Seyfarth Synopsis: With the recent partial shutdown of the federal government, many federal contractors have faced tough decisions balancing their reduced revenue with their desire to keep their workforce intact. One potential solution is to impose mandatory employee furloughs to reduce costs. This cost-saving measure has some risks peculiar to California that are worth a look.

The Partial Federal Government Shutdown

On December 22, 2018, key parts of the federal government shut down after politicians reached an impasse over budget spending. By some estimates, the shutdown, lasting until January 25, 2019, cost the economy over $10 billion. The shutdown affected not only 800,000 federal employees but several million government contractors. Shutdowns of this type—the third since January 2017—look to become a regular feature of American politics.

One obvious shutdown impact is reduced revenue for federal contractors. Companies that perform everything from janitorial services to complex Defense Department analysis are suddenly left with revenue that could be significantly lower than previous projections.

Employee Furloughs

So what do companies do when their biggest client shuts down for days, weeks, or even months? Some companies have turned to employee furloughs in an attempt to solve their revenue gap problem. Furloughs are mandatory time off work without pay. Furloughs can be seen as a good solution because the company reduces its payroll expenses while keeping its workforce in place.

Generally, furloughs fall into two categories, partial-week and full-week. We examine both types of furloughs below, as each raises peculiar issues under California law. Note that this discussion is limited to issues raised by furloughs of exempt employees. Because non-exempt employees are paid on a time-worked basis, furloughs of non-exempt employees do not raise the same legal issues as furloughs of salaried exempt employees.

Partial-Week Furloughs

Partial-week furloughs occur when the employer reduces an employee’s workweek. For example, some employers move employees to a four- or even three-day workweek. Under California law, partial-week furloughs are permissible, but care must be given to the arrangement. First, the salary reductions should be done in advance of the furlough to avoid being seen as a “deduction” from an exempt employee’s salary for missed work days. Advance reductions in salaried employee pay to reflect long-term business needs does not destroy the salary basis for an employee’s exemption. But day-to-day or short-term deductions from an employee’s salary would. Along those lines, employers should consider implementing the changes for a substantial period of time, making it look like more of an adjustment to medium or long-term economic forecasts than a short-term reaction to transitory business conditions. Second, companies must ensure that the reduced salary does not fall below the minimum monthly salary rate for exempt employees, which California currently sets at $4,160 for large employers.

Full-Week Furloughs

The California DLSE has determined that a properly executed week-long furlough of exempt employees will not result in those employee losing an exemption. To be done properly, the furlough must have the employee not performing any work during the defined workweek during the furlough. An employee who performs any work at all must be paid for the full week. Further, reasonable advance notice must be given to employees before the furlough begins. As with the partial-week furlough, the employee’s salary cannot dip below the minimum salary threshold for exempt employees.

Finally, employers should ensure that the furlough is not too long and has a clearly defined return-to-work date. If the furlough is too long or if no return date is designated, it may be deemed a termination, entitling the employee to all final wages, including vacation.

Other Issues Implicated By Furloughs

As if the wage and hour issues raised above were not enough, employee furloughs raise many other legal challenges as well. For example, do your executive contracts have severance provisions that may be triggered with salary reductions over a certain threshold? Does the company’s benefits plan include a definition of eligible employees that may be implicated by furloughs? Indeed, as we have previously discussed in this blog, employee furloughs might even inadvertently trigger California’s WARN notice requirements. All of this is to say employers are well-served by being careful and seeking experienced counsel in this area.

Seyfarth Synopsis:  Changes to the FLSA regulations increasing the minimum weekly salary for exempt employees will impact California employees who currently are being paid less than $47,476 per year. Wise employers will start planning now to make the adjustments required to ensure compliance with both state and federal exemption laws. 

If you have white-collar exempt employees in California, you know that to qualify as an exempt executive, administrative or professional employee, an employee must (among other things) be paid by a salary that is at least twice the state minimum wage. With the California minimum wage currently set at $10 per hour (at least until next January, when it will increase to $10.50/hour), a little math tells us that the California salary threshold for white-collar exempt employees is $41,600/year [40 hours per week x $10.00 = $400/week x 52 weeks = $20,800; times 2 = $41,600].

If you have been catching the national news on the Department of Labor’s recent amendments to the FLSA regulations, you know that the federal salary threshold for white-collar exemptions is going up dramatically—to $913 per week, or $47,476/year.

The federal changes will go into effect on December 1, 2016. There are a number of options for responding to the new regulations, ranging from simply raising salaries to the federally-required level to re-classifying positions to non-exempt. You can access tons of relevant, helpful and interesting information here at Seyfarth’s FLSA Exemption Resource Center.

