Temporary Furloughs

By Jonathan A. Segal Oct 1, 2009
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October CoverRather than reducing employees’ rate of pay, some employers are shutting down for a few days at a time or mandating that employees take off certain days.

If a furloughed employee is nonexempt, an employer generally can require the employee to take a day off without pay, subject only to employee relations or an individual or collective agreement to the contrary. However, if a nonexempt employee is paid under the fluctuating workweek, the company cannot reduce that employee’s pay simply because the employer has shortened the workweek.

If an employee is exempt, an employer generally cannot reduce the employee’s pay for absences of less than a full workweek occasioned by an employer-mandated furlough. Under the salary basis requirement, if an exempt employee is ready, willing and able to work, the employer must pay the employee for days the employer does not permit the employee to work for less than a full workweek.

When a furlough is for less than a full workweek, the employer can require that exempt employees use paid time off (PTO) so that employees receive full pay for the workweek when their salaries and PTO benefits are combined. However, if an employee does not have enough PTO available to fill the gap, the employer must pay for the time.

An employer could have a full workweek furlough of exempt employees when the employees are unpaid. However, if an employee does any work during the workweek remotely by using technology, the employer must pay the employee for the workweek or the exemption may be lost.

While the Fair Labor Standards Act justifies differential treatment between exempt and nonexempt employees, employee relations may not. The distinction may stick in nonexempt employees’ collective craw and be one factor that could stimulate collective action.

Benefits Issues

Regardless of whether an employee is exempt or nonexempt, an employer needs to consider how a reduction in hours will affect the employee’s eligibility for insured, retirement, PTO and other benefits.

With retirement and insured benefits, the plan documents control. If the employee’s regular workweek falls below the minimum hours required for coverage, continuing coverage raises self-insurance risks for the employer unless the plan documents are modified in advance.

As for PTO benefits, the employer has greater flexibility and ordinarily can modify the policy statements unilaterally to extend coverage if desired. For employee relations reasons, employers should address this in advance.

Of course, when reducing hours, employers may wish to reduce benefits, too. However, the potential cost savings must be balanced against the risks. Reducing retirement benefits for some but not all employees may raise 401(k) nondiscrimination testing issues if less highly compensated employees lower their contributions. And, benefits reductions may serve as a catalyst for union organizing.

The author is a partner with Duane Morris in Philadelphia. He focuses on counseling, training and strategic planning to maximize compliance and minimize litigation and unionization.​

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