E-Newsletter

May 2009

Reducing Salaries and Hours Without Losing Exempt Status

Mark A. Johnson, Esq.

Economic difficulties have forced many employers to look for ways to reduce labor costs. Recent U.S. Department of Labor opinion letters shed light on how employers can reduce exempt employees' salary to correspond with reduced hours worked without jeopardizing the employees' exempt status.

To qualify as exempt from the Fair Labor Standards Act's overtime requirements, administrative, executive and professional employees must be paid a "salary." The Fair Labor Standards Act defines salary as "a predetermined amount ... which is not subject to reduction because of variations in the quality or quantity of work performed." An employer who fails to pay an employee a salary and to promptly correct improper deductions from salary must pay overtime pay in all workweeks in which the improper deduction was made.

Reducing wages of salaried exempt employees to correspond with reduced hours can risk destroying the salary basis of pay because it can arguably reduce pay because of a variation in the quantity of work performed. United States Department of Labor regulations add to the uncertainty by stating that if an employee is "ready willing and able to work, deductions may not be made [from salary] for time when work is not available." The United States Department of Labor has recently issued three opinion letters that address the conditions under which employers can reduce salaried employees' wages without destroying their salary basis of pay.

Reducing Salary for Time Off of Less Than a Week

The first opinion letter responded to an employer that proposed to occasionally reduce hours worked by exempt employees due to short-term business needs. If insufficient employees volunteered for voluntary paid time off, the employer proposed to require mandatory time off. Exempt employees who were required to take mandatory time off could use accrued paid leave or take the time off as unpaid. If the time taken off was shorter than a workweek and the employee had insufficient accrued paid leave or elected not to use the accrued paid leave, the employer would deduct an amount equal to the time off from the employee's salary.

The opinion letter concluded that deducting from employees' salary for mandatory time off of less than a workweek would destroy the salary basis of pay and cause the loss of exempt status. According to the letter, deductions from salary due to day-to-day or week-to-week determinations of the business are precisely the circumstances the salary basis requirement was intended to prevent.

The second opinion letter responded to an employer that proposed requiring exempt employees to stay home or to leave work early during slow periods. The exempt employees had paid time off accounts. The employer proposed to deduct the time not worked from employees' paid time off accounts. Thus, the employees would receive the same amount of total compensation as their normal salary while they still had time left in their paid time off accounts. If the employee ran out of paid time off, the employee's salary would be reduced accordingly.

The Department of Labor concluded this practice would violate the salary basis test. The full or partial day deductions from salary would mean the employee was not paid a fixed and guaranteed weekly salary without regard to the quantity of work performed.

Requiring Employees to Take Vacation for Shutdowns of Less Than a Week

The third opinion letter responded to an employer who proposed requiring employees to use accrued vacation time during a plant shutdown of less than a week. According to the opinion letter, since employers are not legally required to provide any vacation time, the law does not prohibit employers from giving vacation time and then requiring that such vacation time be used on a specific day or days. Therefore, the employer could require employees to take paid vacation during a plant shutdown of less than a week without violating the salary basis requirement provided the employees received payment for the time in question equal to their guaranteed salary. Employees who had no accrued vacation available would still need to receive the guaranteed amount in order to qualify as exempt.

Wisconsin Law

The Labor Standards Bureau has not issued guidance addressing facts similar to those discussed in the three opinion letters discussed above. It is likely that the Wisconsin Department of Workforce Development would apply the salary basis test in a similar manner to that described in the opinion letters above because the basic definition of salary is the same under both federal and state law.

Conclusion

Although there are grey areas when reducing salary of exempt employees while also reducing hours, there are some clear principles. First, an employer need not pay an exempt employee for any workweek in which the employee performs no work. Second, an employer can make deductions from employees' paid leave or vacation accounts to pay them for days not worked as long as the amount the employee receives for the workweek equals the employee's predetermined, guaranteed salary. Third, under the right circumstances, an employer can prospectively reduce salaries to correspond with reduced hours provided the reduction is a bona fide change not designed to avoid overtime pay.


For more information contact Krukowski & Costello, S.C.'s educational services department at (414) 988-8400.