LEGAL CORNER

Legal Considerations in Layoffs, Salary Reductions and Furloughs

By Gerard Panaro, Howe & Hutton, WSTDA Legal Counsel

Faced with the worst economy in decades, quite a few organizations appear to be contemplating or have implemented salary reductions, furloughs and/or other methods to save money without actually firing people.

If you do decide on a salary reduction or furlough program, there are several legal issues you have to make sure you are taking into account so that you can minimize or avoid the possibility of being sued successfully (which would totally negate the value of any pay cut or furlough program) as a result of your program:

Will a salary reduction or forced days off result in a breach of contract?
How will reduced hours affect benefits?
Will the program comply with state wage payment laws?
Will the program comply with the Fair Labor Standards Act?
Will the program have an impermissible “disparate impact” on protected categories?

Contract. A contract is any writing that has a definite offer, consideration, and acceptance. Thus, for example, a simple letter stating, “We are pleased to offer you the position of chief bottle washer at an annual salary of $35,000” is a contract. If you reduce that person’s salary, you are breaching the contract. You can also have an oral contract. Contracts may even be created by “course of dealing” or past practice. If it doesn’t have contract disclaimer language, an employee handbook can be considered to be a contract. Therefore, any salary reduction plan should not be implemented without a reasonable notice period to affected employees and evidence that they have consented to the plan (for example, a memo signed by the employee). (The fact that an employee is told: If you don’t agree to the reduction, our only alternative will be to fire you will not negate consent.)

Benefits. There’s no statutory definition of what constitutes “full time” or “part time employment,” but there are statutes which do specify that employees must work a certain minimum number of hours to qualify for certain benefits. For example, under ERISA, an employee must work a minimum of 1,000 hours to qualify for coverage; under the Family Medical Leave Act, an “eligible employee” is one who works at least 1,250 hours in the preceding 12 months (state FMLA statutes may specify a lower threshold).

COBRA may be the most significant statute. COBRA applies to group health plans for employers with 20 or more employees on more than 50% of its typical business days in the previous calendar year (again, state equivalents to COBRA may apply to employers with fewer than 20 employees). One of the “qualifying events” that triggers COBRA coverage is a reduction in the number of hours of employment.

To be a “qualifying event”, the reduction in hours must result in a loss of health insurance coverage to the employee. IRS regulations also say that there is no COBRA qualifying event if the covered employee doesn’t lose coverage. Also take into consideration the employer’s own criteria for accumulating vacation and leave time and/or sick pay or other time off. For example, if the employer’s policy is that an employee accumulates four hours of vacation time for every 80 hours worked, and an employee’s hours are reduced to 70 hours, his/her leave time will accumulate at a slower rate.

Given this complication – that a reduction in hours may disqualify an employee from coverage under certain statutes and/or trigger COBRA coverage – companies may want to see if they can get by with pay cuts only and forget about furloughs or reduced working hours.

Wage payment laws. Wage payment laws are different from “minimum wage” statutes. Wage payment laws usually mandate when and how employees are to be paid and prohibit deductions from an employee’s pay unless expressly authorized by law, a court or the employee him or herself. However, a deduction from pay is not the same as a reduction in pay. For example, it may be illegal to deduct the cost of uniforms or lost equipment from the pay of an employee. However, it is not illegal for the employer to change the rate of pay (so long as it isn’t below the minimum wage). However, the employer must give notice of the change. I would suggest that at least one pay period (whether two weeks, half a month or perhaps one month) would be reasonable, sufficient notice.

Fair Labor Standards Act. The thing to make sure of with the FLSA is that any pay reductions, in the case of exempt employees, do not run afoul of the “salary basis” test for exempt status. Otherwise, you may inadvertently “convert” an exempt employee into a nonexempt employee and be liable for overtime. The “salary basis” test says that to be exempt, an employee must be paid the same amount of money per workweek (not “pay period”), regardless of the quantity or quality of work. Deductions from the salary of an exempt employee, unless specifically authorized by the FLSA, will destroy the “salary basis” and convert the employee into a nonexempt employee.

However, the Appellate Court of Illinois (Robinson v. Tellabs, Inc., 907 N.E.2d 501 (Ill.App. 1 Dist. 2009)) ruled in a recent case that an employer’s policy of imposing unpaid days off following or preceding paid holidays to cope with difficult economic conditions did not violate either the Illinois Minimum Wage Law or the Fair Labor Standards Act. In so holding, the court relied upon opinion letters of the Wage and Hour Division of the Department of Labor (which administers the FLSA) and the difference between a deduction from pay versus a reduction in pay. The court held that the company’s policy of imposing unpaid days off following or preceding paid holidays to cope with difficult economic conditions satisfied the “salary basis test” because the days off were imposed prospectively for bona fide business needs.

As noted, in support of its conclusion, the court cited opinion letters issued by the Department of Labor. These have interpreted the “salary basis” test of the FLSA regulations “as allowing employers, in some cases, to prospectively ‘reduce’ employees’ salaries to address bona fide business needs.” The court cited three DOL opinion letters in which the DOL “adhered to the position that ‘a fixed reduction in salary effective during a period when a company operates a shortened workweek due to economic conditions would be a bona fide reduction not designed to circumvent the salary basis payment.’”

Disparate impact. If you reduce the pay and/or hours of all employees, it will not raise any issues of illegal discrimination. If, however, you reduce the pay or hours of only certain employees or perhaps classifications of employees, and if this affects a “disproportionate number” of persons in a protected category, then you may be opening yourself up to a charge of “disparate impact” under federal and state anti-discrimination laws. For example, let’s say you have a sales department and a support department. The sales department is mostly white; the support department is mostly black. You decide not to adjust the pay or hours of your sales people, for fear it will adversely affect their motivation to make sales, but you decide to reduce the pay and/or hours of your support staff. Conceivably, this could give rise to a disparate impact charge, because the burden falls mainly on the black employees, who are in a protected category.

Final considerations. Given that as a general proposition, an across-the-board reduction in pay (so long as it doesn’t reduce pay below federal or state minimums or violate the “salary basis” test) is perfectly legal; and given the further fact that a reduction in hours can create additional legal complications that may be unintended; an organization will want to ask itself whether it can achieve its goals of saving money and avoiding layoffs simply by reducing pay scales and salaries, rather than by furloughing people.

An added consideration is this: apart from the legalities, furloughs can create practical problems for a business that may be undesirable. One writer (Sullivan, “Employee Furloughs Can Be a Bad Alternative to Layoffs,” ere.net (Feb 09, 2009)) lists a dozen problems, apart from potential lawsuits, that furlough problems can cause:

Most furloughs save less money than layoffs would
The workload doesn’t decrease
Treating everyone the same isn’t fair to top performers
Furloughs can create turmoil in the workplace
Furloughs don’t always forestall layoffs
They anger customers
They affect product quality
They affect innovation
The uncertainty of furloughs will put employees into “job search mode”
Potential new hires will “think twice” about accepting a job offer from you
Teamwork will deteriorate
“Furloughs are a nightmare to scheduling managers”

You are receiving this email as a benefit of your membership with WSTDA. You are not receiving this message because you are subscribed to an electronic list. If you have any input you would like to provide about mailings of this type, please e-mail wstda@ksgroup.org. To unsubscribe to this newsletter, click here.

Web Sling & Tie Down Association

2105 Laurel Bush Rd. • Suite 200 • Bel Air, MD 21015 • phone: 443-640-1070 • fax: 443-640-1031 • wstda@ksgroup.org • www.wstda.com