Department Of Labor Issues Guidance On Reducing Pay For Furloughs

Eric Paltell
Eric Paltell
09/09/2009

As employers try to navigate the economic downturn, companies are increasingly turning to temporary furloughs to save labor costs.  When furloughing employees, employers require staff to use accrued leave or take unpaid time off.  However, if not done properly, this practice could result in employers converting otherwise exempt employees into non-exempt staff who become entitled to overtime under the Fair Labor Standards Act and its state law counterparts.

Two recent opinion letters from the United States Department of Labor’s Wage and Hour Division illustrate the legal dangers of furloughs.  In both letters, employers asked the Department of Labor whether they could reduce the salaries of exempt employees if work hours were reduced due to short term fluctuations in the work flow.  In both instances, the employer allowed employees to use accrued leave to cover the time off, but, in the event the employee had exhausted accrued leave, the employee was required to take time off without pay.

The Department of Labor found the requirement that employees take time off without pay  to be impermissible.  “It is our opinion that salary reductions due to a reduction of hours worked for short term business needs do not comply with [wage and hour regulations] because they result from operating requirements of the business.  Thus, if the employee is ready, willing and able to work, deductions my not be made for time when work is not available.”  The Department of Labor distinguished these deductions, which were the result of  unpredictable, short term fluctuations in work, from a permanent change in an exempt employees’ regular work week and corresponding change in salary.  In the latter case, where the change is long term, the Department of Labor found a reduction in salary to be permissible.

The Department of Labor confirmed that an employer may require an exempt employee to take an entire workweek off due to lack of work and not pay the employee for that week.  The DOL also found it is legal for an employer to require an exempt employee to use accrued leave when they are furloughed, so long as there is no reduction in compensation for the week.  Exempt status is jeopardized only when the employer makes a deduction from the employee’s salary for partial week absences occasioned by lack of work.

The lessen to be learned from these opinion letters is that employers looking to use furloughs to save labor costs must be very careful.   The two opinion letters, which are identified as FLSA2009-14 and FLSA3009-18 can be accessed at the U.S. Department of Labor’s website, www.dol.gov

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