California Wage and Hour Update

DLSE Approves Salary Reduction For Furloughed Exempt Workers

With the economy in flux, businesses are looking for ways to reduce payroll without losing talent. Some companies have put their hourly workers on a “work furlough” by reducing the number of hours or days in a weekly schedule. But can the same be done for salaried exempt workers? Normally, salaries cannot be adjusted based on the number of hours worked in a workweek.

The answer is yes, according the California’s Division of Labor Standards Enforcement (“DLSE”). Although the rules for salaried exempt workers are strict in California, in a recent opinion letter, the DLSE endorsed a salary reduction commensurate with a workweek reduction.

A Temporary Work Furlough

In an August 19, 2009 opinion letter, the DLSE considers the following scenario: A company has experienced significant economic difficulties due to the present severe economic downturn facing California and the nation. Though the employer has already laid off employees, it must further cut costs until the business conditions improve.

The employer would like to reduce the number of its employees’ scheduled work days from five days to four days per week. In implementing this reduction, the employer would not pay non-exempt employees for the day that they were not required to work and would reduce the salaries of the exempt employees by 20%. As soon as business conditions permit, the employer intends to restore both the full five-day work schedule and the full salaries of its exempt employees.

The General Rules

In California, there are three so-called “white collar” exemptions: executive, administrative and professional. (There are a handful of other exempt categories as well.) A properly classified white collar exempt employee must perform certain types of exempt duties (passing the “duties test) and must also be paid on a salary basis.

The salary basis test, found in California Labor Code § 515(a) and in California wage orders (which apply to your specific industry or occupation), provides that a white collar exempt employee must be paid a monthly salary equivalent to no less than two times the minimum wage for full time employment (40 hours per week).

Generally, an employer may not reduce an exempt employee’s salary based on the number of hours worked. For example, if an employee works only six hours in one day, when he was expected to work eight, the employer may not dock part of his salary. There are some narrow exceptions.

Work Furlough Rules

The DLSE determined that there is no express restriction in California law to having a fixed reduction in a salary during a period when the company operates a shortened workweek due to economic conditions.

Looking to federal labor law for an analogous rule, the DLSE noted that the U.S. Department of Labor concluded long ago that the salary basis test does not preclude a bona fide fixed reduction in the salary of an exempt employee to correspond with a reduction in the normal workweek so long as the reduction is not designed to circumvent the requirement that the employees be paid their full salary in any week in which they perform work.

The DLSE acknowledged that in an email letter issued in March 2002, the agency had concluded to the contrary, deciding that a salary reduction during a furlough was not legal. However, the federal court decision upon which the DLSE had based this conclusion was subsequently negated by a higher court ruling. Accordingly, the DLSE now states that the 2002 opinion letter can be disregarded.

Caveats

The DLSE’s opinion letter may not be the last word. The DLSE is California’s labor law enforcement agency, but it does not make law when it issues an opinion letter; it only interprets it. The California legislature could pass legislation to the contrary (though our current governor would likely veto it). Moreover, one of the many California appellate courts, or the California Supreme Court, could issue a contrary opinion.

However, the letter is well-reasoned and is consistent with federal law. It seems plausible to expect that the rule will take hold here in California.

Nevertheless, making the wrong call could be costly, so it is prudent to check with an employment law attorney prior to implementing a work furlough/salary reduction for salaried exempt employees.