10/01/2009
New California DLSE Opinion Letter Supports Employers' Temporary Schedule and Salary Reductions for Exempt Employees for Cost Cutting Purposes
On August 19, 2009, the California Division of Labor Standards Enforcement ("DLSE") issued an important Opinion Letter for California employers (the "8/19/09 OL"), finding that an employer's temporary schedule and salary reductions for exempt employees remains consistent with the salary basis test when implemented to cut costs.
Legal background
California law presumes that any job position is non-exempt and entitled to overtime. A position may be considered exempt if it meets the requirements of one of the exemptions set forth in the California Labor Code and Industrial Welfare Commission Wage Orders. To qualify for an exemption, the position must meet certain tests related to job duties, the compensation amount, and the form of compensation, most commonly to be paid on a "salary basis." California Labor Code Sections 515 and 515.5 describe that the executive, administrative, professional, and computer software exemptions may be met by minimum compensation paid in the form of a salary. In turn, the definition of "salary" adopted by the DLSE (known as the "salary basis test") is found in federal regulations under the federal Fair Labor Standards Act ("FLSA"). 29 C.F.R. §541.602.
An important factor in the salary basis test, for purposes of the 8/19/09 OL, is its general requirement that a salary be a regular payment of a "predetermined amount...not subject to reduction because of variations in the quality or quantity of the work performed." 29 C.F.R. §541.602(a). Except for permitted deductions, primarily for personal absences taken by the employee, "an exempt employee must receive the full salary for any week in which the employee performs any work, without regard to the number of days or hours worked." Id. The salary basis test is not met if the employer deducts part of a salary "for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available." Id.
Given these restrictions, employers have generally avoided partial-week unpaid shutdowns or furloughs, where work is withheld from exempt employees, along with corresponding salary deductions. (Full-week shutdowns are protected under the salary basis rule that: "Exempt employees need not be paid for any workweek in which they perform no work.") While some mixed support existed in federal sources for partial-week unpaid exempt shutdowns or furloughs, prior to the 8/19/09 OL, the DLSE had rejected the concept in an earlier opinion letter as inconsistent with the salary basis test.
Facts
The 8/19/09 OL concerned a California employer experiencing significant economic difficulties due to the present "severe economic downturn." Rather than conduct further layoffs, the employer sought to cut costs by taking what the employer characterized as a "highly unusual and temporary measure"—reduce its employees' workweek from five to four days, together with a proportional reduction in pay for its exempt employees. The employer expressed its intention to restore the schedule and the full salaries when business conditions permitted. Its question for the DLSE: "Are the temporary reductions consistent with the salary basis test and exempt status?"
Opinion
The DLSE found that "there was no express restriction in California law to having a fixed reduction in salary during a period when the company operates a shortened workweek due to economic conditions." Accordingly, under the factual circumstances described in the 8/19/09 OL, an employer may implement a reduction in work schedule and salary for exempt employees without jeopardy to their exempt status, provided the employer otherwise still meets the salary basis test, and the affected employees still earn at least the monthly exempt minimum salary.
The DLSE also surveyed corresponding FLSA interpretations by the courts and the U.S. Department of Labor ("DOL"). Specifically, the DLSE found that the DOL "consistently concluded that the salary basis test does not preclude a bona fide reduction in the salary of an exempt employee to correspond with a reduction in the normal workweek so long as the reduction is not designed to circumvent the requirement that the employees be paid their full salary in any week in which they perform work." Likewise, the DLSE cited a recent federal appellate case supporting the reductions of exempt workweek and salary. Archuleta v. Wal-Mart Stores, Inc. (10th Cir. 2008) 543 F.3d 1226 (rejecting Dingwall v. Friedman Fisher Associates, P.C. (N.D.NY 1998) 3 F.Supp.3d 215 as unpersuasive and not well-reasoned). In turn, the DLSE took care to distinguish and reject its own contrary opinion in its March 12, 2002 Opinion Letter, which had relied on Dingwall.
Practical considerations
The 8/19/09 OL is helpful for employers who are struggling in the current economic climate but wish to avoid layoffs while also cutting costs. Thus, the DLSE advised that the employer at issue could implement schedule and salary reductions for its exempt employees, so long as its exempt positions still met the salary basis test and minimum remuneration level. Nevertheless, the applicability of the 8/19/09 OL is limited to circumstances where the one-time reduction is based on economic difficulties, will last only until conditions improve, and is taken to avoid further layoffs.
Salary deductions based on hours worked in any workweek are treated differently than deductions in salary corresponding to a reduction in hours in the normally scheduled work week. Thus, the 8/19/09 OL does not permit employers to make such reductions on an ad-hoc basis, or reduce salary on a day-to-day or a week-to-week basis. Instead, care should be taken to schedule and announce any reduction in schedule and pay in advance of its implementation, and for the approved purposes.
While the DLSE opinion letters serve as helpful guidance, California employers should keep in mind that they do not have the legal authority of regulations, and courts do not owe them deference. Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal. 4th 557, 568-577. As a result, the same issues if litigated in court could reach a different outcome.
If you would like to discuss these issues further and/or have questions about this Alert, please contact one of the attorneys listed above.