Employers can reduce labor costs without layoffs

n this economic climate, many companies are laying off employees to cut costs and stay open. However, there is an alternative to layoff in the form of a mandatory furlough. A furlough occurs when a company either shuts down for a specific number of days, say one week per month, or reduces its employees' workdays, say from five to four. In either situation, the employees' time off is without pay. This is a viable method for an employer to reduce costs without losing its already trained employees; however, it may affect an employee's exempt status and, consequently, his or her overtime exemption under the Fair Labor Standards Act.

Under the FLSA, exempt employees must be paid the same minimum salary for each week that they perform any work. If the pay cut created by a furlough takes an exempt employee's salary below the minimum required by the FLSA, the employee's exempt status is threatened. The FLSA also prohibits an employer from deducting money from an exempt employee's paycheck during a current pay period based on a reduction in work time. Further, under California law, reducing an exempt employee's schedule in combination with a salary deduction will defeat the overtime exemption.

To maintain an employee's exempt status and implement a furlough, the employer may, of course, simply reduce the employee's salary without reducing the hours worked. Another option is to implement the furlough on the basis of a full week that coordinates with the workweek. Under this system, the employee's exempt status would not be jeopardized because the employee is not entitled to a salary for any week in which he or she performs no work.

If a mandatory furlough is in the offing, the employer must make sure that all affected employees are given advance written notice. We recommend that the notice set forth the changed hours of work as well as the obligations of the employee during the furlough. This would include, for example, whether the use of accrued PTO or vacation time is elective or mandatory and, in the case of exempt employees, notice that absolutely no work may be performed on behalf of the employer during the furlough even insignificant work in the form of e-mail, telephone or other methods of communication.