May 2009 — Today’s difficult economic and financial climate has many companies considering various cost-cutting measures, including layoffs, reduced workweeks, pay reductions and voluntary furloughs. These actions raise wage and hour questions that often are overlooked. The unwary employer may reduce payroll costs but wind up with a wage and hour lawsuit as a result.
Typically, payroll is an employer’s largest controllable expense. Therefore, when a company decides it needs to cut expenses, fast, they usually try and do it off the backs of their employees. Reducing payroll costs can take many forms including:
- involuntary layoffs, job eliminations and workforce reductions;
- temporary shutdowns during summer, holidays or other seasonal slow periods;
- voluntary furloughs;
- reduced workweeks;
- temporary or permanent reductions in salaries or hourly pay rates; and/or
- elimination of bonus programs or other incentive compensation.
What often gets overlooked, however, are wage and hour considerations. Many payroll reduction measures fail to comply with the Fair Labor Standards Act, as well as state wage and hour laws. The main wage and hour risk associated with these cost-saving measures relates to exempt employees (salaried employees). Employees who are classified as exempt under the executive, administrative, and professional exemptions generally must be paid on a “salary basis” to remain eligible for the overtime exemption. This means that the employee must receive the same amount of pay each pay period (at least $455 per week under the FLSA) regardless of the “quality” or “quantity” of work performed. Making certain deductions from or reductions to the employee’s salary can result in the exemption being lost, not only for the affected employee, but also for other employees in the same job classification.
As a general rule an exempt employee’s salary cannot be docked for an absence caused by the employer or the operating requirements of the business. The Department of Labor’s (“DOL”) regulations interpreting the FLSA put it this way: “If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.” So, if the operation is slow due to a struggling economy, the employer cannot tell exempt employees to stay home on Friday and then deduct a day’s worth of pay from the exempt employee’s salary. The prohibition on salary deductions presents an obstacle to employers wishing to curtail payroll expenses via reduced workweeks, temporary layoffs, shutdowns and furloughs that impact partial workweeks.
There are some exceptions to the rule regarding when an employer can reduce a salaried employee’s pay without violating the law. Most of the time those exceptions require the employer to shut down the operation for more than a full week and/or make a permanent, long-term switch to a shortened shift. In rare circumstances, an employer may announce an across-the-board cut in pay. This move is typically legal as long as the hourly employees still make more than the applicable minimum wage and the salaried employees make at least $455 per week.
If you have recently experienced a cut in pay and/or had your compensation reduced because of a scale back or economic slowdown, it may be worth asking a lawyer to review your circumstances. In many instances, the company may not be allowed to legally reduce your pay. If you need more information, contact our employment law attorneys for a free consultation today.