Furloughs, Reduced Work-Weeks & Flexible Work Arrangements: The Law of Alternative Work Arrangements

As employers look for alternatives to layoffs during these tough economic times, there are numerous options to cut costs. Those options include work furloughs, reduced work-weeks or reduced salaries, and flexible work arrangements. Yet, employers must take care to structure those measures to avoid legal pitfalls. Leila Narvid of Payne & Fears LLP in San Francisco believes that these options have the benefit of avoiding the decrease in morale that inevitably comes with layoffs. At the same time, she says that “unless carefully planned and regulated, they can expose employers to liability for wage and hour violations.”

Furloughs

Some employers may want to reduce overhead by closing part or all of their business during slow times, such as for a few weeks around holidays. Mandatory furloughs are a viable alternative to layoffs if implemented correctly. Narvid explains that furloughs can be difficult to implement when it comes to exempt employees (employees exempt from the wage and hour regulations covered by the Fair Labor Standards Act and other state laws). Exempt employees under federal law and many state laws must be paid the same minimum salary for each pay period.

“If any exempt employee performs any work during a workweek,” Narvid says “that person must receive his or her entire salary for that week.” Thus, failure to pay an exempt employee for a week where any work is performed — even very minimal work — can jeopardize that employee’s exempt status. Narvid recommends that employers should inform exempt employees that absolutely no work is authorized during the furlough period without advance permission.

Furloughs are a bit easier to implement with non-exempt employees. Under federal and most state wage and hour laws, non-exempt employees must be paid only for actual hours worked. Consequently, Narvid explains, an employer may send them home for lack of work or to otherwise save payroll costs, and need not pay them for their regularly scheduled hours if they have not actually worked.

Narvid warns that employers need to be careful about making employees use vacation or PTO during a furlough. Mandatory use of vacation or paid time off (PTO) has the advantage of saving the employer’s resources. However, not all states allow the employer the discretion to mandate use of vacation or PTO during a work furlough. For example, in California, “use it or lose it” vacation policies are illegal, and employers must give workers reasonable notice before depriving them of accrued vacation or PTO.

Reduced Work-Week & Decreased Salaries

A reduced work week — for example, a four-day work week — can be even more difficult to implement than furloughs. “Say, for example, an employer wants to implement a 4-day work week, with 20% pay cut,” Narvid explains “such a pay reduction could threaten the exempt status if the 20% pay cut brings the employee’s salary below the required threshold amount, which is $455 per week under federal law, and higher in some states.” An employer also may not deduct 20% of pay from an exempt employee’s paycheck during a current pay period based on a reduction in work time. “The least risk is taken by reducing the pay of exempt employees without dictating the hours they work,” Narvid suggests. In fact, this option has been followed by a good number of law firms that do not want to layoff associate attorneys, but need to reduce costs.

Flexible Work Arrangements

While flexible working arrangements — such as telecommuting, compressed work weeks, and work-share programs — sound like an attractive alternative to layoffs, Narvid says they are not without their pitfalls. She explains that most wage and hour laws, such as the FLSA, were not designed to be flexible or to facilitate the practical concerns of the modern-day employer and employee. The same difficulties that arise with work furloughs for exempt employees arise with work-share and compressed work schedules for exempt employee. In addition, workplace health and safety rules, worker’s compensation, and tax issues can be complicated when employers have workers spending half their time at home, and half their time on-site.

This is bound to change, however. Narvid shares that, in December 2008, Senator Kennedy (D-Mass) and Senator Maloney (D-NY) introduced the Working Family Flexibility Act, which would grant employees the right to request reduced hours or an alternate work schedule. If this bill is passed, state and federal regulators will be forced to clarify several labor & employment laws, in the wage & hour arena.

Providing Notice

Narvid cautions that if an employer decides to impose a furlough or reduced work week, it should notify its employees well in advance. In addition, employers should look at their employment contracts and employee handbooks to make sure that nothing in them prevents the employer from unilaterally changing the terms of its workers’ employment.

The bottom line is that cutting costs does not have to mean layoffs, as long as the employer takes certain cautionary steps. There are numerous ways to avoid layoffs which can benefit both employers and employees, especially when implemented in accordance with law.

By Anna Collins, Esq. (Portland Maine)

Disclaimer: The above article is not intended as legal advice. Readers should consult with their own lawyers.