Suppose your company is struggling to keep its head above water. It has reached the point where you're thinking about temporarily reducing your workforce — or reducing the amounts you pay employees who remain on the payroll. But what might the legal ramifications be?
It depends. The Department of Labor (DOL) is responsible for administering and enforcing federal employment laws, including the Fair Labor Standards Act (FLSA). The FLSA, which is well-known for its rules governing overtime pay and the minimum wage, also includes provisions concerning reductions in pay and furloughs in financially challenging situations. Following is a brief review of several key issues addressed by the FLSA.
The FLSA makes important distinctions between nonexempt and exempt salaried workers for several purposes. Notably, nonexempt workers are paid on an hourly basis and qualify for overtime pay at one-and-a-half times their usual rate.
Generally, employers must pay overtime wages to covered nonexempt employees on the regularly scheduled payday for each workweek. Failing to do so constitutes an FLSA violation. Furthermore, the FLSA requires that all covered nonexempt employees receive at least the applicable federal minimum wage for all hours worked. However, the law doesn't preclude an employer from lowering an employee's hourly rate, provided the rate falls no lower than the minimum wage. You also are allowed to reduce the number of hours employees are scheduled to work.
Employers don't have to pay nonexempt employees for scheduled full days of work if the employees only work part of the day. In other words, the FLSA doesn't require employers to pay hourly employees for hours they don't actually work.
Changing an exempt employee's wages can be trickier. Reductions in the predetermined salary of an exempt employee will generally cause a loss of the employee's exempt status. Accordingly, the employee must then be paid at least the federal minimum wage and overtime pay as required by the FLSA.
In some cases, however, a prospective reduction in salary may not cause the loss of the exemption. For example, an employer must pay an exempt employee the full predetermined salary amount "free and clear" for any week in which the employee performs work, regardless of the number of days or hours worked. But the employer isn't required to pay the predetermined salary if the employee performs no work for an entire workweek.
Employers can't make deductions from an exempt employee's predetermined salary for absences due to its own operating requirements if the employee is "ready, willing and able" to work. Also, salary deductions generally aren't permissible if the exempt employee works for less than a full day.
Note: Physicians, attorneys, outside salespeople and teachers in bona fide educational institutions aren't subject to any salary requirements. Deductions from the pay of such employees won't result in loss of the exemption.
What happens if a salaried employee volunteers to take time off during a business slowdown? Assuming it's not related to the employee's illness or disability, you can reduce pay for one or more full days of missed work. But this must be completely voluntary by the employee.
What about a prospective reduction in pay? There's no prohibition against an employer prospectively reducing the predetermined salary amount to be paid regularly to an exempt employee during a business or economic slowdown. However, the change must be legitimate and not a pretext for evading salary requirements. Such a reduction unrelated to the quantity or quality of work performed won't result in loss of the exemption. On the other hand, deductions from predetermined pay based on day-to-day or week-to-week forecasts of your business's operating requirements isn't permissible.
Whether on-call time is hours worked under the FLSA depends on the particular circumstances. Generally, if the facts show an employee is "engaged to wait," that's treated as work time. If the facts show an employee is "waiting to be engaged," it isn't treated as work time.
For instance, firefighters who play board games while waiting for an alarm to sound are considered working. They're employees who have been "engaged to wait." But IT workers who merely leave contact numbers because they're "on call," in the event servers go down, aren't considered working.
The bottom line: The DOL allows some leeway for businesses experiencing financial difficulties. But you must navigate FLSA rules carefully. Vet your plans with professional advisors before putting them into action.
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