On August 19, 2009 the California Division of Labor Standards Enforcement ("DLSE") issued an Opinion Letter stating that an employer having significant economic difficulties will not violate the "salary basis" of its exempt employees by temporarily reducing the work schedules of those exempt employees from five days to four days per week, with a corresponding reduction of 20 percent to their weekly salary. This is a significant departure from the contrary view expressed in a DLSE Opinion letter issued in 2002.
To qualify for an executive, administrative or professional exemption under California law, an employee must satisfy both the "salary" prong and the "duties" prong of the test for the exemption. In most cases where the exemption is in question, the focus relates to the "duties" prong of the exemption. Nevertheless, in this downturned economy, where employers have tried to avoid layoffs by other costcutting measures, the focus at times has shifted to the "salary" prong of the exemption.
To qualify for payment on a "salary basis," the exempt employee must be paid a qualifying salary, i.e., a monthly salary equivalent to no less than twice the state minimum wage for full‐time employment (i.e., 40 hours per week). Moreover, the exempt employee must receive his or her weekly salary for each workweek in which the exempt employee performs any work, without reduction based on the quality or quantity of the exempt employee's work. Although there are exceptions where the employee absents himself or herself from work for one or more full days (e.g., vacation, sick time, personal day off), the exempt employee generally must receive his or her full salary for the workweek if the employee is ready, willing and able to work.
To cut labor costs, employers sometimes implement a reduced workweek schedule, with a corresponding reduction in pay. For non-exempt employees, there generally is no problem, since there is no requirement that an employer pay a non‐exempt employee any specified amount other than minimum wage and overtime where applicable for hours actually worked by the non‐exempt employee.
For exempt employees, the situation is different. If an exempt employee is ready, willing and able to work, an employer generally cannot mandate that the employee take a day off without pay. The DLSE confirmed this principle in its 2002 Opinion Letter.
On August 19, 2009, the DLSE reexamined its position, and found that there is no express restriction under California law, or in any California court decision, against having a fixed reduction in salary during a period where an employer operates on a shortened workweek due to economic conditions. The DLSE noted that federal law, as interpreted by federal courts, allows an employer to implement a shortened workweek without jeopardizing the "salary basis" of an exempt employee, as long as the reduction is not designed to circumvent the "salary basis" requirement of the exemption. The DLSE therefore concluded that the "salary basis" of the California exemption should be interpreted in similar fashion.
With respect to the specific proposal in issue, the DLSE noted that the proposal was based on the employer's experiencing a "significant economic downturn." The DLSE further noted that the employer intended the shortened workweek and pay reduction to be temporary, intended to restore the full‐time schedules and full salaries as soon as business conditions permitted it to do so, and did not intend to implement these salary reductions "any more frequently than described." The DLSE therefore concluded that this proposal was not prohibited by California law, provided that the exempt employees continued to earn a monthly salary of not less than twice the state minimum wage for full‐time employment (i.e., the required statutory monthly salary threshold had to be met, regardless of the weekly 20 percent salary reduction).
The DLSE Opinion Letter is not binding on California courts, but it should be perceived as persuasive authority. Keep in mind, however, that the DLSE Opinion Letter is not a "blanket" approval of any type of shortened workweek with a pay reduction for exempt employees. Accordingly, before implementing a shortened workweek that includes exempt employees, an employer should consult with labor counsel to determine whether its proposal is likely to fall within the parameters of this August 19, 2009 DLSE Opinion Letter.
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