The California Department of Labor Standards Enforcement (DLSE) recently issued an important opinion letter permitting an employer to reduce the work schedules of its exempt employees, accompanied by a reduction in the exempt employees' salaries, without violating the salary basis test for overtime exemption under California law.
The DLSE's opinion approved an employer's request to reduce its exempt employees' scheduled work days from five to four days per week, along with a corresponding 20 percent cut in salary. This approach was designed to address the employer's significant economic difficulties, with the expectation that as soon as business conditions permitted, the employer would restore the full five-day work schedule and the full salaries of its exempt employees.
The DLSE found that the salary basis test does not preclude a bona fide fixed reduction in the salary of an exempt employee corresponding with a reduction in the normal workweek, so long as the reduction is not designed to circumvent the salary basis requirement. The DLSE specifically noted that this opinion letter replaces an earlier 2002 DLSE opinion that had reached a contrary conclusion.
Under this recent DLSE opinion, employers confronted with significant economic difficulties may reduce exempt employees' work schedules in less than full-week increments and may make proportional reductions in their salaries, provided the employee still earns a monthly salary equivalent to no less than two times the state minimum wage and continues to satisfy the duties test for the applicable exemption. However, in California, an exempt employee's salary must not fluctuate on a week-by-week basis in accordance with the number of hours worked.