Sept. 3, 2009 California Employers May Temporarily Reduce Hours and Salary of Exempt Staff Without Jeopardizing Overtime Exemption

Summary

In a recently issued opinion letter, the Division of Labor Standards Enforcement (DLSE), which interprets and enforces California's wage and hour laws, stated that a reduction in hours and salary will not affect an employee's exempt status if the reduction is a temporary response to severe economic difficulties.  This opinion represents a change in direction for the DLSE, and brings the agency's interpretation of state law more in line with the federal Fair Labor Standards Act (FLSA) on this issue.

Discussion

In these difficult economic times, many employers have considered cutting costs by shortening the workweek and reducing pay on a pro-rata basis.  This option is generally acceptable for non-exempt employees, because they are paid for hours actually worked.   For exempt employees, however, the DLSE has long provided that employers cannot shorten the workweek in exchange for a corresponding reduction in pay without violating the salary basis test and jeopardizing an employee's exempt status.  Under the salary basis test, employees must be paid a fixed salary that is not subject to deduction for the quality or quantity of work.

In a recent opinion letter, the DLSE signaled a dramatic change in course.  The opinion was sought by an employer who wished to reduce the schedules of exempt employees from five days to four, and to cut the employees' pay by twenty percent to reflect the reduced workweek.  The action was planned as a cost-cutting measure because the employer was experiencing significant economic difficulties.  The employer intended to restore the full five-day workweek as soon as possible, at which time it would return the exempt employees to their previous salary levels.

The DLSE concluded that the employer's action was permissible under the salary basis test as long as the reduction in hours and salary was based on economic conditions and was not an attempt to circumvent the law.  In reaching its conclusion, the DLSE expressly reversed an opinion it issued in 2002 on similar facts.  The DLSE said its earlier opinion was contrary to a long line of reasoning and authority under federal agency rules and court opinions. 

Earlier this year, the U.S. Department of Labor issued a similar opinion letter stating that, under the FLSA, an employer may reduce an exempt employee's salary when it shortens the workweek as a result of economic conditions. 

What This Means

While the DLSE's opinion letter does not have the force of law, it provides support for employers who are forced to shorten the workweek and reduce pay because of an economic downturn.  The circumstances under which an employer may safely implement such a reduction, however, are limited.  The reduced schedule and pay must be a temporary, yet "fixed" adjustment.  The reduction cannot be "ad-hoc" or otherwise designed to circumvent the requirement to pay exempt employees a fixed salary regardless of the quantity of work they perform in a given week.  For example, employers could not make regular adjustments to pay based on day-to-day or even week-to-week workload assessments without jeopardizing the exempt status of the workers.  

In addition, all of the other salary basis rules must be observed.  Notably, the employee must still be paid a salary of at least $640 per week (for 2009) and the job duties performed by the employee must otherwise satisfy the duties test for the applicable exemption. 

This E-Update was authored by Brenda Kasper and Lisa Frank.  For more information, or questions, please contact Ms. Kasper, Ms. Frank or any Paul, Plevin attorney at (619) 237-5200.