Can I Reduce My Employees’ Wages and Salaries Due to Economic Slump?

 The economic impact of the COVID-19 pandemic and related business closures and/or slowdown has been devastating for many. Employers are forced to cut costs, and many are considering reductions in hours, wages, and salaries to remain afloat. While this is a reasonable measure to minimize business interruptions and to keep as many employees on payroll as possible, employers should carefully implement wage, salary, and hour reductions to maintain legal compliance. The following provides general, federal guidance on these cost-cutting options, but employers should note that certain workers may be subject to additional laws (for instance those working on employment-based immigrant visas), and some states and local jurisdictions have stricter laws and regulations with which to comply.

 Non-Exempt Employees

Reduction in Hours

Generally speaking, to maintain federal wage and hour compliance, non-exempt employees need only be paid for those hours that they actually work (some jurisdictions may require reporting time or waiting time pay, so check your state and local laws, as well). Accordingly, a reduction in hours can be an effective cost cutting measure, especially if business has slowed during the pandemic.

Reduction in Wages

Non-exempt employee wages may be reduced in a non-discriminatory manner as long as employees receive at least the applicable minimum wage for all hours worked, plus overtime, as appropriate. Employers should review their state and local laws for minimum wage and overtime requirements, as well as any applicable guidance on notice requirements and/or time periods before reducing wages. 

Exempt Employees

Unpaid Leave

The Fair Labor Standards Act (FLSA) permits employers to place exempt employees on unpaid leave (sometimes referred to as a furlough). However, exempt employees are generally compensated on a salary basis, which is a predetermined amount regardless of the quality or quantity of work performed, and they must be compensated for the entire workweek in which any work is performed.

Accordingly, salaried, exempt employees should only take unpaid leave in one-workweek increments, so as not to jeopardize their exemptions. Employers must also ensure that exempt employees are not required to work, and do not work, during an unpaid leave.

Reduction in Hours and Salary

Employers can reduce salaried, exempt employees’ hours and corresponding salaries without jeopardizing their exemptions if such reductions are prospective and bona fide, and, after the reductions, all other requirements of the exemptions are still met.

Prospective Reductions

A prospective reduction is one that does not occur within a pay period in which an exempt employee has already performed work. Salary reductions should not take effect until future pay periods in which the affected exempt employees have not performed any work and are not entitled to their pre-reduction salaries. Employers should review their state and local laws for any applicable guidance on notice requirements and/or time periods before reducing salaries. 

Bona Fide Reductions

Bona fide salary reductions are those that are not designed to evade the FLSA salary basis requirement, meaning they do not effectively reduce an exempt employee’s salary to the equivalent of an hourly wage (compensation based on the quality or quantity of work).

Generally speaking, infrequent and long-term or permanent salary reductions for good cause are considered bona fide. Temporary salary reductions can also be bona fide, however, such as when triggered by economic downturns, loss of revenue, and attempts to avoid layoffs. It’s likely that given the unprecedented economic impact of the COVID-19 pandemic, resulting temporary salary reductions will be viewed as bona fide.

FLSA Exemption Requirements

Importantly, in order to preserve an exemption, employers still need to comply with general FLSA exemption requirements. For example, a salary reduction should not bring an exempt employee’s compensation to a rate lower than $684 per week (employers should refer to state and local laws to determine if more generous salary requirements are in place). Moreover, if a salary reduction is accompanied by a change in job duties, such new job duties must still adhere to the FLSA duties requirement.

Please note this current global emergency and applicable laws, regulations, proposals, guidance, advice, and responses change rapidly. We strive to keep you up to date as much as possible, but this blog article is intended for general informational purposes only and should not be construed as legal advice or opinion. Contact myHRcounsel with questions concerning specific facts and circumstances.