Before You Unfurl That Plan To Furlough Employees

(Published May 18, 2009)

Many companies and state governments are turning to furloughs as an alternative to laying off employees. Besides the obvious benefit of keeping workers employed, other potential benefits include not having to rehire and retrain employees when business improves; cutting overtime costs; avoiding the cost of paying severance; and avoiding potential legal risks associated with terminations.

Furloughs are not without fault, though. Layoffs or other cost-cutting measures may still be needed, and employees may be disheartened by the loss of pay. It is important that you understand the payroll aspects of a furlough before rolling out the plan; otherwise, you risk violating the federal Fair Labor Standards Act (FLSA).

Pay for furloughed non-exempt employees is straightforward. Non-exempt employees need only be paid for hours worked; they don't work, you don't need to pay them.

It's a bit more complicated when it comes to exempt employees. They must be paid their full salaries during any week in which they do work. Thus, your best bet is to use full-workweek furloughs; exempts need not be paid if they are off for a full workweek.

Partial-week furloughs are more complicated. Exempts cannot just be paid for three days worked and have two unpaid furlough days. However, if you have a bona fide time off plan, you may require exempts to use accrued time (but not in California, if you haven't provided notice) for the time not worked. While this won't give you the cost savings of an unpaid furlough, it does allow you to get accrued leave time off the books. Caveat: This strategy fails for exempts whose leave banks would result in a negative balance due to current debiting or for those who already have negative time in their banks; they must receive their full pay.

Furlough Alternative: Cut Hours, Cut Pay 

An alternative to a partial-week furlough is cutting hours and a corresponding amount of pay. Again, for non-exempts, you only have to pay the amount of hours worked.

For exempts, though, the danger of a pay cut that corresponds with a cut in hours is they may lose their exempt status, and you may owe back overtime pay.

Key: The Department of Labor (DOL) allows bona fide pay reductions that are due to economic conditions and are not an attempt to circumvent the FLSA. However, changes to exempts' work schedules must be intended to be permanent, and not in response to transitory periods where there is a lack of work. The DOL's example of a change in exempts' work schedule that is intended to be permanent: A change from 52 five-day workweeks to 47 five-day workweeks and five four-day workweeks. The change could be due to economic conditions, but because it's intended to be permanent, it wouldn't violate the requirement that exempts be paid their full salaries in any week they do any work. (See DOL opinion letters FLSA 2009-16 and FLSA 2009-18.)

If you intend to reduce exempt employees' pay to correspond with reduced workweeks (e.g., employees take Fridays off, and their pay is cut by 20%), be sure to:

1. maintain a minimum salary of $455 per week; and 
   
   
2. make the change prospectively.

Note: Check state wage and hour laws, too. Your state may have a higher minimum salary than the FLSA, and have additional requirements, such as the notification rule in California.

Related Topic(s): Leave, Payroll Management/Docking