Seyfarth Synopsis: If Congress fails to pass a long-term funding bill, we could be facing a federal government shutdown with no money flowing to fund non-essential services. While it seems the crisis may be averted for now — with a short-term spending bill that would keep the lights on for another week — the potential for a shutdown still looms. And with it comes concern for many private-sector employers with federal contracts. If the money dries up, employers may need to consider cost-saving measures, such as temporary furloughs, reductions in hours, or reduced pay.

If Congress fails to pass a funding bill and the government shuts down, employers may need to consider cost-saving measures. Employers should bear in mind the potential wage and hour implications when implementing these changes.

  • Non-Exempt Employees: Reductions in Hours and Hourly Rate. Because non-exempt employees do not need to be paid for time when they are not working, employers can reduce their scheduled hours, as well as their hourly pay without implicating wage and hour laws. Such changes should be prospective and, of course, the hourly pay must still satisfy the federal and state minimum wage. When reducing rates of pay, it is important to check state law on how far in advance you must tell an employee their hourly rate is going down. It is also important to continue paying workers on time.
  • Exempt Employees: Full-Week Reductions in Hours and Salary. Frequent readers of this blog should know that exempt employees are subject to the salary basis test, which means that they generally must be paid the same minimum weekly salary regardless of how many or few hours they work each week. (Federal law currently requires a minimum weekly salary of $455). Reductions in that weekly salary could jeopardize the employee’s exempt status. This means that employers cannot subject exempt employees to partial week furloughs. Full-week furloughs are OK, so long as the employee performs no work during the week. And, yes, that includes abstaining from responding to email, taking phone calls, and other activities that could constitute hours worked. Given that many employees are constantly “plugged in,” ensuring compliance with this requirement is essential yet challenging.
  • Exempt Employees: Partial-Week Reductions in Hours and Salary. As you might have surmised by now, partial-week reductions in salary are generally not permitted without risking an employee’s exemption. For example, employers generally cannot pay exempt employees 80% of their salary for working four-day workweeks instead of five at the employer’s request. A narrow and delicate exception to this rule is that employers can implement a fixed reduction in future salaries and base hours due to a bona fide reduction in the amount of work. While the FLSA and federal regulations do not specifically address furloughs, the Department of Labor’s opinion letters and courts have (almost) unanimously concluded that employers may make prospective decreases in salary that correspond to reduced workweeks, so long as the practice is occasional and due to long-term business needs or economic slowdown. How frequently an employer can furlough its exempt employees is not settled, but federal courts have held that salary reductions twice per year are infrequent enough to be bona fide.

Once the budget crisis passes and employees return to work, caution is still warranted in returning furloughed employees to work. As always, when dealing with these issues, be sure to contact your wage and hour counsel.