How to Implement a Furlough For Salaried (overtime exempt) and Hourly Employees

Updated: June 16, 2009

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.

  • For example, on the issue of shortened workweeks with a concomitant reduction in pay, the U.S. Department of Labor ("DOL") has taken the position that such reductions in salary are permissible and will not defeat the exemption, provided that the reduction in salary (1) is bona fide and not intended to circumvent the salary basis test; (2) does not bring the salary to below the minimum threshold; (3) is prospective; and (4) is not done so frequently that the salary becomes a "sham" for hourly wages.

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).

Featured Research
  • EHR Implementation

    More and more medical practices are selecting and implementing electronic health records (EHR) than ever before. In fact, statistics show that the number of practices who have purchased an EHR has doubled in just three years. That being said, many practices fail to prepare for their new EHR and thus do not gain the full benefits that come with implementing a solution. more

  • Selecting the Right EHR for Your Practice

    The purchase and implementation of an electronic health record (EHR) system is no small feat and is a big step for a practice, small or large, to take. Selecting your new EHR is one of the most important decisions that you will make for your practice. more

  • 8 Ways Business Travelers Can Save with VoIP

    Do you or any part of your workforce travel for work, or even telecommute? If that answer is yes, then you should be utilizing mobile VoIP. With VoIP, businesses have been found to save as much as 40% on local calls and a whopping 90% on international calling expenses. more

  • Top 10 Contact Center Tools for an Unforgettable Customer Experience

    It should come as no surprise that consumers have only increasingly become less and less brand loyal in the modern age. In fact, 89% of them have switched brands within the last year due to a poor customer experience. One of the major steps to preventing this customer churn is to invest and invest heavily into improving your customers' experience. Now the major question to ask yourself is, "of all the contact center tools available, what are the ones that I should be utilizing for my business?" more

  • The Future of ERP

    Today's business decisions are data-driven and the difference between success and failure can be boiled down to utilizing the correct data. Now more than ever, companies have access to not only robust data but consumable data as well, through Enterprise Resource Planning (ERP) software. more