“People are very open-minded about new things, as long as they’re exactly like the old ones.”

-- Charles F. Kettering

Considering the circumstances, this seems like a good time to discuss the subject of cutting labor costs during a business emergency. The Fair Labor Standards Act (“FLSA”) is meant to prevent employers from taking advantage of their employees, but what happens when a crisis requires businesses to adapt to a drop in revenue? Don’t worry, the Department of Labor (“DOL”) has issued guidance to help employers in these situations. For non-exempt employees, the answer is simple, employers can cut the hours of their hourly nonexempt workers as they see fit unless there is a prior agreement between the employer and the employee. However, the situation for exempt employees is more complicated.

Reduction in Hours

Exempt employees are more complicated because of the requirements to qualify as an exempt employee. To be exempt employees must qualify under a duties test, which examines the type of work the employee most regularly performs, and a salary basis test, which determines that the employee is paid a salary of at least $684 a week. In addition, an employer may only deduct from an employee’s wages under strict sets of circumstances such as but not limited to absences on account of sickness/disability or major safety infractions.

This brings us to the primary option of employers feeling the pressure of Covid-19 or different business slowdown, a reduction of salary and hours of work. The Department of Labor has issued guidance saying that a bona fide reduction of salary due to financial exigencies will not prevent an employee from qualifying under the salary basis test. Department of Labor Field Operations Handbook 22g11. Of course, employers may not make reductions in pay in retaliation for filing wage complaints. But, if an employer is experiencing a reduction in business, they may otherwise carefully adjust their exempt employee’s hours and consequently their salary to combat the issue. The reduction in salary should be connected to the reduction in hours worked. If an employer were to reduce their employee’s salary by 40%, but their hours by 20%, then the two would not be connected. Having said that, employees still must meet the salary basis test meaning that if the reduction takes them below the $684 a week threshold, then they will lose their exempt status for the pay period.

Exempt Re-classification

Of course, losing their exempt status is not necessarily a bad thing in this situation, at least going forward. Reclassifying your exempt employees as non-exempt is the second option for employers looking to reduce costs. Generally, the DOL discourages the classification and reclassification of employees because it leads to instability for the employee. The DOL has said that recurrent or frequent changes in classification can result in an employer losing the ability to claim the employee as exempt in the future. Administrator's Opinion WH-93, CCH ¶ 39,710, November 13, 1970. The good news is that a one-time classification and reclassification contemplated because if a business downturn would not count as a recurrent or frequent change.

The purpose of the FLSA is not to bankrupt employers or to economically handcuff them and prevent reductions in compensation paid to exempt employees. However, the regulatory scheme can be a little contemplated and an employer should be careful before making informal or temporary changes without considering the impact on an employee’s exempt status.