Business Owners Should Weigh Legal Concerns When Considering Furloughs
Call it what you want — the best of both worlds or making the best out of a bad situation — but many employees confronted with the choice of losing a valued job or agreeing to a reduction in hours or wages, choose the latter. As the conventional wisdom goes, the employees are just happy to be working.
Many employees taking unpaid, mandatory furloughs are tightening their belts and then spending their free time working around their homes and apartments, taking a much needed rest or spending one-on-one time with their families.
Employers are also looking at the bright side of furloughs and turning to them in lieu of layoffs. Furloughs can be structured in many different ways, but the basic furlough requires employees to take a mandatory, unpaid break from work for a specified amount of time. The benefits of work furloughs are many:
- The company reduces labor costs.
- The company saves utility and other operational costs (depending on the scheduling of the furlough).
- The majority of a company’s employees, along with their skills and institutional knowledge, remain in place, thereby saving the company the substantial costs of recruiting, hiring and re-training new employees when the work picks back up.
- The company remains agile because it can adjust the furloughs to meet changing market demands.
- The company may preserve employee morale and company culture.
However, the risks are also many. Because of the complexity of the laws and the many business and legal considerations that come with furloughs, employers should consult closely with their counsel before implementing a furlough program. The following is a broad overview of some of the legal risks to be considered.
Wage and hour claims — Furlough programs must be designed by first considering whether an employee is exempt or non-exempt from the minimum wage and overtime provisions of the Fair Labor Standards Act, 29 U.S.C. §§ 201, et seq. Under the FLSA, these categories of employee must be treated differently with respect to furloughs.
Considerations for non-exempt (hourly) employees — There are fewer FLSA complications when implementing furloughs for employees who are paid based solely on the hours worked. If an employee is paid at an hourly rate for the hours she works, and she works fewer hours, her pay is automatically reduced. It doesn’t matter whether the hours are reduced across the board, for one day a week or for an entire week. So long as the applicable minimum wage and overtime provisions are followed, there are few complications to consider — at least in theory.
It is critical in this situation, though, that all managers be reminded that hourly workers must be paid for all time “suffered or permitted” to be worked, using the language of the FLSA. Sometimes furloughs are chosen because there is less work to be done. Other times, the workloads are not reduced, but the furlough is simply an effort to reduce labor costs. In those situations, managers may feel increased pressure to produce the same amount of work in less time. If employers are not careful, managers may ask subordinates to work “off the clock” — a classic FLSA violation that could lead to substantial damages and government scrutiny, not to mention employee morale and other cultural problems.
Another problem can occur when a great deal of overflow work is directed to the lowest-paid exempt workers to avoid overtime pay. Whether a position is exempted from the FLSA is determined on the basis of job duties, not on titles, so it is quite possible a low-level manager suddenly overburdened with leftover work and making the same (or less) money as before, might take a closer look at whether he is improperly classified as exempt and should actually be paid overtime. If his job duties have changed significantly because of the furloughs and he is now doing a higher percentage of manual labor and exercising less and less independent judgment and discretion, he may be right.
FLSA considerations for exempt employees — To maintain an exemption from federal minimum wage and overtime rules, exempt employees must be paid a minimum of $455 per week, along with other additional requirements in relation to their job duties. With certain exceptions, an employee’s salary cannot be reduced for the quantity or quality of his daily work. That typically means that if the employee works any part of the work day, for FLSA purposes he is entitled to his full week’s salary. This requirement presents a problem for furlough programs that are randomly scheduled for less than a week’s time or that allow exempt employees to work part of the week, such as a program that allows an employee to work Monday through Thursday, but asks her not to work on Friday and subsequently reduces her pay by 20 percent.
While it is not impossible to create a compliant furlough program that allows for scheduling flexibility, one of the safest courses of action from an FLSA perspective is to require exempt workers to take weeklong unpaid furloughs. Even with this course, though, there are dangers. Work done remotely still constitutes “work,” so exempt employees should be prohibited during their furlough week from drafting documents, participating in conference calls or from checking or responding to e-mails, Blackberry devices or voice messages. If an employee is so important that she must be on a conference call on Wednesday at 10 a.m. during her furlough week, then the safest course is to either reschedule her unpaid furlough or reconsider whether she should be on the furlough list in the first place.
Another option is to make a long-term prospective change to exempt employees’ salaries. For example, if an exempt employee was making $1,000 a week, her salary could be prospectively reduced on a going-forward basis to $800 a week. So long as the decrease does not make the weekly salary fall below the minimum of $455 per week, this option could be a viable alternative for some employers.
To maintain morale and prevent the risk of losing or alienating key employees, some employers have coupled long-term prospective salary decreases with a comparable increase in paid time off. So, for example, the employee now making 20 percent less in pay, may be given a 20 percent increase in paid time off to compensate. That paid time off might be required to be taken at certain times, or employees may be given flexibility in their scheduling.
This option, if properly executed, has the same effect as a furlough because employees are working less and receiving less income.
This scenario allows the exempt employee to work part of the week, and still receive his full pay for the entire workweek, albeit at a reduced rate. In contrast, in the earlier example, the employee worked part of the week but was not paid for the entire work week, which runs afoul of the FLSA.
Other legal concerns include:
Workplace injuries — When work hours have decreased but workloads have not, employees might rush to complete projects and meet customer deadlines. This can lead to accidents and increased worker’s compensation, FMLA or even disability claims, especially in industries that rely on manual labor.
Express contract claims — Companies cannot afford to overlook the negotiated contracts they may have with some employees, especially key employees. If furlough requests alter the terms of those contracts, the employer could end up paying damages instead of saving labor costs. Naturally, if a company’s work force is unionized, the collective bargaining agreement must be followed.
Implied contract claims — Hopefully, all employers already know their employee handbooks may be considered enforceable contracts. Most handbooks that have been reviewed by legal counsel include disclaimers stating the handbook is not a contract and the policies can be unilaterally changed by the employer at any time, with or without notice. Regardless, before making a furlough decision, employers would be wise to review the sections of their current and past handbooks that deal specifically with any of the proposed changes — particularly changes in hours and compensation — to determine whether there is any problematic language.
Employers should also review employee offer letters, which sometimes include language that could be read to imply a contract for a guaranteed salary or schedule.
Notice — Some states have laws requiring employers to notify employees before significantly reducing their hours or salary. Arizona is not among them, but employers with operations in multiple states should ensure they are in compliance with these notice provisions.
Though some recent economic indicators predict the recession has bottomed out, the need for corporate cost cutting is likely to continue for some time. It is easy to decide to scale down the company picnic, but implementing a furlough program is much more complicated. Companies must be sure to work closely with counsel to ensure their programs meet both their business needs and are compliant with the law. While employees might be doing their best to take job changes in stride, some employees may just decide to spend their furloughs researching their employment law rights.