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Furloughs During Economic Downturns: A Reminder of the Wage & Hour Rules

Late yesterday afternoon, I received a call from a client that was eerily reminiscent of the calls I often received during the 2008-2009 financial crisis. The call went something like this: “Eric, because of the impact COVID-19 is having on our business, we are considering furloughing staff. What are the wage and hour implications of furloughs?” After receiving that call, I dusted off some of the guidance I had given 11 years ago and am sending it out again.

Furloughs can be a viable alternative to layoffs for employers facing a severe cash flow crunch due to a sudden loss of business.  Unlike layoffs, furloughs are temporary in nature and allow employees to retain health insurance and other employee benefits while they are out of work.

For hourly paid and other non-exempt employees, the wage and hour implications of furloughs are straightforward.  Employees need only be paid for hours actually worked, and their pay can be reduced for partial or full-week absences.

For salaried exempt employees, the rules are not as cut and dry. Deductions from an employee’s salary for partial week absences can jeopardize the employee’s exempt status, meaning that they can become eligible for overtime when they work more than 40 hours in a week. As a result, an employer cannot, for example, have exempt employees take off part of the week and dock their pay for the absences.

However, there are options for employers looking to furlough exempt staff. One possibility is to have the employee remain out of work for an entire week and not pay her for that week, as the FLSA permits an employer not to pay salary for any workweek in which no work is performed.  An employer can give the employee the option of using accrued leave for that week, and (in most states), the employer can even require that accrued leave be used during furlough periods.

Reduced workweeks are a bit trickier.  One way to handle a reduced workweek is to prospectively cut the employee’s salary. For example, if the workweek is reduced from five to four days, the employer could implement a 20% pay cut. A number of courts and Department of Labor Opinion Letters have ruled that so long as the salary adjustment  does not reduce the employee’s salary below the required threshold ($684 per week or $35,568 annually), the employee retains their exempt status.

As an alternative to a pay cut, an employer can give exempt employees the option of using accrued leave to make up for the lost hours. To stick with the example of the reduction to a four-day workweek, an employer could allow the employee to use a day of leave each week to retain their current salary.  If the employee does not have leave available or does not want to use leave, they could be furloughed for the entire week.

As the COVID-19 crisis evolves over the next few weeks (and the fall-out likely continues for months thereafter), we will continue to write on employment law issues raised by these challenges. For assistance, please call us at (410) 727-4300. In the meantime, please stay safe and healthy!

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