United States: Furloughs And Reduced Hours: Cost-Cutting Strategies Other Than Layoffs December 2008

Last Updated: December 23 2008
Article by Alison S. Hightower, Eric Bellafronto, Barry Freeman and Bryan Smith

In these tough economic times, many employers have been compelled to let some employees go. Other employers need to cut costs but are looking for lawful alternatives to layoffs.

Employers do have some other options, as long as they structure those measures to avoid legal pitfalls. While employers may consider reducing employee salaries prospectively as the easiest way to save labor costs, such reductions often are rejected as too demoralizing for the workforce. Mandatory furloughs and reduced hours thus are the two most prevalent options considered by employers seeking to reduce labor costs without layoffs.

Mandatory Furloughs

Some employers may want to reduce overhead by shutting down all or part of their operations during slow times, such as for one or two weeks around holidays. Mandatory furloughs are a viable alternative to layoffs if implemented properly.

Effect on Status of Exempt Employees

Exempt employees under federal law and most state laws must be paid the same minimum salary for each pay period. Moreover, if an exempt employee performs any work during a workweek that exempt employee must receive his or her entire salary for that week. Failure to compensate an exempt employee for a week where any work is performed jeopardizes that employee's exempt status. However, if an employer furloughs an exempt employee for an entire workweek, then no salary is owed for that full week and the employee's exempt status is not affected.

Absolutely No Work Permitted

When employees are furloughed, employers should expect that they will not work. With the advent of Blackberries, the ease of remote connections, and the use of voicemail, it is likely that at least some exempt employees will—with the best intentions—check their voicemail, send an email, or otherwise conduct "work" while on furlough. But an exempt employee is entitled to pay for any workweek in which he or she performs any work. Stated another way, the employer may not make deductions from an exempt employee's predetermined salary for absences "occasioned by the employer" or caused by "the operating requirements of the business."

Employers should therefore inform employees that work is not authorized during the furlough period without advance written approval. Preferably, the discretion to authorize work during the furlough should be limited to one or two high-level executives to minimize the potential that exempt employees would respond to subordinates' requests to perform work during the shutdown and thereby be entitled to pay for the entire week. Moreover, depending on the nature of the business, work may not be appropriate except in the case of an emergency.

Mandatory Use of Vacation/PTO During Furlough

Some employees on a mandatory furlough will want to draw from their vacation or PTO to supplement their income. Similarly, employers often want to compel the use of vacation or PTO during a furlough in order to reduce the liability from the company's books. Employers may provide employees the option to use accrued vacation or may mandate its use, but applicable laws may restrict the employer's options.

Mandatory use of vacation has the advantage of saving the employer's resources by using up paid vacation. While federal law tends to permit this practice, not all state laws allow the employer the discretion to mandate use of vacation during a work furlough. In California, for example, "use it or lose it" vacation policies are prohibited, and "reasonable notice" must be provided before an employer can deprive an employee of accrued vacation or PTO. What constitutes "reasonable notice" has yet to be defined by the courts or the California Labor Commissioner. The latter once found that a full nine months notice was mandated and then argued that a fiscal quarter was the appropriate notice, but later withdrew both opinions. No court has yet to opine on the subject - except to note in the context of an employee seeking time off for personal reasons that no statute limits an employer's ability to control the scheduling of employee's vacations.1

Mandatory vacation use also raises issues when some employees do not have sufficient vacation accrued to cover the entire furlough. If exempt employees do not use vacation for the entire week and do some work during that week, then the employer could face liability for pay for the entire workweek or loss of exempt status for that employee. An employer can permit advances of vacation but will need to determine how its policy and the governing state law treat the negative vacation balances should some employees quit or be terminated before that advanced vacation pay is earned.

Many states require that the employee agree to—in advance—any deduction from wages upon separation from employment, including deductions for negative vacation balances. Other states simply forbid such deductions regardless of any agreements between employee and employer.

Voluntary use of vacation/PTO generally is the safest course for an employer to take. That way, if exempt employees want to be paid during a furlough, they have to voluntarily "burn" their PTO – without jeopardizing the employees' exempt status. If exempt employees choose NOT to utilize their PTO and they do not perform any work, the employees' exempt status is still protected, and the employer gets the added benefit of entirely avoiding the payment of the employees' salaries – a nice cost-saving measure in tough economic times.

What About the Union?

Employers considering mandatory furloughs—with or without compelled use of vacation or PTO—should also consider the impact of collective bargaining agreements (CBA)on these policies. Depending upon existing provisions of their CBAs, employers may have an obligation to bargain before implementing a furlough or requiring use of vacation or PTO during the furlough.

