Question:

Because of current economic conditions, we are considering implementing furloughs for our employees. However, we are concerned that our exempt employees may lose their exempt status if they are furloughed. Could you please explain the law regarding furloughs for exempt employees?

Answer:

Furloughs are becoming increasingly common as of late. As was mentioned in a previous Workplace Law article, reducing employee hours is one of several alternatives to laying off employees. However, there is good reason to be cautious when implementing furloughs for exempt employees.

To be classified as an exempt employee, an employee must satisfy both the duties test and the salary basis test. The duties test requires that an employee be considered an executive, administrative, or professional employee, as defined in the applicable Industrial Welfare Commission wage orders. The salary basis test requires that the employee receive no less than two times the state minimum wage for full time employment. The current minimum wage is $8.00 per hour. Thus, in addition to meeting the duties test, an employee who is properly classified as executive, administrative, or professional employee must be paid at least $2,773.33 per month to be considered an exempt employee.

An employer may reduce an exempt employee’s compensation without altering the employee’s exempt status so long as the employee’s salary remains above $2,773.33 per month. However, when an exempt employee’s hours are reduced because of a furlough, problems may arise. Pursuant to federal regulations, an employee does not satisfy the salary basis test if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. Accordingly, if an employer mandates furlough-related absences, any deductions from an exempt employee’s predetermined compensation will result in the employee failing to meet the salary basis test. Consequently, the employee will lose his or her exempt status, and will become eligible to receive overtime compensation and meal and rest periods.

For example, an employer may reduce the compensation of an executive, administrative, or professional employee from $5,000 per month to $4,000 per month without risking the loss of exempt status. However, if an employer reduces an exempt employee’s compensation from $5,000 per month to $4,000 per month, and also reduces the employee’s five day workweek to a four day workweek, the employee would lose his exempt status. Therefore, employers must decide whether the benefits of the furlough outweigh the costs associated with the loss of exempt status.

Notably, there is one exception to the above-mentioned rules that allows exempt employees to be furloughed without the loss of exempt status. Because the applicable federal regulations provide that exempt employees need not be paid for any workweek in which they perform no work, the California Division of Labor Standards Enforcement (DLSE) has stated that a properly executed week long furlough of an exempt employee will not result in the employee losing his or her salary basis. So, an employer can reduce an exempt employee’s salary and institute a week long furlough without jeopardizing the employee’s exempt status. To be properly executed, the employee must not perform any work while on furlough; if an employee performs any work, the employee will be entitled to compensation for the entire week. Further, advance notice of any furlough must be given to affected employees. In addition, in order to maintain exempt status, after the pay reduction the employee must still be paid at least $2,773.33 per month in order to meet the salary basis test as explained above. Other exceptions may apply to public employees and employees in specific occupations. Lastly, employment agreements and collective bargaining agreements must be complied with.

In conclusion, employers may reduce the salary of at-will exempt employees as they please. However, employers may not furlough exempt employees without risking the loss of exempt status unless the furlough is for an entire workweek. Further, the employee must receive advance notice of the furlough, and must not perform any work during the furlough. Employers may decide that the benefits of reducing the hours and pay of exempt employees is worth the cost of the loss of exempt status. In those cases, employers must immediately begin treating the employee as non-exempt, and keep track of the employee’s hours worked and meal periods. Because of the complexity of the law in this area, before initiating a furlough of exempt employees, contact your employment law attorney.
– – – – – – – – – – – – – – – – – – – – – – – – – –
Back to Menu- Work Place Law 2009 Articles