Labor Commissioner Decides Reduced Work Schedule and Pay May Not Affect Employee's Exempt Status
By David Goldman
[Originally published as a Wendel Rosen Client Update, October 14, 2009.]
Faced with reduced demand for their goods and services during this depressed economy, many businesses have sought to reduce their labor costs. In order to avoid laying off otherwise valuable or productive employees, many employers have considered shorten workweeks for their rank and file, non-exempt employees as well as their management and administrative employees who are otherwise exempt from wage and hour regulations imposed by Federal and California law. But are there legal consequences in reducing the work hours and pay of management and administrative employees?
Let’s quickly review the law. Generally, there is no legal restriction or consequence for an employer to reduce the working hours of an hourly, non-exempt employee. An hourly employee is paid only for the hours he or she actually works. On the other hand, if an employer reduces the workweek and salary of a manager or administrator who is otherwise exempt from wage and hour regulations, there may be important legal consequences. Exempt employees, typically are those employees that fall within the “white collar” exemptions, such as the executive, administrative and professional categories. Important qualifications to obtain exempt status exist (both a “duties” and “salary basis” test must be satisfied) and, once qualified, substantial flexibility is provided to employers of “exempt” employees. For example, meal and rest periods are not mandated for exempt employees, nor are exempt employees required to be paid overtime for working more than 8 hours in a workday, or more than 40 hours in a workweek.
Exempt employees, however, must be paid a predetermined salary that is at least two times the minimum wage, based on full-time employment, whether they work more than 40 hours a week, or less, and very often exempt employees work much more. In other words, in order to meet the “salary” test under federal and state law, an exempt employee must receive a predetermined amount, “which amount is not subject to reduction because of variation in the quality or quantity of the work performed.” Consequently, the salary test will not be met if deductions are made from an employee’s predetermined compensation for absences occasioned “by the employer or by the operating requirements of the business, if the employee is ready, willing and able to work.” See 29 CFR §541.602; CA Enforcement Policies Manual, §51.6.14. Unfortunately, these legal requirements have been interpreted differently by state and federal authorities. A case in point is the reduction of an exempt employee’s workweek and a corresponding reduction of salary caused by the reduced demand for a business’ goods or services.
The DOL has consistently taken the position that an exempt employee complies with the “salary” test when a bona fide fixed reduction in salary occurs with a corresponding reduction in the normal workweek, if the reduction is not designed to circumvent the requirement that employees be paid their full salary in any week in which they perform work. See, for example, DOL Opinion Letter, February 23, 1998.
On the other hand, when the Labor Commissioner examined the same issue, it concluded that such a reduction would violate the “salary” test and, in effect, destroy the employee’s exempt status. (“Couched any way you please. . . the fact is the employer has reduced the time he is making available and has reduced the salary, pro rata, to reflect this reduction [of pay]. . . the salary test requires that the employee’s predetermined pay not be subject to reduction because of variations in the quantity of work performed.”) Labor Commissioner Opinion Letter, March 12, 2002.
However, in August 2009, the Labor Commissioner revisited this issue and determined its earlier 2002 decision was no longer persuasive. Instead, the Labor Commissioner distinguished a federal court decision it previously relied upon and acknowledged that other contrary federal decisions have issued since its 2002 Opinion Letter. This time the Labor Commissioner adopted a more practical interpretation and held that simultaneous reductions in work schedules and salary do not violate the “salary” test, as long as it is for a bona fide reason not designed to circumvent payment of full salary if an exempt employee works any portion of a workweek. See Labor Commissioner Opinion Letter, August 19, 2009.
What Does This Mean for California Employers?
An important conflict between federal and state agencies regarding an employee’s exempt status seems to have been resolved favorably for California employers. Now, California employers can reduce the work hours and salaries of exempt employees without jeopardizing the exempt status of managers, administrators and professionals with some confidence, if the reduction is done for bona fide business reasons which are not designed to avoid paying exempt employees their full salary if they should not work a full workweek.
This new opinion of the Labor Commissioner is a sensible one, as both employees and employers benefit from this interpretation of the law. Employers want to retain valuable employees but may not be able to afford to pay full salary when less than a full week of work is available. Employees, on the other hand, may want to retain their jobs during these tough economic times, even if it is at a reduced salary and workweek and, consequently, are more understanding of the difficult economic times that confront their employers. Many employees are willing to receive reduced pay in order to keep their jobs. It is a shared pain and one that allows employers to more easily increase hours worked, and pay, when business circumstances warrant it. Now, California employers can make this business decision, in appropriate circumstances, without jeopardizing the exempt status of its managers and administrators.
But, a word of caution. To pass legal muster, reduced workweeks and salary must be bona fide and predetermined. While reduced workweeks and pay may be intended as temporary, they should not change from pay period to pay period. Reductions must be made in advance and not applied retroactively. And, significantly, there must be a business reality to the reduction, not only for legal reasons, but for morale purposes. If the business climate improves and business activity returns to previous levels for a sustained period, the workweek and salary should be restored. Otherwise, employers risk losing those employees they struggled hard to retain. Mishandling these situations can have dire economic impacts. When a manager or administrator loses his or her exempt status, all the protections of wage and hour regulations, such as overtime, meal and rest periods, detailed pay vouchers, statutory and civil labor penalties, all become applicable and costly impacts will be imposed on the uninformed employer. Therefore, when considering reducing workweeks and pay for exempt employees, it is prudent for employers to confer with labor counsel to implement a program that complies with the requirements of the law.
