Does Your Furlough Plan Violate Wage and Hour Laws?

By Judith Ogden, J.D.

Employees may initially approve of the use of furloughs in an attempt to save jobs. A furlough is a mandatory unpaid leave from work. Many employers, including government entities are relying on these with more frequency to cut costs.   However, the failure to consider the impact of employment laws on a furlough policy can create a whole new set of headaches for employers.  The primary concern involves the federal wage and hour laws.  Hourly employees are usually not the problem.  They are only paid for the hours that they work.  Furloughing salaried employees raise more questions.

Salaried employees are usually considered to be exempt.  Exempt employees cannot just have their compensation reduced.  The federal Fair Labor Standards Act (FLSA) requires that employees must be paid at least the minimum wage and must be pay overtime if they work more than 40 hours in a given workweek, unless they meet certain exceptions. Most workers are classified as either exempt or non-exempt depending on their salary and the type of work they do.  The most common exemptions are the white-collar exemptions for administrative, executive, and professional employees, computer professionals, and outside sales employees.  How much employees are paid will also determine if an employee is exempt or nonexempt.

Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis.  Generally, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked.  Exempt employees do not need to be paid for any workweek in which they perform no work.  If the employer makes deductions from an employee’s predetermined salary, then the employee is not being paid on a “salary basis.”

Employers cannot just reduce compensation for exempt employees to address temporary economic reasons. Instead, exempt employees would have to be placed on furlough for a block of time, usually for a week or more.

Salaried employees can lose their exempt status when required to take partial-week furloughs, or if they engage in productive activity during the furloughs.

To be exempt an employee must be paid at least $23,600 per year ($455 per week).Consequently, if furloughing an exempt employee reduces his or her salary below $455 during that week, the employee has been converted to a non-exempt employee.  These salary requirements do not apply to outside sales employees, teachers, and employees practicing law or medicine.

With non-exempt employees, employers must pay them for the hours worked, including any overtime hours. If an employer tells furloughed non-exempt employees not to work on certain days but then allows them to, that would violate the FLSA.

A number of states have their own wage and hour laws, so multi-state employers must consider other rules.  In a union setting, collective bargaining agreements determine if furloughs may be ordered.  The same is true if an employee has an individual contract. However with most at-will employees there is not a contractual issue.  If the employer is offering a unilateral change in compensation, the employee is deemed to accept it by staying on the job.

Special rules also apply to government employees. When a furlough is for less than a full workweek and a salaried exempt worker performs any work during that week, a private-sector employer must pay the exempt employee’s full weekly salary.  However, the FLSA regulations state that “deductions from the pay of an employee of a public agency for absences due to a budget-required furlough shall not disqualify the employee from being paid on a salary basis except in the workweek in which the furlough occurs.” Some furloughs of state workers have been overturned by courts for other reasons.  In California, the court held that the governor was incorrect in ordering furloughs for employees in “special fund” agencies, or those that receive money from sources other than the state general fund.  In Pennsylvania, the court held that the governor was not prevented from paying the wages of state employees with monies from the state treasury that has not been appropriated by the legislature, because the FLSA trumps state law.

Therefore, some things to keep in mind when requiring furloughs:

1.    Permitting work during furlough periods, even when unauthorized and involving something as minimal as checking email, may well give rise to the obligation to pay for the time.

2.    Implementing a strict policy of prohibiting unscheduled work and having an administrative procedure to uniformly enforce the policy is advised.

3.    Determine if there are any potentially discriminatory patterns in terms of who is being furloughed.  This could lead to a disparate impact case. Document the criteria and have business reasons.  If furloughs are not being applied across the boards, determine selection criteria, and apply it uniformly.

4.    If salaried workers appear to be willing to work without being paid now, if things get worse and they have to be let go, they may decide to report the FLSA violation.