The current economic downturn has forced many employers to be creative about cutting labor costs.  Various approaches including implementing reduced workweeks, furloughs, requiring that vacations be taken, etc., have been employed to avoid layoffs and retain skilled workforces.   That’s all painful enough, but beyond the administrative costs, morale issues, and headaches associated with such plans are there other things to worry about?   Given that you are a savvy HR professional or manager, you are well aware that there are always other things to worry about when dealing with human resource issues.

Ensuring compliance with the Fair Labor Standards Act (FLSA) by carefully maintaining exempt employees’ status can be tricky.   But then again just everything about the FLSA is tricky.  A few things to ponder are found below.

Refresh My Memory, What Does That Pesky FLSA Require Regarding Exempt Employees?
The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime, at time and one-half the regular rate of pay, for all hours over 40 hours in a workweek.  These are non-exempt employees.

However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for those employed as bona fide executive, administrative, professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees. To qualify for exemption, employees generally must meet certain job duties tests and be paid on a salary basis of not less than $455 per week. Job titles do not determine exempt status and simply paying someone a salary does not make him exempt.   In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department of Labor regulations.

OK, the Exempt Status Is Clear (boring, but clear).   So What Does This Have to Do with the Current Economic Crisis and Employers’ Attempts to Cut Costs and Save Jobs?
I was hoping you’d ask.  Although I’m sure you are just being polite.  Employers seeking to save money by reducing payroll costs by altering work schedules or reducing work hours must make sure that they aren’t violating the salary basis test.

Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Subject to  a few exceptions*, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. Exempt employees do not need to be paid for any workweek in which they perform no work. If the employer makes deductions from an employee’s predetermined salary, i.e., because of the operating requirements of the business or the employer’s needs, that employee is not paid on a “salary basis.” If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.

So What Can an Employer do Regarding Cutting Exempt Employee Salary Costs?
(Besides leaving it all behind, buying a sailboat and heading to Australia.)

The Department of Labor released several opinion letters in 2009 which address these issues.  The applicable Wage and Hour Opinion Letters include: FLSA 2009-2, FLSA 2009-14, and FLSA 2009-18.  They can be found at:  http://www.dol.gov/esa/whd/opinion/flsa.htm.

The questions addressed include:

1. May an employer require exempt employees to use accrued vacation during a company shutdown of less than a workweek without violating the salary basis test?
Yes.  Since under the FLSA employers aren’t required to provide any vacation time, they aren’t prohibited from giving vacation time and later requiring that it be used on certain days. Therefore an employer could require exempt employees to take vacation, for a full day’s or partial day’s absence, as long as the employees still receive payments equaling their guaranteed salaries.

However, (yes, you knew there would be “a however”), the picture changes if an exempt employee has no accrued leave.  In such cases pay cannot be docked for a day or partial day when no work is done or none is available.

2. May an employer reduce exempt employee’s hours, and therefore pay, due to short term business needs?
No.  Salary deductions (of exempt employees), due to a reduction of hours worked because of short term business needs, do not comply with the salary basis test.  Such reductions can’t be made because of a business’ operating requirements.  Short term temporary or recurrent changes in an exempt employee’s hours and pay are viewed as attempts to avoid the salary basis tests and thus are not permissible.

3. What if an exempt employee volunteers to take a day off each week and have his pay reduced accordingly?
That’s a tough one.  The regulations allow deductions from pay if an exempt employee is absent from work for one or more full days for personal reasons.  However, an exempt employee’s decision to take such leave must be completely voluntary and “not occasioned by the employer or by the operating requirements of the business.”

4. What if a “more permanent” change is made to an exempt employee’s normal work schedule and her salary is also reduced?
A longer term change in schedule and pay would be acceptable as long as it’s not done to avoid the salary basis test.  Day-to-day or week-to-week changes would violate the FLSA.

5. May an employer require mandatory time off for exempt employees for a week or two?
Yes. The regulations provide that exempt employees “need not be paid for any workweek in which they perform no work.”   Notice, however, that it must be a “workweek,” which may or more not be the same as a calendar week. Remember also that employees must truly be “off”…they can’t be working at home or working via the phone or internet.

What’s the Big Deal if an Employee Loses Exempt Status Because the Salary Basis Test Isn’t Met?
It can be a serious problem if a exempt employee is misclassified as non-exempt because his position no longer meets the FLSA tests (e.g., doesn’t meet the salary basis test) or he was never exempt to begin with.  Under the FLSA an organization can be liable for 2 years of back overtime (3 years if the act is willful).  Additionally, a DOL investigation can lead to reclassifying a whole group of positions.  Now that’s expensive.  Then there’s the bad publicity and reduced employee trust.  It’s not pretty.

An Additional Note: Remember that state law may impose additional requirements beyond those required by the federal FLSA.  Further, public sector employers have somewhat different wage and hour requirements than private organizations.  Therefore it’s important to research the issues and contact your attorney before taking actions that could be impacted by the FLSA.  Employee lawsuits increase during economic downturns so act cautiously.

*Circumstances in Which the Employer May Make Deductions from Pay
Deductions from pay are permissible when an exempt employee: is absent from work for one or more full days for personal reasons other than sickness or disability; for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan; to offset amounts employees receive as jury or witness fees, or for military pay; for penalties imposed in good faith for infractions of safety rules of major significance; or for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions. Also, an employer is not required to pay the full salary in the initial or terminal week of employment, or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.