Reduced Workweeks

What if the employer would rather reduce the work schedule and corresponding pay of all employees, including exempt employees, for example, by 20 percent or one day a week? Although the exempt employees would work some portion of the week, their pay has now been reduced. Clearly such a pay reduction would threaten the exempt status if the 20 percent cut brings the employee's salary below the required threshold amount—currently set at $455 per week under federal law (and higher in some states). An employer also may not deduct 20 percent of compensation from an exempt employee's paycheck during a current pay period based on a reduction in work time.

Can the employer reduce the pay and work schedule of an exempt employee for future pay periods if the employee receives at least the statutory minimum of $455 per week on this reduced schedule? The few courts that have considered the effect on exempt employees on a going forward basis have disagreed on the legality of such measures.

Ten years ago a federal district court in New York rejected an employer's attempt to direct exempt employees to work four-day weeks and to reduce salary by 20 percent.2 But several other courts later found that an employer can make prospective reductions in an exempt employee's compensation with a like adjustment in scheduled hours to accommodate its business needs.3 These courts reasoned that the governing federal regulations do not preclude prospective reductions that are implemented for future work periods, as opposed to deductions from pay for current or past work periods, which would not be legal.

However, even according to those courts who subscribe to the latter viewpoint, employers may not manipulate payments by "sham practices" such as routinely informing exempt staff of the work schedule for the following week and making prospective adjustments accordingly.

An employer considering reducing the compensation and schedules of exempt employees thus must weigh the legal uncertainties of this approach under federal law. In addition, the exempt status of employees who are forced by business slowdowns to work fewer hours may be jeopardized under applicable state law. Accordingly, the least risk is taken by either: (1) reducing pay of exempt employees without dictating the hours they work or (2) instituting occasional week long furloughs. Obviously this type of restriction seems counterproductive to the goal of retaining jobs and avoiding layoffs, but the nation's wage and hour laws are not focused on issues beyond pay practices.

Notification: When Do We Tell Employees?

If an employer decides to impose mandatory furloughs or reduced schedules, it should, of course, notify its employees in advance. While all states require advance notice, some specify the amount of notice for any reduction in compensation. For example, Missouri has a requirement of 30 days notice, while Maryland requires one pay period. Written notice is advisable to have a clear record of the information conveyed, even if state law does not require written notice.

In addition, employers must consider whether any employment agreement or applicable law requires not only specific written notice, but consideration for the modification to the terms of employment provided in that agreement. Even if the employees are governed only by employment policies that the employer reserves the right to terminate or modify, some states do not permit those modifications without the employees' express knowledge and consent. However, most states permit an employer to modify a unilateral employment contract—such as by reducing compensation—and deem that the employees' continued employment constitutes acceptance of the reduced compensation without any additional consideration.

In cases where furloughs are for longer periods or where work hours are cut significantly, employers should also be aware that federal WARN and some state WARN laws could apply. In most cases, the cut in hours would have to be 50% or more over a relatively lengthy period for such laws to apply. Nevertheless, employers taking significant actions should talk with counsel about WARN-related concerns.

Best Practices

Employers should consider whether furloughs present a viable alternative to layoffs - thereby keeping more persons employed, maintaining institutional knowledge for the inevitable upswing in the economy, and reducing the likelihood of lawsuits or grievances. A few smart practices will assist in a smooth process:

  • To reduce the risk of losing exempt status, furlough employees for full weeks that coincide with the workweek.
  • Check potentially applicable contracts and collective bargaining agreements for possible requirements and limitations.
  • Determine whether vacation or PTO must be used or may be used, and whether employees can borrow from yet-to-be-accrued vacation.
  • Provide advance notice in compliance with state law.
  • Inform all affected employees—including exempt employees—that no work is permitted during furlough, including checking email and voicemail.
  • Centralize reporting of any emergency to one or two individuals who will determine whether to suspend the furlough for some or all employees.
  • Consider all applicable state as well as federal laws.

Footnotes

1. Conley v. Pacific Gas & Elec. Co., 131 Cal. App. 4th 260, 270 (2005).

2. Dingwall v. Friedman Fisher Assoc., 3 F. Supp. 2d 215 (N.D.N.Y. 1998).

3. In re Wal-Mart Stores, Inc., 395 F.3d 1177, 1189 (10th Cir. 2005); Caperci v. Rite-Aid Corp., 43 F. Supp. 2d 83 (D. Mass. 1999).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions