COVID-19 has disrupted the global economy and employers may soon face the need to reduce expenses associated with exempt employees. Employers can place exempt employees on furlough, or, in some cases, reduce salaries and hours, without jeopardizing the FLSA exemption, but exceptions may need to be made for certain employees on work-authorized visas.
The FLSA permits employers to place exempt employees on unpaid furlough. However, an exempt employee compensated on a salary basis—a predetermined amount regardless of the quality or quantity of work performed—must be compensated for the entire workweek if the employee performs any work during the workweek, or the exemption may be lost.
Additionally, an exempt employee compensated on a fee basis—an agreed sum for a single job regardless of the time required to complete the job—must be compensated at a rate that would amount to at least the minimum salary per week required for FLSA exemption, assuming the employee worked forty (40) hours per week. As such, a fee basis exempt employee may no longer be exempt if unpaid furlough causes the rate of compensation to drop below the minimum salary per week threshold.
Accordingly, employers should furlough salary basis exempt employees in one-week increments, so that unpaid furloughs do not jeopardize FLSA exemptions. Additionally, employers should establish proper systems to ensure that exempt employees are not required to work, and do not work, during furlough.
Further, employers should not place fee basis exempt employees on unpaid furlough if doing so would cause the employees to be compensated at a rate below the minimum salary per week threshold.
H-1B and E-3 workers cannot be furloughed without pay because of the prevailing wage requirements in those visa categories. These workers can be exempted from the furlough, but if this is not feasible from a business perspective, then they must be paid their normal wages while on furlough. This remains the case even if the employee chooses to spend the furlough outside the United States.
Salary and Hours Reduction
Alternatively, employers can reduce salary basis exempt employees’ salaries and hours without affecting the exempt status of the employees. Such salary reductions will not jeopardize the FLSA exemption if they are prospective and bona fide, and, after the reduction, all other FLSA exemption requirements are still met.
However, employers should reconsider reducing the salaries of fee basis exempt employees because the fee basis exemption requires employees to be paid an “agreed sum,” and a reduction of the agreed sum may jeopardize the exemption. The following discussion is applicable only to exempt employees compensated on a salary basis.
Salary reductions must be prospective to preserve the FLSA exemption. A prospective reduction is one that does not occur within a pay period in which an exempt employee has performed work. Accordingly, salary reductions should not take effect until future pay periods in which affected exempt employees have performed no work and are not already entitled to the pre-reduction salary.
Bona Fide Reductions
Bona fide salary reductions are those that are not designed to circumvent the FLSA salary basis requirement—that is, they do not reduce an exempt employee’s salary to the functional equivalent of an hourly wage (compensation based on the quality or quantity of work).
Generally, infrequent and permanent salary reductions for good cause are viewed as bona fide, and not the functional equivalent of an hourly wage. However, temporary salary reductions can also be bone fide. Temporary bona fide salary reductions have been triggered by economic downturns, loss of revenue, preferential reductions in operating costs, and attempts to avoid layoffs. Accordingly, temporary salary reductions triggered by the effects of COVID-19 are likely to be viewed as bona fide.
FLSA Exemption Requirements
Employers must ensure that salary reductions do not result in a failure to meet the FLSA exemption requirements. For example, exempt employees must generally be compensated at a rate not less than $684 per week to be exempt; if a salary reduction brings an employee’s weekly compensation to a rate lower than the $684 threshold, the exemption may be lost. Moreover, if a salary reduction is accompanied by a change in job duties and the new job duties do not adhere to the FLSA duties requirement, the exemption will be lost.
The salaries of H-1B and E-3 workers cannot generally be reduced below the level that was approved in the most recent government filing without the employer running afoul of the prevailing wage requirement in these visa categories. If it becomes imperative to reduce hours or salary for these workers, then the proper amendments to approved petitions must first be filed with the US Department of Labor and the US Citizenship and Immigration Services. Employers should seek guidance from immigration counsel under these circumstances.
California, New York, and Texas law largely follows the FLSA with respect to exempt employee furloughs and salary reductions. However, state laws may raise additional concerns, such as prior employee notice, accrued leave payouts, and constructive terminations for extended furloughs. Whether a furlough or salary reduction plan will jeopardize exempt status, or raise additional concerns, is dependent on the specifics of the plan and the relevant jurisdiction. Please seek guidance from counsel before implementing such a plan in response to the effects of COVID-19.