Until now, we in the Golden State did not often worry about the federal salary minimum for exemptions, because it was so much lower than what was required here. Now, however, we must take note—and make adjustments—for any employees who are currently classified as exempt and who are not being paid at least the equivalent of $47,476 per year.

What types of employees are we talking about? Employees who are likely to fall into this category in California include the ranks of a company’s exempt staff currently being compensated at or close to the current state minimum allowable salary; in other words, those being paid at or above $41,600, but less than $47,476. Examples might include some managers, executive assistants, human resources professionals, business development or marketing professionals, teachers, accountants, engineers, and creative professionals.

Even though the FLSA amendments will not go into effect until December 1, one question has already surfaced as a Cal-Peculiarity:  what to do with part-time exempt employees? It was, and remains, permissible (if perhaps uncommon) to have exempt employees who work part-time schedules, as long as they are paid at least the salary minimum (federal and CA) for each week of work, as the federal regulations do not allow pro-ration of weekly salary. As of December 1, 2016, any part-time exempt employees will have to be paid at least $913 per week.

If paying the higher weekly amount to part-time exempt folks is not a good option for the employer, a solution (in theory) under federal law would be to convert the employee to salaried non-exempt, and pay the employee for any overtime incurred according to the fluctuating workweek method (a method of calculating the regular rate of pay that varies according to the number of hours worked in a particular week). Not so fast. This method is not permitted in California, and converting California part-time exempt to salaried non-exempt employees could have expensive, unintended consequences if overtime were incurred. So, that solution may not be your best bet under California law.

Employers in California, as elsewhere, still have time to consider their workforces and make and implement plans for any necessary adjustments to their current exempt positions. But, we recommend that you begin your review and planning now.

By Tim Rusche, Jonathan Brophy and Jennifer Wiegley

It seems simple enough. You hire an employee as a manager, you call her a manager, you pay her like a manager – voila! You don’t have to pay overtime, right?  Not so fast.

Entrepreneurial lawyers and disgruntled employees frequently attack “exempt” classifications to recover overtime pay, missed rest break and meal period pay, and other penalties. To avoid being an easy target, it is critical that employers avoid common pitfalls (like reading this blog with less than rapt attention!) and take affirmative steps to protect the exemption.

The Test:

In addition to earning at least two times the minimum wage, generally speaking, the “executive exemption” requires employees to spend most (i.e., the majority) of their time on management tasks, to regularly exercise discretion and independent judgment, and to supervise at least two employees.  In addition, their recommendations for changes in employment status, like hiring and firing, must be given particular weight.

Common Pitfalls:

  1. Bigger Salaries Are Not Always Better.   Just because an employee receives a high salary does not make him or her exempt under California law.  Regardless of the size of salaries, employees still must meet the other requirements of the exemption.
  2. A Job Title By Any Other Name Would Smell As Sweet.  If an employee is not  actually performing managerial or related duties more than 50% of the time or meeting the other requirements of the exemption, neither an impressive job title nor a detailed job description will save the exemption.
  3. To Deduct, Or Not To Deduct, That Is The Question.  Employers cannot deduct from exempt employees’ salaries for poor performance, lack of work, or some kinds of missed work days.  Employers must consider alternatives to salary deductions for disciplinary measures in order to protect the exemption.
  4. Give Them An Inch And They Will Take a Mile. While discretion is the better part of valor, and the exercise of discretion and independent judgment is an essential element of the exemption, unfettered discretion can actually hinder an exemption defense.  Employers must allow exempt employees to exercise discretion, but when exempt employees are free to work as they please with zero oversight, employers can face an uphill battle when employees argue that they used their discretion to perform mostly nonexempt duties.
  5. Lean Is Good But Too Skinny Is Dangerous. While all businesses strive to run efficiently, employers should provide exempt employees sufficient resources so that they are not compelled to spend most of their time performing nonexempt work.
  6. Independent Contractors May Not Fit the Bill. Exempt employees must supervise at two least other employees. The supervision of independent contractors or employees of contractors may be attacked as insufficient.
  7. Allow Exempt Employees To Rule The Roost.  Oftentimes employers vest hiring and firing decisions in their Human Resources or other departments, or high atop the chain of command.  If an exempt employee’s recommendations regarding hiring and firing or other changes in employment status are regularly ignored, the employee may not qualify for the executive exemption.

Workplace Solutions:  How can you protect executive exemption classifications?  Below are a few tips: Continue Reading It’s Not ALL About the Benjamins – What Really Makes an Exempt Executive