Many companies affected by the current economic downturn are searching for ways to help weather that storm. Occasional reduction in work hours, implementing mandatory vacations, or instituting short-term furloughs can help an employer to retain experienced employees, while allowing the company to achieve cost savings in this time of economic crisis. The Department of Labor (DOL) recently released three opinion letters written in January of this year in response to employer inquiries about the effect of such short-term shut-downs on employees’ exempt status under the Fair Labor Standards Act (FLSA). Wage and Hour Opinion Letters, FLSA 2009-2, 1/14/09; FLSA 2009-14, 1/15/09; and FLSA 2009-18, 1/16/09; all released on 3/6/09.

An “exempt” employee is one who is not subject to the overtime or minimum wage (or both) requirements of the FLSA. The "salary basis test" is one way the FLSA distinguishes exempt from non-exempt employees. Under the salary basis test, an employee is considered exempt from overtime compensation if he receives a predetermined amount of pay on a regular basis, and that amount is not subject to reduction based upon the quality or quantity of work. Importantly, an employee is not deemed to be paid on a salary basis if deductions from that individual’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business.

If an employee is classified as exempt but does not meet the necessary salary basis test, that exemption may be lost. Under the FLSA, the employer can be liable for back overtime pay of up to two years (three years for a willful violation) for any non-exempt employee who has been misclassified as exempt. In addition, a single misclassification can trigger a loss of exempt status for an entire group of employees if the whole group has been treated similarly under the organization’s policies and practices.

The three situations addressed by the DOL in its recent opinion letters involve similar circumstances, approached by employers in different ways. The first involves a plant shutdown lasting less than one workweek; the second is a “mandatory time off” policy occasioned by short-term business needs; and the third involves a reduction of work hours for exempt health care employees due to “periods of low patient census.” In all three circumstances, the employers proposed to allow exempt workers to use accrued vacation for the time off, but planned to “dock” pay for workers who had no accrued vacation or paid-time-off (PTO) available.

While the three opinion letters deal with varied factual circumstances, they include a number of important conclusions. First, employers may be able to make deductions from an employee’s accrued vacation or PTO leave bank during a short-term lay-off without affecting that person’s FLSA-exempt status, so long as the employee’s salary remains constant for the pay period. Therefore, in all three circumstances addressed, the employer could implement short-term lay-offs, so long as each affected employee received compensation for the time off. Second, however, the letters point out that problems will arise with respect to individuals who have no available vacation or PTO – in that case, the employer cannot dock the pay of the person for a day in which no work was done. Instead, the employer would have to pay the “regular” salary for the day missed in order for the person’s salary basis to remain the same, otherwise, that employee’s exempt status could be jeopardized. In other words, any salary deductions due to day-to-day or week-to-week operating requirements of the business are inconsistent with the guaranteed salary basis required by the DOL regulations, and could lead to re-classification of the employee.

In addition, the DOL opinion letters include three acceptable actions with respect to short-term layoffs: (1) because the regulations provide that exempt employees “need not be paid for any workweek in which they perform no work,” an employer can require employees to take mandatory time off for a week, and can withhold that week’s salary without jeopardizing the individuals’ exempt status; (2) an employer can refuse to pay for an employee’s completely voluntary decision to take time off (for personal reasons, or other reasons not occasioned by the company’s operating requirements) without affecting exempt status; and, importantly, (3) a permanent change in an exempt employee’s regular workweek schedule (permanently reducing five-day workweeks to four-day workweeks, for instance), with a corresponding change in salary, will not affect exempt status, so long as the exempt individual continues to receive at least the $455 salary minimum required by the regulations.

While a final determination regarding exempt status depends on the specific facts of an employer’s situation, these DOL opinion letters underscore the requirement that, subject to specific exclusions, an exempt employee must receive his or her full salary for any week in which that employee performs any work, without regard to the number of days or hours worked. To disregard this provision is to expose the company to the considerable expense and disruption of a DOL audit with probable attendant liability.