The US Department of Labor (DOL) recently issued two opinion letters that provide additional guidance to employers who wish to cut labor costs for salaried exempt employees. Wage and Hour Opinion Letter 2009-14 (January 15, 2009); Wage and Hour Opinion Letter 2009-18 (January 16, 2009) (released March 6, 2009).

In the first case, the employer proposed occasionally reducing the hours worked by exempt employees due to short-term business needs (e.g., low patient census). In such cases, the employer offers “voluntary time off” (VTO), where employees may, at their option, use paid annual, personal or vacation leave, but continue to accrue benefits. The employer approves VTO on a first-come, first-served basis. If there are insufficient volunteers for VTO, the employer requires “mandatory time off” (MTO) under a seniority-based rotational method. Exempt employees required to take MTO may use accrued paid leave or take unpaid MTO. If the employee elects not to use accrued paid leave or does not have sufficient accrued paid leave to cover the VTO or MTO, the employer deducts the amount equal to the VTO or MTO from the employee’s salary, if it is shorter than one workweek. For unpaid VTO or MTO lasting an entire workweek, the employer does not pay the salary for that pay period. Salaried exempt employees may take VTO or be assigned MTO in one-day increments.

The DOL administrator examined whether these employees are paid on a “salary basis” for the purpose of the Fair Labor Standard Act’s overtime exemption for executive, administrative and professional employees. The applicable regulation states in pertinent part:

[a]n employee will be considered to be paid on a “salary basis”. . . if the employee regularly receives each pay period . . . a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. . . . An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.

29 C.F.R. § 541.602(a).

DOL concluded that salary deductions due to a reduction of hours worked for short-term business needs do not comply with § 541.602(a) because they result from “the operating requirements of the business.” Thus, “[i]f the employee is ready, willing and able to work, deductions may not be made for time when work is not available.” The DOL explained, however, that deductions from the fixed salary based on short-term business needs are different from a reduction in salary corresponding to a reduction in hours in the normal scheduled workweek, which is permissible if it is a bona fide reduction not designed to circumvent the salary basis requirement, and does not bring the salary below the applicable minimum salary:

Unlike a salary reduction that reflects a reduction in the normal scheduled workweek and is not designed to circumvent the salary basis requirement, deductions from salary due to day-to-day or week-to-week determinations of the operating requirements of the business are precisely the circumstances the salary basis requirement is intended to preclude. Therefore, in this instance, salary deductions due to MTO lasting less than a workweek violate the salary basis requirement and may cause the loss of exempt status. The employer is not, however, required to pay the salary for MTO of a full workweek.

Section 541.602(b)(1) states that “[d]eductions from pay may be made when an exempt employee is absent from work for one or more full days for personal reasons.” Thus, salary deductions may be made when exempt employees voluntarily take time off for personal reasons, other than sickness or disability, for one or more full days. For example, the DOL explained that an exempt employee paid $500 per week on a salary basis may take VTO for personal reasons for four days in a workweek and receive one fifth of the salary. The employee’s decision to take VTO, however, must be completely voluntary and not “occasioned by the employer or by the operating requirements of the business.”

In the second letter, the employer proposed requiring salaried exempt employees to stay home or leave work early during periods of insufficient work (also “periods of low patient census”) and deduct the non-work time from the employees’ accrued paid time-off accounts. The employees would receive their regular salaries so long as they had sufficient hours in their PTO accounts to cover the non-work periods. If an employee’s accrued PTO was exhausted, the employee’s salary would be reduced in full-day increments, except that in no event would an employee’s salary be reduced below the minimum salary required for exemption, $455 per week.

The DOL observed that “[s]ubject to specific exceptions found in the regulations, an exempt employee must receive his or her full salary for any week in which the employee performs any work without regard to the number of days or hours worked. In no event can any deductions from an exempt employee’s salary be made for full or partial day absences occasioned by lack of work.”

Employers may, however, make deductions for absences from an exempt employee’s leave bank in hourly increments, so long as the employee’s salary is not reduced. If exempt employees receive their full predetermined salary, deductions from a leave bank, whether in full day increments or not, do not affect their exempt status.

The employer presented two specific questions:

1. Are exempt employees who are required to take PTO during periods of “low patient census” in danger of losing their exempt status?

According to the DOL, “[i]f an employer requires that an exempt employee work less than a full workweek, the employer must pay the employee’s full salary even if: (1) the employer does not have a bona-fide benefits plan; (2) the employee has no accrued benefits in the leave bank; (3) the employee has limited accrued leave benefits, and reducing that accrued leave will result in a negative balance; or (4) the employee already has a negative balance in the accrued leave bank.

2. If an exempt employee’s accrued PTO is exhausted and the periods of low patient census continues, could [the employer] schedule the exempt employee for less than forty hours and reduce pay accordingly?

The employer stated that, if an exempt employee’s accrued PTO is exhausted, in periods of low patient census the employee “would be sent home and paid a reduced salary for the week.” The employer also stated that the employee “would be away from work for one day during the week and receive pay for four days. This practice would only be done in full-day increments for a short period of time.” The DOL concluded that “[i]n light of the requirements in 29 C.F.R. § 541.602(a) . . . such full or partial day reductions in compensation would mean that the employee is not paid on a fixed and guaranteed weekly salary basis without regard to the quantity of work performed.”

As the DOL explained in a previous Opinion Letter:

Consistent with this position, we have stated that a fixed reduction in salary effective during a period when a company operates a shortened workweek due to economic conditions would be a bona fide reduction not designed to circumvent the salary basis payment. Therefore, the exemption would remain in effect as long as the employee receives the minimum salary required by the regulations and meets all the other requirements for the exemption.

By contrast, the employer’s letter described a plan in which exempt employees are called at home and required to take the day off, or are sent home early in the workweek, “during occasional unplanned and transitory periods of low patient census.” Deductions from pay in full day increments would be made whenever the employee’s paid time-off leave was exhausted. Applying the same reasoning as in the first letter, the DOL opined that this was not a salary reduction that reflected reduction in the normal scheduled workweek. Rather, it involved deductions from salary due to day-to-day or week-to-week determinations of the operating requirements of the business. This was “precisely the circumstances the salary basis test is intended to preclude.”

Although employers have some flexibility to reduce salaries and schedules and to furlough exempt employees, these letters confirm that these steps must be analyzed and implemented very carefully to avoid turning exempt employees into non-exempt employees who may be eligible for prospective and retroactive overtime compensation. The Arent Fox Employment Law Group regularly advises clients on these and other wage and hour matters. Please feel free to contact us if you have any questions.

Michael L. Stevens
stevens.michael@arentfox.com
202.857.6382