It’s nearly impossible to go even a day without seeing news headlines about the latest layoffs. Many employers find themselves desperately brainstorming how they can reduce expenses without having to reduce their workforces. Reducing the number of hours for exempt employees is one option that can provide budget relief, but employers should take care that they don’t land themselves in overtime exemption trouble.
As a general rule, employers can lawfully reduce an exempt employee’s salary due to the operational requirements of the business so long as the employee’s salary is at least two times the minimum wage. However, most employers don’t want to just implement salary reductions without offering employees something positive in exchange—such as a corresponding reduction in hours. Unfortunately, in California, tying an exempt employee’s salary reduction to the number of hours worked can result in a forfeiture of the employee’s exempt status.
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California’s Division of Labor Standards Enforcement (DLSE) has taken the position that a an exempt employee’s salary is provided for the work performed, regardless of how many hours the employee actually works. In addition, if an exempt employee performs any work during a work week, the employee is entitled to his or her full weekly salary. This is part of the “salary basis” requirement for lawful exempt status.
Because this is the DLSE’s position, if an exempt employee’s reduction in salary is tied to a corresponding reduction in hours, the “salary basis” for exemption is lost and the employee becomes entitled to daily and weekly overtime pay. A loss of exempt status also entitles the employee premium pay for missed meal and rest periods. This is true even if the employer is participating in the Employment Development Department’s (EDD) Work Sharing Program.
While it makes sense that employers are weary of asking exempt employees to work the same hours for less pay, it still may be a better option than laying those employees off. Making sure employees understand why their salary is being reduced, even though they are being asked to work the same hours, will help minimize morale problems. Of course, employers should make sure that all salary reductions are implemented in a non-discriminatory manner and can be justified by legitimate business needs.