week shut - tions presents an obstacle to idea is that a deduction is not being down because business is slow, it employers wishing to curtail payroll taken from the employee’s salary. can require employees to use their expenses via reduced workweeks, Rather, his salary has been set to earned vacation and PTO during the temporary layoffs, shutdowns and match the shortened workweek. shutdown. This can also be done in furloughs that impact partial work - The DOL has stated that a “fixed single-day or even partial-day incre - weeks. Fortunately, there are ways reduction in salary effective during a ments. The rationale is that the to implement these payroll reduction period when a company operates a employee is receiving his or her full measures without violating the wage shortened workweek due to eco - salary for the workweek, albeit por - and hour laws. nomic conditions would be a bona tions are composed of vacation or What are the solutions? fide reduction not designed to cir - PTO. In a 2005 opinion letter, the There are a number of steps cumvent the salary basis payment.” DOL explained: employers may take to achieve pay - The key is to ensure that the Since employers are not required roll expense reduction without caus - reduced workweek/reduced salary under the FLSA to provide any vaca - ing improper salary deductions. plan is clearly announced to tion time to employees, there is no Full week shutdowns. One way employees before implementation. If prohibition on an employer giving to avoid the salary deduction prob - an employer makes workweek and vacation time and later requiring lem is to implement shutdowns, lay - salary adjustments so frequently and that such vacation be taken on a spe - offs and furloughs in full workweek haphazardly as to make the employ - cific day(s). Therefore, a private increments. Exempt employees do ee’s salary a sham, and more akin to employer may direct exempt staff to not have to be paid their salary for an hourly wage, the employer will take vacation or debit their leave any workweek in which they do not risk losing the exemption for failure bank . . . provided the employees perform any work. So closing for a to pay a bona fide salary. receive in payment an amount equal full workweek at the holidays or dur - Reduce pay without any to their guaranteed salary. ing a slow seasonal period eliminates reduction in the workweek. Likewise, in a prior opinion letter, the risk of improper salary deduc - Absent contractual requirements that the DOL stated that an employer may tions. In this scenario, it is important set salaries or wage rates, employers “make deductions from an exempt to ensure that exempt employees do generally are free to set pay at employee’s leave bank for days not perform any work, even from whatever level they wish. Of course, when the employee is instructed by home, during the shutdown. nonexempt employees must be paid the employer not to report to work Reduce pay in connection at least the minimum wage and time because of budgetary constraints.” with adopting formal reduced and one-half their regular rate for Once the employee has used all workweek schedule. Another hours worked over 40 in a work - of his or her vacation or PTO, then option is to formally adopt a week (or over eight hours in a day the employer must pay the full reduced workweek schedule and in some states), and exempt see REDUCTIONS page 22

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14 while those with vacation time employer to force the use of paid REDUCTIONS remaining will be required to use vacation to compensate exempt Cont. from page 14 vacation time for the days off. employees for a partial week layoff Caution advised. The practices unless the employer has provided at discussed above are permissible least three months’ notice. Prior to salary. This may mean that, in a under the federal Fair Labor implementing any payroll reduction total shutdown for a partial work - Standards Act. However, state wage measures, employers should consult week, where the employer requires and hour laws sometimes impose legal counsel to ensure compliance use of earned vacation, employees different and more restrictive require - with federal and state law. n who have already used their vaca - ments. For example, California wage tion will receive their full salary and hour law does not permit any

Reprinted with permission from the Fall, 2009 issue of . . . The Illinois

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