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September 02, 2009
Can You Reduce Exempt Employees' Work Schedules, Salaries to Avoid Layoffs?

California's Division of Labor Standards Enforcement (DLSE) has issued an opinion letter that states that under certain circumstances, an employer may simultaneously reduce its exempt employees' work schedule and salary without violating their exempt status under state wage and hour law.

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The letter came in response to an employer that said it is experiencing significant economic difficulties because of economy. In order to avoid further layoffs, the employer is interested in changing exempt employees' usually weekly schedule from 5 days to 4 days and reducing their salary by 20 percent (or some other percentage). The employer indicated that the reductions in scheduled work days and salaries would be reversed as soon as the business conditions permit.

“It is the opinion of the Division of Labor Standards Enforcement that neither the Labor Code and Industrial Welfare Commission wage order provisions, nor the federal law upon which the pertinent provisions of California law is based, prohibits the employer described in your letter from implementing its proposed reduction in the work schedule and salary of the affected exempt employees,” the opinion letter says.

This opinion is in contrast to one issued by the division in 2002, when it concluded federal rules preclude an employer from reducing the salary of an exempt employee during a period in which the company operates a shortened workweek due to economic conditions. The 2002 opinion relied upon in part a federal district court decision that the division now views as misguided, as evidenced by subsequent court rulings.

For employees to still qualify as exempt, the division said, they must continue to pass the state's salary test (at least $2,773.33 per month) and duties test after the reduction.

“In accordance with the several Department of Labor opinion letters and federal district and appellate court decisions interpreting the federal law, which the DLSE has historically followed, and based upon the facts presented which provide no indication that the employer intends to adjust the salary any more frequently than described, it is the opinion of this office that the employer is not prohibited under California law from implementing the proposed scheduled reduction in the work schedule and salary of the affected exempt employees so long as the employee still meets the salary test by earning a monthly salary equivalent to no less than two times the state minimum wage for full time employment. Of course, each affected employee must also continue to satisfy the duties test for the applicable exemption.”

The division's mention of the frequency of the salary adjustments is important. The above scenario is seen as a permanent furlough arrangement. More frequent changes to salaries may be seen as a "sham"--a way to circumvent the salary-basis test.

Under the federal Fair Labor Standards Act, employers may set up a permanent change in an employee's usual weekly schedule, such as changing the weekly work schedule from 5 days to 4 days, and altering the employee's salary to match. The employees must still pass the salary test (at least $455 weekly) and duties test required by the FLSA for exemption.

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