Shortened Workweeks and Reduced Salaries
During the current economic crisis, employers are looking at each and every available tool to manage labor costs. Most employers have been through more than one round of layoffs and restructuring to the point where there is no more fat to be cut. Poor performers and unnecessary positions have already been eliminated, leaving only good performers and necessary positions to be affected by future layoff and restructuring decisions. Understandably, employers have become reluctant to make further permanent reductions because they need to get existing work done; and, they want to retain the talent and skills of their remaining employees for when the economy eventually (and it will) recovers.
Recently, several employers throughout Michigan have announced that they are reducing their normal workweek for some or all salaried, exempt employees from a five day, eight hours per day (40 hour) workweek to a four day, eight hours per day (32 hour) workweek with a proportionate reduction in exempt salaries. These announcements have spawned discussion and debate among affected exempt employees, human resource professionals, and labor and employment attorneys. While such actions at first blush seem to violate the salary basis rules associated with exempt employees, we believe there is sufficient legal authority to conclude otherwise.
Until recently, employers rarely used reduced workweeks and reduced salaries for exempt employees as a tool to manage labor costs. Typically, white collar workers were either permanently laid off, or laid off for a specified number of full workweeks. Shortened workweeks were typically reserved for managing labor costs associated with hourly, non-exempt employees.
Employers have perhaps been reluctant to shorten the workweek and reduce salaries for exempt employees because of the salary basis rules associated with exempt employees. To qualify for exempt executive, administrative or professional status, an employee's primary duties must meet the applicable duties test and the employee must be paid on a salary basis as defined by the U.S. Department of Labor, Wage and Hour Division. The salary basis rule (29 CFR 541.602) generally states that:
An employee will be considered to be paid on a 'salary basis' within the meaning of these regulations if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee's compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.
The regulation further states:
An employee is not paid on a salary basis if deductions from the employee's predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.
Finally, the salary basis regulation requires a minimum weekly salary of $455 and sets forth seven limited circumstances when a reduction to an exempt employee's salary may be made without violating the salary basis rule and harming exempt status.
An employer that fails to satisfy the salary basis rules and that fails to promptly correct improper reductions that were made loses the benefit of exempt status for the employees who were subjected to an improper salary reduction and for any other similarly classified and situated employees. The exemption is lost for all weeks in which the improper salary reduction was made. None of the seven enumerated circumstances for a salary reduction expressly applies to a situation when an employer changes to a shortened workweek (i.e. less than the normal 40 hour workweek). However, there are sufficient guidance and rulings from the USDOL and decisions from at least two federal Courts of Appeal that permit a prospective reduction of workdays in workweeks with a proportional reduction in exempt salaries without violating the salary basis rules and without the loss of exempt status. Such reductions are permitted only if: (1) the reduced salary still meets or exceeds the minimum weekly salary requirement (currently $455), and (2) the changes in salary are not so frequent as to become a sham or circumvention of the salary basis rule. The $455 minimum weekly salary requirement may not be prorated to a lesser amount to reflect the shortened workweek. In other words, to preserve exempt status, the weekly salary must be at least $455 regardless of the number of work days in the workweek.
The guidance from the USDOL is in the form of a statement in its Field Operations Handbook which states: "A reduction in salary to not less than the applicable minimum salary because of a reduction in the normal schedule workweek is permissible and will not defeat the exemption, provided that the reduction in salary is a bona fide reduction which is not designed to circumvent the salary basis requirement." In addition, the USDOL has published at least three Wage and Hour Administrator Opinion Letters, which the USDOL considers to be "rulings" on this issue, each of which expressly concludes that such workweek and salary reductions for exempt employees does not violate the salary basis rules and does not affect exempt status.
The Tenth Circuit Court of Appeals issued decisions on this issue in 2005 and 2008. The Second Circuit Court of Appeals issued a decision on this issue in 2008. In each case, the court held that an employer may make a prospective reduction in the workweek and a proportional reduction in exempt employee salaries without violating the salary basis rule, provided the salary equals or exceeds the minimum weekly amount of $455 and the changes in the workweek and salaries are not so frequent as to be a sham or circumvention of the salary basis rule.
Both federal courts acknowledged and gave great weight and deference to the three Opinion Letters published by the USDOL Wage and Hour Administrator. While other federal Circuit Courts of Appeal are free to reach a different conclusion, they are unlikely to do so given the weight and deference federal courts generally give federal agencies in interpreting their own regulations. In this case, the oldest Wage Hour Administrator Opinion Letter dates back to 1970. Given the long-standing interpretation by the USDOL on this issue, other courts that might be called upon to adjudicate this issue are also most likely to give that same high degree of weight and deference to the USDOL's interpretation.
Finally, when considering whether to implement a shortened workweek and reduced salary for exempt employees, employers should consider at least one practical implication. If the employer intends to permit exempt employees to cash in accrued vacation time to make up for the reduced salary, then no real payroll savings will be achieved unless and until the employee either decides not to cash in accrued vacation time or exhausts accrued vacation time. In other words, shortened workweeks would have to be implemented for a sufficiently long period of time to exhaust accrued vacation days before there would be any savings on labor costs.
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