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Avoid furlough days for exempt employees
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The Governor says: "Furlough fever, catch it!"
AP photo: Noah Berger
Furlough fever has swept California recently due to the state budget crisis and the ongoing recession. May employers have been tempted to institute furlough days as a cost-cutting measure – “Hey, if Governor Schwarznegger can do it, why shouldn’t we?” Giving employees unpaid days off, rather than laying off employees, can be a better alternative for both employers and employees. Furloughs for non-exempt employees are not problematic, since their pay is dependent on the number of hours they work. However, instituting furlough days for exempt employees is not advisable for California employers.
Since exempt employees are paid on a salary basis, it generally doesn’t matter how many days or hours the work in a week, they are entitled to the same salary. If exempt employees are furloughed for a day each work week, with a commensurate reduction in their salary, the California Labor Commissioner has opined that such an arrangement conflicts with their exempt status and may transform them into non-exempt employees. That would be a problem, since all the daily and weekly overtime that exempt employees typically work would become compensable, meaning possible back pay liability for the employer.
This potential problem with furloughs only applies in California, since the federal Department of Labor has opined that furlough arrangements do not invalidate exempt status. Most other states defer to the federal standards. As usual, California has to be different.
One solution is to avoid a formal furlough program for exempts, and instead reduce salaries across the board to achieve the desired cost savings. Exempt employees are not required to work a set number of hours, so if their work hours drop in conjunction with the salary reduction, then no harm, no foul.
