To address the ongoing economic downturn, employers are exploring alternatives to reductions in forces, such as wage cuts, shortened weeks, and furloughs (unpaid shutdowns). Following are the general legal concerns which employers should consider before implementing a furlough program:
Wage & Hour Issues:1
Salaried (exempt) employees: Because an exempt employee need not be paid for any workweek in which the employee performs no work, full week, unpaid furloughs are permissible under the Federal Fair Labor Standards Act ("FLSA"), and under most state wage and hour laws. Keep in mind, however, that if a salaried employee performs any work in a workweek, he or she is entitled to their full salary for the week. Therefore, if an employer implements week-long furloughs the employer will also need to institute and distribute a policy prohibiting the furloughed employees from performing any work during the furlough. To the extent some minimal amount of work is performed during a furlough week (e.g., returning a phone message or answering an email), an employer could also argue that the work is de minimis, and therefore not compensable.
Partial-week furloughs (e.g., a four-day workweek schedule at 20% reduction in pay; or mandatory days off without pay), are not without risk under the wage and hour laws, but there are some creative solutions that have passed legal muster under wage and hour laws when certain criteria have been met.
According to various DOL Opinion Letters, reducing salary once or twice each year does not violate the salary basis test.2 In addition, two cases can be interpreted to support more frequent reductions in salary, up to four or five times per year.3 However, there is one federal case that has held that an employer's decision to reduce salary and hours resulted in the loss of the employees' exempt status.4
Relying on the DOL opinion letters and the 10th Circuit's 2005 Wal-Mart decision, an Illinois Appellate court recently applied that same analysis in a case involving exempt employees who were required to take time off without pay during certain holiday weeks.5 There, the court held that forced time off without pay during holiday weeks did not destroy the subject employees' exempt status because the mandatory unpaid time off was based on a bona fide business need; was a prospective reduction in pay rather than a prohibited deduction in pay, and was only required infrequently.
Hourly (non-exempt) Employees: To the extent an employer considers requiring non-exempt employees to take furloughs, off-the-clock work could be an issue here as with exempt employees. As mentioned above, however, an employer could address that issue by communicating to furloughed employees that they are not permitted to perform any work during the furlough.
EEO Issues: Just like in a RIF situation, an employer could potentially face claims of discrimination under disparate impact and/or disparate treatment theories if some proportion of employees selected for the furlough program fall within a category protected by the various anti-discrimination laws. Therefore, it makes sense for employers to take a look at the demographic makeup of the selected employees before instituting the program.
Contractual and/or Benefit Plan Issues: Employers also review employee contracts, handbooks and benefit plan documents to check for any contractual obligations that could be compromised by a furlough program. In addition, to the extent that benefit plans and/or handbooks condition certain benefits on the number of hours an employee works in a given week, such that a furlough program could result in the loss of healthcare coverage, the program could also trigger COBRA obligations.
1 See 29 C.F.R. §§ 541.602, 541.603; 820 ILCS 105/4a(2)(E).
2 See Wage and Hour Opinion Letter dated 11/13/70, 1970 WL 26462 (salary reduction 2 times per year is OK); Wage and Hour Opinion Letter dated 03/04/97, 1997 WL 998010 (salary reduction once per year is OK); Wage and Hour Opinion Letter dated 02/23/98, 1998 WL 852696 (salary reduction once per year is OK); see also Archeluta v. Wal-Mart Stores, Inc., 2008 WL 4457699 (10th Cir. 2008) (salary reduction two times per year is OK).
3 See e.g., Caperci v. Rite Aid Corp., 43 F.Supp.2d 83, n.14 (D. Mass. 1999) (reducing pay on a "handful of occasions" is okay); In re Wal-Mart Stores, Inc., 395 F.3d 1777 (10th Cir. 2005) (pay reductions due to seasonal decreases in sales during the summer months is okay).
4 See Dingwall v. Friedman, 3 F.Supp.2d 215 (S.D.N.Y. 1998). However, that case did not address the DOL Opinion Letters at all, and was criticized by the 10th Circuit in the Wal-Mart case.
5 See Robinson v. Tellabs, slip op., Case No. 02 CH 2860 (1st Dist. April 27, 2009).