Use Caution When Cutting Exempt Employees' Salary

Businesses are facing difficult decisions during the coronavirus pandemic, and many may need to reduce workers' hours and pay to stay afloat. But employers can land themselves in legal trouble if they cut an exempt employee's salary without adhering to federal and state wage and hour laws.

"Given the current economic downturn, many employers are considering modifications to employee pay to help reduce costs," said Andrew Murphy, an attorney with Faegre Drinker in Minneapolis. While payroll reductions can provide opportunities for cost savings, he said, they also present legal risks, especially when they involve employees who are exempt from overtime pay.

Who Is Exempt?

Under the federal Fair Labor Standards Act (FLSA), employees must be paid 1.5 times their regular hourly rate for hours worked in excess of 40 in a workweek, unless they fall under an exemption. The most commonly used exemptions are the administrative, executive and professional, which are collectively called white-collar exemptions.

Employees who are fall under the white-collar exemptions must:

• Be paid on a salary basis. Employees must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
• Be paid at least a certain salary level. Employee must be paid at least $684 a week ($35,568 annualized).
• Perform certain duties. Employees' job duties must primarily involve executive, administrative or professional duties as defined by FLSA regulations.

"Their salary shouldn't fluctuate up and down depending on their workload," noted Dave Baffa, an attorney with Seyfarth Shaw in Chicago, during a webcast hosted by the Society for Human Resource Management about coronavirus-related furloughs, layoffs and unemployment compensation.

In other words, a salaried employee who only works a few hours in a workweek is still entitled to his or her full salary for that week.

"Employers would do well to remember that, even if business is slow and employees have less work to do, salaried employees still need to be paid their full salary in any workweek in which they perform work," Murphy said.

Employers can cut pay for full workweeks during a furlough for any weeks that employees aren't working at all, but employers need to ensure absolutely no work is performed. "I mean, not a single e-mail," Baffa said. If they perform any work during the week, they are supposed to be paid.

Focus on Long-Term Business Needs

Despite the strict rules for exempt classification, employers can still reduce employees' salaries in some situations. "In doing this, however, employers should bear in mind that courts and other authorities may look skeptically on short-term salary reductions that appear aimed at addressing temporary dips in employee workload," Murphy said. 

The U.S. Department of Labor (DOL) has previously taken the position that short-term, week-to-week salary adjustments are impermissible. On the other hand, the DOL has said that "[a]n employer is not prohibited from prospectively reducing the predetermined salary amount to be paid regularly to [an exempt employee] during a business or economic slowdown, provided the change is bona fide and not used as a device to evade the salary basis requirements." 

Employers should seek to link salary reductions to long-term business needs, such as forecasted changes in customer demand or cash flow, rather than more immediate changes in workload, Murphy suggested. While guidance on this is unclear, he noted, evaluating adjustments on a six- to eight-week basis seems reasonable under the current circumstances. 

Lock-in the reduction in pay for a sustained period of time and make sure it doesn't fluctuate from week to week, Baffa recommended. "It should look and feel much more like a sustained schedule or pay cut that persists for at least a few weeks."

Don't Dip Below the Threshold

Even when exempt employees have less work to do, they must be paid at least the minimum salary required for exempt status under federal and state law, explained Wendy Lane, an attorney with Greenberg Glusker in Los Angeles.  

Employees must be paid at least $684 a week ($35,568 annualized) to remain exempt from overtime pay under the FLSA, but the minimum salary may be higher under state law. In Alaska, for example, the exempt salary cutoff is $815.20 a week ($42,390.40 annualized). California's threshold is currently $54,080 (annualized) for businesses with at least 26 employees and $49,920 for those with fewer.

[Looking for state-specific information? See State & Local Updates]

Some state laws also require employers to give workers notice prior to reducing salary.

Watch for Changes to Job Duties

If an employee's job duties are altered along with their salary reduction, Lane noted, the employer will also need to make sure that the employee's duties still satisfy the "exempt duties" tests under applicable federal and state laws. 

For example, the employee's exemption will be lost if a change in duties causes an otherwise exempt employee to spend the majority of his or her time on manual or clerical work—rather than on high-level tasks requiring independent judgment and discretion—or if a manager no longer supervises two or more employees due to layoffs.

If complying with the requirements for exempt classification is not possible, Lane added, employers should remember that they can voluntarily reclassify certain employees to hourly, nonexempt status. This would allow them to base employees' pay on the number of hours worked and pay below the required minimum exempt salary.  

Employers that decide to reclassify employees to nonexempt status, she said, should ensure that employees are provided with instructions on complying with the applicable timekeeping rules, meal and rest breaks, and other requirements for nonexempt employees in the state where they work.