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Legal Issues When Reducing Employees’ Hours, Wages

by Kara Shea

We’ve received many questions lately from employers facing tremendous pressure to reduce their operating expenses. Some proposed cost-cutting efforts implicate various employment laws. Since things may get worse before they get better, I’m undertaking a series of articles to address some of the issues you may encounter in the months ahead. I’ll look first at the ramifications of reducing employees’ hours and pay.

Learn more about wage issues in the Wage and Hour Compliance Manual

Q. We are undergoing some hard times in our organization. Our revenue sources have dried up since our customers are having a hard time paying their bills, and we may have to let some people go. We thought one way to avoid that or at least delay it might be to put folks on reduced-hour schedules and cut their pay accordingly.

A. That won’t be a problem for your non-exempt employees so long as you continue to track their time and make sure you pay them at least the minimum wage for all hours worked. But if any of your employees are classified as exempt salaried employees, you may have a problem.

If you reduce exempt employees’ nonfluctuating salary below $455 or make deductions from their pay based on your failure to provide work, you may lose the exemption. One alternative may be to reclassify them as nonexempt during the downturn.

If you prefer to try to maintain the exemption with reduced salary and hours, you should consult with an experienced employment attorney to make sure you aren’t placing their exempt status in jeopardy. That might not be an immediate concern since employees on reduced schedules likely aren’t working more than 40 hours per week.

However, if you take actions indicating that your exempt employees are “subject to” such deductions now, it could affect their exempt status far into the future, when your business is doing better and they are back to working lots of hours.

Also bear in mind that some employees whose hours are reduced may change from full-time to part-time status during a downturn, which may affect their benefits eligibility. Confer with the administrator of your group health plan about the possible ramifications of reducing employees’ hours. Certain employees may be entitled to COBRA continuation coverage in such a scenario.

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Q. Part of the problem is that our employees don’t have enough to do, so they aren’t contributing enough to cover the costs of their salaries. I don’t think switching them to hourly pay will solve the problem because they might work slowly to ensure they’re taking home as much pay as before. What about switching them over to a productivity basis of payment — such as a piecework basis?

A. It’s fine to pay your non-exempt employees based on what they accomplish rather than on an hourly or a salaried basis. However, you must still track their time to make sure you’re paying them at least the minimum wage as well as any overtime at an appropriate rate.

Be aware that paying exempt employees on anything other than a salaried basis typically destroys the exemption. Under certain limited circumstances, some exempt employees may be paid on a fee basis rather than on a salaried basis. Confer with an experienced employment attorney to make sure that you’re applying the compensation system in compliance with federal regulations.

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Q. Is it OK for me to change employees’ schedules or the way they’re being paid after they’ve been working for me for years? Can’t they claim breach of contract?

A. In an employment-at-will state, unless there’s a contract in the picture, you can change the terms and conditions of your at-will workers’ employment (including their compensation) at any time.

It’s advisable, however, to provide your employees with a reasonable amount of notice about an upcoming change. Keep in mind that you do have to pay them according to the old arrangement for all work they’ve already performed at the time of the changeover.

Also be mindful that reductions in hours or pay are adverse employment actions under federal and state discrimination and retaliation laws. So if you’re taking actions that affect employees in protected categories, take special care to make sure your decisions are made in a consistent and neutral fashion and not based on any discriminatory or retaliatory factors.

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Kara Shea is an editor of Tennessee Employment Law Letter and a partner with Miller & Martin PLLC, practicing in the Nashville office. She can be reached at (615) 244-9270.

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