In step with our blog series on Managing Labor Costs in a Down Economy, we will be posting information and thoughts on varying steps employers can take to control labor costs.  This series of posts is intended to provide ideas to executives looking for ways to reduce labor costs in an economic downturn.

This post focuses on furloughs of private-sector (non-government) employees.  In future weeks, we will address other potential considerations such as one-off terminations, full-scale reductions-in-force, and the Worker Adjustment and Retraining Notification Act (WARN) (mass layoffs and plant closings).

Furlough Plans for Employees of Private-Sector Employers

Employers discussing the option of furloughs must recognize the difference between how non-exempt (generally hourly) employees may be furloughed and how exempt (generally salaried) employees may be furloughed.  Under federal and Wisconsin wage and hour laws, non-exempt employees may be furloughed for single days, or even hours, within any given workweek.  For example, a non-exempt employee who normally works 40 hours could be limited to working a 32-hour week for a given furlough period, thus resulting in saved labor costs for the employer. 

Exempt employees, however, must be treated with care.  To qualify as exempt under Wisconsin and federal wage and hour law, employees must be compensated on a salary basis and meet certain duty requirements.  Employees are paid a “salary” for purposes of Wisconsin and federal law if they receive the same pay each week in which work is performed regardless of the number of hours worked that particular week.

As a result of this general rule regarding the definition of an exempt employee, a company may not force exempt employees to take, for example, one or two unpaid days of leave in a workweek and prorate their salaries accordingly without jeopardizing the salary basis portion of their exempt status.  If the exempt status is lost as a result of such a practice, the employees could inadvertently be converted to non-exempt hourly employees eligible for overtime compensation.

Within these legal requirements, some budget-cutting, time-off options for exempt employees follow:

1. A company may require its exempt employees to use paid vacation or other paid time off consistent with its policies and practices on days when the exempt employees are required not to work, provided that, in any given workweek, the employees receive their full salary for that workweek.  In other words, without violating an employee’s exempt status, an employer could require an exempt employee to work Monday through Thursday and take Friday off in a given workweek, if the employer required the employee to use paid vacation pay for the Friday off in order to ensure that the employee is paid his or her full salary for the entire workweek.
2. A company may give exempt employees the option (at the employees’ sole discretion) to take unpaid personal leave in full-day increments.  This form of leave does not jeopardize the salary basis test because it is taken at the sole election of the employee.  In order to preserve exempt status, however, such voluntary unpaid personal days must be taken in full-day increments, and there cannot be a suggestion that the employer required or mandated the leave.
3. A company may require exempt employees to take week-long unpaid furloughs (i.e., Sunday through Saturday).  Week-long unpaid furloughs do not jeopardize the salary basis test because the employees are not required to work any hours during the workweek in which they are not receiving a salary.
4. A company can institute a prospective reduction in exempt employees’ salaries (without reducing the workweek).  To soften the impact of this reduction, the employer could increase the paid vacation available to the employee.
5. In some circumstances, a company may be able, due to a “business slowdown,” to reduce exempt employees’ salaries in conjunction with a reduction in hours.  This adjustment may not be made on an ad hocbasis, however.  Rather, among other things, adjustments must be made for a significant period of time and be tied to a legitimate business reason.  Note that the federal Department of Labor has allowed employers to reduce exempt employees’ salaries when the exempt employees’ workweeks are shortened due to long-term business needs.  However, the shortened workweek must be a semi-permanent arrangement (e.g., for no less than two months) and may not fluctuate back and forth (e.g., reduce employee’s salary for one quarter, raise it the next, and lower it again in the third quarter).  These arrangements are risky and the Department of Labor has cautioned that short-term business needs will not justify a reduced workweek/salary arrangement.

Employers should always consult with counsel before implementing any of these types of modifications to ensure that the contemplated modification fits their actual circumstances and the law.

Other Considerations with Implementing Furloughs

Employers must also keep in mind how furloughs affect their employees’ eligibility for unemployment insurance.  Wisconsin unemployment insurance law provides that an employee who is working (or is paid the equivalent of) thirty-five or more hours is not eligible for unemployment insurance benefits, subject to a few conditions.  Employers reducing hours must be cognizant of how their unemployment insurance account may be impacted — and run the cost-benefit analysis of implementing such reduced hours.

In addition, employers reducing hours must be cognizant of how long the reduced hours are in effect so as not to trigger the WARN Act and state mass layoff laws.  Under WARN and the Wisconsin equivalent of that law, an employee suffers an “employment loss” under those laws if his or her reduction in hours is more than 50% during each month of a six-month period.  Thus, if a number of employees have their hours reduced more than 50% for six months, those employees could count toward the trigger number for the notices required by WARN and similar state laws.  Watch this blog for a future installment of this series regarding the federal and state laws regarding plant closings and mass layoffs.