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Furloughs and Reduced-Hour Schedules As Alternatives to Layoffs

Layoffs have many downsides. Employee morale is guaranteed to drop. A company’s unemployment insurance premiums will rise, perhaps steeply. And if an employer provides severance packages and/or outplacement services, they could get very expensive. If layoffs are significant in number, a business may not be able to adequately compete once the economy turns around. And there’s always the possibility that a laid-off employee will reintroduce himself to your company by means of a lawsuit.

In February, more than 200,000 California state employees were ordered to stay away from work in the first wave of mandatory employee furloughs designed to chip away at a $42 billion budget deficit. At the same time, Wynn Resorts Ltd. reported its intention to cut pay for its salaried workers and reduce hours for hourly employees in an effort to help save $75 million to $100 million annually at its two Las Vegas hotels. The University of Southern Utah hopes to save $5.65 million and avoid widespread layoffs by furloughing 2,995 full- and part-time employees for one week in April.

With today’s bleak economic outlook, many employers are looking for ways to cut costs without resorting to employee layoffs. If that describes you, then you may want to consider what some states and one of the best-known casino operators are doing. Employee furloughs and reduced-hour schedules are options you may want to consider. But do so carefully.

HR Guide to Employment Law: A practical compliance reference manual covering 14 topics, including overtime and other wage and hour issues

Voluntary or mandatory employee furloughs involve placing employees in temporary non-duty, non-pay status for budget reasons. A furlough differs from a normal layoff in that employees continue to work on a fairly regular basis, with employers scheduling them to have certain days off. For example, an employer may elect to furlough a non-exempt employee by asking or requiring him to take off every other Friday without pay.

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Reduced-hour schedules
A reduced-hour schedule is usually more permanent in nature and involves a regular reduction in an employee’s normal working hours. For example, an employer may change a non-exempt employee’s normal workweek from a five-day, 40-hour workweek to a four-day, 32-hour workweek. Businesses must pay a non-exempt employee only for actual hours worked, so it’s fairly easy to implement this option.

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Be careful with exempt employees
If an employer elects to use employee furloughs or reduced-hour schedules, it must insist that all employees perform absolutely no work during those times. In fact, the employer should have a written policy prohibiting any work absent advance written approval.

But the requirement of no work is particularly important if a company employs exempt workers. As you know, exempt employees are entitled to full pay for any workweek in which they perform any work. If an employer fails to pay an exempt employee his full salary for any week in which he performs any work, it jeopardizes his (and quite possibly the entire classification’s) exempt status.

So how can an employer use furloughs or reduced-hour schedules for exempt employees? First and foremost, if you elect to use furloughs for exempt employees, you must furlough the employee for an entire workweek so you don’t affect his exempt status. But that may be uninviting if losing exempt employees for an entire week has more downsides than benefits.

May you reduce an exempt employee’s normal workweek from a five-day, 40-hour workweek to a four-day, 32-hour workweek with a proportionate reduction in salary? Such reductions are permitted only if:

  1. the reduced salary still meets or exceeds the minimum weekly salary requirement (currently $455); and
  2. the changes in salary aren’t so frequent as to become a sham or circumvention of the salary-basis rule.

The $455 minimum weekly salary requirement may not be pro-rated to a lesser amount to reflect the shortened workweek. In other words, to preserve exempt status, the weekly salary must be at least $455 regardless of the number of workdays in the workweek.

Wage and Hour Compliance Manual

Use of accrued leave
Should an employer allow an employee on furlough or reduced-hour status to supplement his income by drawing from accrued leave? The answer depends on the business’ need to cut current costs. Depending on an employer’s unique circumstances, it may be in its best interest not to allow employees to use accumulated leave to account for days lost to furloughs or reduced-hour schedules. An employer won’t realize any real cost savings until an employee fully exhausts all his accumulated leave — which could take quite a long time. On the other hand, the longer such leave accumulates, the more valuable and expensive it may become. That dynamic occurs because leave is often accumulated at a lower wage rate than when it’s paid. So allowing employees to exhaust accumulated leave may not result in immediate payroll savings, but the company will enjoy a reduction in future liabilities.

Remember, in some states, there’s no statutory requirement to pay accumulated leave (vacation or paid time off) at the termination of employment. But some employers are bound by collective bargaining agreements or policies requiring the payment of accumulated leave at termination. Whatever decision an employer makes should be influenced by its obligation to pay accumulated leave at termination.

State-by-state comparison of 50 employment laws in all 50 states, including leave laws

Speaking of collective bargaining agreements . . .
Before an employer implements furloughs or reduced-hour schedules, it must consider any notice or bargaining requirements set forth in collective bargaining agreements. You don’t want to run afoul of previously negotiated provisions because that will certainly result in grievances.

Either way, it’s always a good practice to at least involve labor union leadership in discussions leading up to furloughs or reduced-hour schedules. Seeking cooperation in advance can mitigate potential problems after implementation.

Things will get better
One thing is sure: The economy will eventually turn around. We have experienced economic highs and lows throughout history. We encourage you to consider furloughs and reduced-hour schedules as means to avoid layoffs. When properly used, they will help position you to better compete when the economy turns around. You also will have a loyal and committed workforce behind you.