During this economic downturn, an increasing number of employers are turning to furloughs and/or complete shutdowns as a means of saving labor costs.  These types of actions can be tricky when they affect exempt employees who are paid on a salary basis.

The US Department of Labor (DOL) defines “salary basis” in pertinent part as follows:

An employee will be considered to be paid on a “salary basis” within the meaning of these regulations if the employee regularly receives each pay period on a weekly, or less frequent basis, 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. Subject to the exceptions provided in paragraph (b) of this section, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work. 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).

One of the implications of the foregoing regulation is that if an employer shuts down a facility entirely or furloughs some employees, in each case for less than a workweek, but does not pay exempt employees their regular salary for that workweek, it could unwittingly convert them to non-exempt employees, in which case it may be liable for overtime compensation for such employees going back two or three years.

In a recent Opinion Letter, however, the DOL confirmed that if an employer shuts down a facility or furloughs employees for less than a workweek, but forces exempt employees to use accrued vacation time during the time off that week, it does not violate the salary basis regulation.  Wage-Hour Opinion Letter No. 2009-2 (January 14, 2009, released March 6, 2009).

According to the Opinion Letter, it is the Wage and Hour Division’s position that:

[s]ince employers are not required under the [Fair Labor Standards Act] to provide any vacation time to employees, there is no prohibition on an employer giving vacation time and later requiring that such vacation time be taken on a specific day(s).  Therefore, a private employer may direct exempt staff to take vacation or debit their leave bank account ... , whether for a full or partial day’s absence, provided the employees receive in payment an amount equal to their guaranteed salary.   

(Citations omitted).

Thus, the DOL concluded that “the employer may require exempt employees to use accrued vacation time for any absence, including one resulting from a plant shutdown, without affecting their exempt status, provided that employees receive a payment in an amount equal to their guaranteed salary.”  However, the DOL made it clear that “an exempt employee who has no accrued [vacation] benefits ... or has a negative balance ... still must receive the employee’s guaranteed salary for any absence(s) occasioned by the employer or the operating requirements of the business.”   

Although this Opinion Letter offers some flexibility to employers who wish to furlough exempt employees for less than a full workweek, the fact that employers still have to pay employees their accrued vacation for the partial time off that workweek means that the employer will not realize as much or any immediate cost savings as a result of the furlough.  Of course, employers generally may always furlough non-exempt employees for less than a full workweek without having to pay them accrued vacation time.

The Arent Fox Employment Law Group regularly advises employers on layoff, furlough and wage and hour issues.  If you have any questions about any of these issues, please feel free to contact us.

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