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September 24, 2009
Q&A: Pay Cuts, Exempt Employees, and the FLSA

Although the economy is showing signs of recovery, HR people around the country continue to struggle with how to reduce labor costs without endangering the status of their exempt employees and thus violating the Fair Labor Standards Act (FLSA).

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Here, we present a few questions--and answers--that have come to BLR's legal experts or to the federal Department of Labor's Wage and Hour Division (WHD) regarding what types of actions are permissible.

Q: “Rather than conducting layoffs, we may be able to restructure by going to 4-day work weeks temporarily, such as for a couple of months. But can exempt employees be part of this?”

Here's the answer from BLR's legal experts: Under the FLSA, employees must be paid at least $455 a week to be classified as exempt. You can reduce the work week to 32 hours from 40 and exempt employees' salaries by one-fifth--provided they still earn at least $455 a week. Further, exempt employees' salaries can't fluctuate from week to week, but reducing them for 2 months is permissible.

And, the number of hours for which nonexempt employees are paid can be changed at will, so long as each still earns at least minimum wage. Communicating fully about such changes is crucial, to explain why they must be made, how long management expects them to last, and about the company's plans for staying viable.

Here are two related questions that were sent to WHD. The following are synopses from WHD opinion letters:

Q: “We would like to reduce the hours of exempt employees occasionally in response to our short-term business needs. Can we ask people to volunteer to take time off, first-come first-served, and draw on their accrued bank of paid time off? If there aren't enough volunteers, can we select employees for mandatory time off, based on seniority? If either volunteers or selected employees chose not to use paid leave, could we reduce their salaries?”

The other question was very similar: a healthcare facility wanted to adjust working hours when it had few patients. Could exempt employees be asked to stay home under such conditions? All who had accrued paid leave would receive their full salaries, but those who didn't would not.

The WHD opinion letters stressed that FLSA allows employers to reduce an employee's salary if and when the employee takes time off for personal reasons other than sickness or disability. That is, if an exempt person wants to take off 4 days in a week and work only 1 day, his or her salary can be reduced to one-fifth the normal amount. But the key to such a reduction is that the changed schedule be entirely voluntary.

WHD said, “The employee's decision to take voluntary time off, however, must be completely voluntary and not ‘occasioned by the employer or by the operating requirements of the business.'” The division additionally noted that day-to-day or week-to-week fluctuations in employee compensation because of the changing needs of a business “are precisely the circumstances the salary basis [for exemption] is intended to preclude.”

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