Handling Furloughs of Exempt Employees

Exempt Classification

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Some employers have decided to furlough employees rather than lay them off in order to save money and jobs, and most importantly, to save talent. Employers tend to favor furloughs because this method allows employees to share the pain of a bumpy economy or business downturn while retaining their jobs and often their health insurance and other benefits. Reduced hours for everyone are usually seen as a better alternative than having some employees lose their jobs. Those on furloughs are still employed and are likely to remain with the employer once business outlook improves, while laid off workers are unemployed and looking for new jobs and employers.

What’s the difference between a furlough and a layoff?  A furlough is a temporary leave of absence from employment in the form of voluntary time off or mandatory time off. The time off may be in full-day or full-week increments, but the absence is generally short and the employee maintains his or her employment. A layoff may be for an indefinite period or may be a permanent termination of employment. Employers that implement temporary furloughs rather than layoffs can save on severance costs, as well as future rehiring and retraining expenses.

Nonexempt employees are paid for each hour worked, so furloughed nonexempt employees are simply paid for fewer hours. However, organizations wishing to furlough exempt employees must be careful to structure the leaves so that the furlough is not done in a way that results in the loss of their exempt status.

The Fair Labor Standards Act (FLSA) requires that exempt employees be paid their full salaries for any workweek in which any work is performed. As long as exempt employees receive their full salary, the Department of Labor (DOL) does not care if some of that pay is actually paid time off. For example, the salary may be made up of pay for four days of work and one day of vacation pay.

Full-week absences

From a compliance point of view, the safest way to furlough exempt employees is to require them to take unpaid time off in full-week increments. Employers must ensure the furloughed exempt employees do not perform any work during the week. This means exempt employees may not work at home, read/respond to e-mails, or be called upon to troubleshoot problems.

The downside of this approach is that full-week absences may result in workflow problems, coverage issues, or other problems created by the unavailability of exempt employees. From the employees’ point of view, it is more difficult to adjust their personal budgets when there is no pay for a full week. However, full week absences make it more likely to receive unemployment benefits, if eligible.

Reduced hours

Many employers prefer to have employees work fewer hours each week and pay them less. The FLSA does not permit employers to reduce the pay of exempt employees in exchange for working fewer hours. An employer who elects to have exempt employees work four days instead of five per week cannot simply pay them 80 percent of their salaries for these weeks. Any change in exempt employees’ salaries must be “permanent.” Short-term changes can endanger the employees’ exempt status. For example, reducing hours (and salaries) over the summer is not acceptable because the salary change is not permanent.

Voluntary time off

The FLSA permits exempt employees to take voluntary time off without pay. Employers may reduce the salary of an exempt employee who takes voluntary time off. However, this unpaid time off must be truly voluntary and cannot be caused by employer business conditions or be the result of even subtle pressure to take time off.

While employee furloughs are in many ways more beneficial to employers and employees, employers must be very careful to structure the furlough of exempt employees so that they do not endanger the exempt status of those employees.