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By:  Richard L. Hackman
Related Practice Areas: Employment Law, Labor Law

 On March 6, 2009, the U.S. Department of Labor, Wage and Hour Division (DOL) posted a significant number of new FLSA opinion letters. In connection with these postings, the DOL issued the following statement:

“The Division has posted 36 Administrator opinion letters and four Non-Administrator opinion letters that were signed prior to January 21, 2009...Some of the posted opinion letters, as designated by asterisk, were not mailed before January 21[2009]. While the Wage and Hour Division is making these letters available to the requestor and to the public, the agency has decided to simultaneously withdraw these letters for further consideration. A final response to these opinion letter requests will be provided in the future.”

The opinion letters designated with an asterisk will be reconsidered by the Obama administration because the opinions expressed in these letters are not consistent with the new administration’s philosophy. The best course of action is to avoid relying on any of the withdrawn letters until the DOL either issues final approval or completely withdraws the letters. 

However, several of the newly posted letters that were not conditionally withdrawn merit immediate attention because they address an issue many employers are facing in these difficult economic times. Specifically, how does an employer reduce the work week of an exempt employee without losing the exemption and violating the Fair Labor Standards Act (FLSA)? 

Financial constraints are causing many employers to consider cost-savings in the area of employee compensation. As employers weigh their options, careful consideration must be given with respect to an employer’s continuing obligation to pay its exempt employees on a “salary basis” in order to preserve the exemption. Paying an employee on a “salary basis” means that for every work week in which the person performs any work, the employee must receive a fixed, predetermined salary of at least $455 per week. This salary may not be reduced “because of variations in the quality or quantity of work performed.” The FLSA provides for certain limited exceptions to this rule; however, generally speaking, the employee’s salary may not be docked for absences during a work week caused by the employer or by the organization’s operating needs. 

On March 6, 2009, the DOL issued three Opinion Letters that provide guidance on this question. In FLSA2009-2, the DOL approved an employer’s plan to require exempt employees to use accrued vacation time during a plant shutdown of less than a work week without violating the salary basis test and jeopardizing their exempt status. Specifically, the DOL reiterated its longstanding position that:

“[s]ince employers are not required under the FLSA to provide any vacation time to employees, there is no prohibition on an employer giving vacation time and later requiring that such vacation time be taken on a specific day(s). Therefore, a private employer may direct exempt staff to take vacation or debit their leave bank account . . . , whether for a full or partial day’s absence, provided the employees receive in payment an amount equal to their guaranteed salary” Wage and Hour Opinion Letter FLSA2005-41 (Oct. 24, 2005).

However, if an exempt employee does not possess any accrued vacation or other leave benefits, or has a negative balance in his/her account, the employee still must receive the employee’s guaranteed salary for any absences caused by the employer or the operating requirements of the business. 

In Opinion Letter FLSA2009-14, the DOL addressed an employer’s proposal to reduce the hours worked by exempt employees due to “short-term business needs,” i.e., low patient census. The DOL drew a distinction between a reduction in an exempt employee’s salary for “short-term business needs” (day-to-day or week-to-week) versus a reduction in hours in the normal scheduled work week. The employer proposed occasionally reducing the hours worked by exempt employees and offered two options: (1) “voluntary time off” (VTO) where employees may, at their option, use paid annual, personal or vacation leave; or if there are not enough volunteers for VTO, then (2) “mandatory time off” (MTO) under a seniority-based system where employees required to take MTO may elect to use accrued paid leave or take unpaid leave. If the employee elected not to use paid leave, or did not have sufficient paid leave to cover VTO or MTO, the employer would deduct the amount from the employee’s salary if the reduced hours are less than one week. If the reduction lasts an entire work week, the employer would not pay any salary for the week. 

The DOL determined that such salary deductions due to a reduction of hours worked for short-term business needs do not comply with the regulations. Specifically, the DOL stated that:

“Deductions from an employee’s fixed salary based on short-term business needs are different from a reduction in salary corresponding to a reduction in hours in the normal scheduled work week, which is permissible if it is a bona fide reduction not designed to circumvent the salary basis requirement . . . Unlike a salary reduction that reflects a reduction in the normal scheduled work week and is not designed to circumvent the salary basis requirement, deductions from salary due to day-to-day or week-to-week determinations of the operating requirements of the business are precisely the circumstances the salary basis requirement is intended to preclude.” 

Finally, in Opinion Letter FLSA2009-18, the DOL reiterated its previously held position that an employer who requires a salaried exempt employee to stay home due to insufficient work may deduct such nonworking time from the employees’ accrued paid time-off bank without jeopardizing the employee’s exempt status so long as the employees receive their regular salaries during such work week. However, in the event that an employee has insufficient leave bank hours to encompass these nonworking periods, the employer must pay the employee’s full salary even if the employee has no accrued benefits in the leave bank. Failure to do so would result in a violation of the salary basis test.
Based on the guidance from the DOL, employers do have some options with respect to the reduction of exempt employees’ salary as a cost-saving measure:

• Formally adopt a “reduced work week schedule,” and adjust exempt employees’ salaries accordingly. Although the salary basis test requires payment of the exempt employee’s full salary in work weeks where work is performed, it is permissible for employers to implement a formal, reduced work week schedule and lower salaries accordingly. For example, an employer could announce to employees that, due to the economic downturn, the employer will, for the next three to six months, implement a four-day work week and reduce exempt employees’ salaries commensurately. While this may seem akin to an impermissible salary deduction due to “operating requirements” of the business, the employer is effectively not making work available one day per work week. The DOL has approved this practice in prior Opinion Letters for economic reasons. Under these circumstances, the exemption would not be lost so long as the employee receives the minimum salary required by the regulations ($455 per week) and meets all other requirements for the exemption.

• Implement a reduction in pay without reducing the work week -- i.e. a reduction in exempt employees’ salary by 5%. The only caveat is that exempt employees must be paid a salary of at least $455 per week.

• Mandate exempt employees’ exhaustion of PTO benefits during periodic plant shutdowns of less than a work week. However, if the exempt employee has insufficient accrued PTO to cover these nonworking periods, or a negative PTO bank, the employer must pay the exempt employee’s full salary for the work week.

• An exempt employee’s salary need not be paid for any work week in which the exempt employee performs no work. Accordingly, if the employee is “furloughed” for one or more entire work weeks, then the salary basis test does not require that the employee be paid any salary at all during those weeks.

Please do not hesitate to contact Barley’s Employment Group if you have any further questions regarding these recently issued Opinion Letters.