In 2001, Tellabs faced a severe econimic downturn and one of the options it selected to stem the crisis was to require all employees to take certain furlough days. The Company prospectively informed employees on two occasions that they would not be allowed to work – and would not be paid – for one or more days before or after a paid holiday. This amounted to six days in total for the year, including the two days after July 4 and the days before Thanksgiving, Christmas and New Year’s Eve.

The Issue

Employee Theodore Robinson thereafter became the lead plaintiff in a class action lawsuit filed on behalf of nearly 3,000 exempt employees at Tellabs. He claimed that this program of forcing otherwise exempt employees to take unpaid holidays violated the “salary basis” requirement for employees to be properly classified under the Illinois Minimum Wage Act. That statute, which relies for its interpretation on regulations implemented under the federal Fair Labor Standards Act, mandates that employees satisfy both a duties test and a salary basis test to be exempt from overtime requirements. Only the former was at issue here – specifically whether reducing the class members’ salaries during the furlough weeks was contrary to being paid a salary, and, therefore precluded the employees’ exempt status and entitled them to overtime pay. Plaintiffs did not challenge that the program was implemented for bona fide business needs.

The battle lines were drawn. All agreed that, to avoid having to pay overtime, Tellabs had to show that the employees continued to “regularly receive . . . a predetermined amount . . . which was “not subject to reduction because of variations in the quality or quantity of the work peformed . . . [and] without regard to the number of days or hours worked.” Also, the parties were faced with regulations stating that employers may not deduct amounts from pay “for absences occasioned by the employer or by the operating requirements of the business.”

The Result and Rule

In Robinson v. Tellabs, Inc., No. 1-07-2731 (Ill. App. 1st Dist. April 27, 2009), the Illinois Appellate Court affirmed judgment in favor of Tellabs. It agreed with the trial court that Tellabs’ program of imposing furlough days prospectively for bona fide business needs did not violate the salary basis test. Relying primarily on a federal appellate court decision and Department of Labor opinion letters, the Court held that employers are only prohibited from making salary reductions in response to events for pay periods in which pay has already been set. Companies can make prospective salary reductions to take effect in future pay periods to accommodate business needs – so long as it is not done “with such frequency that the salary is the functional equivalent of an hourly wage.” The Court held that Tellabs’ periodic annnouncement of furlough days was not so frequent as to destroy salary basis.

The Take-Away

Two important lessons can be learned from Robinson:

  • Employers can impose unpaid days off (or furlough days) for salaried employees. But they must do so prospectively, for bona fide business needs and not with such frequency that an issue arises as to whether the resulting variations in weekly pay creat the functional equivalence of an hourly wage. This requires forward looking planning and careful documentation.
  • Employers should remember the need to focus on the “salary basis” required for employees’ exempt status. It is not enough for employees to peform exempt duties. There have been a rash of wage and hour class action lawsuits in recent years, and employers need to make sure that they are in compliance with all aspects of the laws. For example, employers should remember that partial day salary deductions generally cannot be made for partial day absences or disciplinary infractions.