In today’s economic climate, companies are continually looking for ways to cut costs without cutting jobs and resorting to layoffs. One option many companies are considering is mandatory unpaid time off, sometimes referred to as an employee furlough. By requiring mandatory unpaid time off, companies can reduce payroll expenses by reducing the number of hours employees work. However, mandatory time-off requirements may have implications under the Fair Labor Standards Act (FLSA) depending on how an employee is classified. The U.S. Department of Labor (DOL) issued an opinion letter recently addressing the issue.
Audio Conference: Hold Off on Layoffs: Furloughs, Salary Freezes, and Other Labor Cost Cutters
Background
The FLSA is a federal law governing minimum wage and overtime. It requires employers to pay a prescribed minimum wage each workweek as well as overtime for hours worked over 40 in a week. When it comes to overtime, the FLSA classifies employees as either exempt or non-exempt. Generally, non-exempt employees are required to receive overtime. Exempt employees, on the other hand, aren’t entitled to the same luxury because they fit into a select group of exceptions defined by the law.
There are three major groups of employees that are exempt from overtime under the FLSA: executive, administrative, and professional. An employee may qualify for one of these exemptions if he meets both the duties and salary tests. While the duties test for each category may differ, each employee in one of these categories is required to be paid on a “salary basis.” That means he must receive at least $455 per week and, subject to some narrow exceptions, must receive his full salary for any week in which he performs work without regard to the number of days or hours worked.
So what about mandatory time off?
Exempt employees’ weekly salary cannot be subject to a reduction because of variations in the quality or quantity of work. A company requiring its employees to take mandatory unpaid time off is likely doing so as a cost-saving measure due to a slowdown in the amount of work available. As a result, an employer requiring exempt employees to take mandatory unpaid time off may risk losing the employees’ exemption under the FLSA (and suddenly be required to pay them overtime).
Recently, the DOL issued an opinion letter for employers seeking guidance on the matter. The FLSA doesn’t require you to pay an exempt salaried employee for “any workweek in which [the employee] performs no work.” As a result, employers may require salaried exempt employees to take a mandatory full workweek off without pay and still preserve their exempt status. In the alternative, employers may allow employees to use paid vacation days in lieu of mandatory unpaid time off without affecting their exempt status, provided they receive their guaranteed salary.
Bottom line
Employers may require exempt employees to take mandatory unpaid time off for weeklong intervals without losing their exempt status. However, salary deductions resulting from mandatory unpaid time off and lasting less than a workweek violate the salary basis requirement and may cause employees to lose their exempt status.