DLSE Approves Reduction of Salaries and Hours of Exempt Employees
By Stephen R. McCutcheon, Esq.
Many employers are facing the dismal task of instituting pay reductions, furloughs, or part-time schedules in these challenging economic times. Although the United States Department of Labor has long stated that employers may make prospective reductions in the hours and salary of exempt employees, until recently the California Department of Labor Standards Enforcement (DLSE) took the opposite view. A recent opinion by the Labor Commissioner brings the DLSE’s position in line with that of the federal government, and suggests that California law will permit an employer to make fixed reductions in the hours and salary of exempt executive, administrative, and professional employees due to economic conditions, without imperiling exempt status.
To qualify as exempt under state and federal laws, an executive, administrative, or professional employee must possess certain job duties and be paid on a salary basis. To meet the salary portion of the test for exempt status, the employee must regularly receive a predetermined amount of compensation on a weekly or other basis. The amount of compensation cannot be subject to reduction because of variations in the quality or quantity of work performed. This generally means that an exempt employee’s salary cannot fluctuate because he or she performed more less work in a particular period, and the employee must receive the full salary without regard to the number of days or hours worked. For example, an exempt employee must be paid the full salary for any week he or she works, even if there are partial or full day absences due to the lack of work.
The Labor Commissioner has now acknowledged that employers may need to make reductions in hours and salary due to significant economic difficulties from the economic downturn. In the Labor Commissioner’s opinion, an employer would not run afoul of the salary basis test under circumstances in which it sought to avoid layoffs by reducing the work schedule of an exempt employee from five to four days per week, and making a corresponding reduction in the employee’s salary until economic conditions improved. Importantly, the Labor Commissioner noted that his opinion relied upon the fact that the employer did not intend to make more frequent adjustments in hours and salary. Moreover, the Labor Commissioner cautioned that to continue to qualify as exempt, the affected employees must still earn a monthly salary of no less than twice the state minimum wage for full time employment, and continue to satisfy the duties test for the exemption.
The opinions by the Labor Commissioner may be afforded weight by the courts, but they do not have the force and effect of a law or regulation. A court may disagree with the reasoning of the Labor Commissioner and find that such a reduction causes an employee to lose his or her exempt status, entitling him or her to overtime pay and resulting in the imposition of other penalties. Thus, while this new opinion provides a valuable tool for interpreting state laws and regulations, it does not necessarily provide a safe harbor for employers seeking to avoid layoffs through reductions in salary and hours. Caution is warranted.
If an employer is considering the adoption of a reduced work week and a corresponding reduction in the salary of its exempt employees, it must carefully evaluate all of the facts and circumstances surrounding its decision, including whether the change is anticipated to be fixed and permanent, or will be for a limited period of time. The greater the frequency of changes to hours and salary, the greater the danger that changes to the hours and compensation of exempt employees will be deemed attempts to circumvent the salary basis test, and not bona fide reductions.
For more information or assistance with adopting a reduced workweek schedule and a reduction in the compensation of salaried employees, please contact Cook Brown, LLP.