The Risks of Reduction: Employee FurloughsJune 10, 2020 – Article
The COVID-19 pandemic has forced businesses across the country to make difficult decisions. Some determined it was necessary to permanently shut down operations, while others cut wages to reduce costs and remain in business. Still others tried scaling back by laying off or furloughing employees, often with the hopes of returning them to work once safe and economically feasible to do so.
The employee furlough, while temporary in nature, has the potential to cause long-lasting damage to employers unfamiliar with its risks. This article discusses a few of those risks.
What is a furlough?
The term “furlough” does not have a uniform legal definition, but it is commonly described as a temporary, (often) unpaid leave from work. Though generally associated with government shutdowns, furloughs are not limited to the public sector. Private employers also implement workforce furloughs to cut costs, typically in response to difficult financial conditions. A furlough can be for a fixed, uninterrupted period of time (e.g., an employee does not work for three straight weeks and returns on a pre-determined date) or on a rolling basis (e.g., an employee does not work one day every other week).
Unlike layoffs and reductions in force, which usually sever the employment relationship, furloughs typically function more like unpaid, non-disciplinary suspensions, leaving the employment relationship intact. While this can reduce administrative difficulties when bringing furloughed staff back to work, it can also create complications for employers unsure or unaware of their obligations during the furlough period.
The Fair Labor Standards Act
Under the Fair Labor Standards Act (FLSA), employers are required to pay nonexempt employees at least the applicable federal minimum wage for all hours actually worked. By the same token, employers are not required to pay nonexempt employees for time not worked. Absent an employment agreement or a state or local law requiring otherwise, employers may generally cut or reduce nonexempt employee work hours without liability. As a result, nonexempt employee furloughs tend to present fewer wage-and-hour-related challenges for employers. Exempt employees, on the other hand, can be trickier.
Exempt employees are entitled to a guaranteed minimum salary (currently $684/week) for any week in which they perform any work, regardless of the number of days or hours worked. Thus, for example, an exempt employee who only works Monday and Tuesday and is furloughed for the rest of the week is likely entitled to compensation for the entire week, which obviously defeats the cost-saving purpose of a furlough. And failing to fully compensate that exempt employee may jeopardize the exemption. To help prevent this scenario, employers that choose to furlough exempt employees are advised to do so in full-week increments.
But it is usually not enough to just send an employee home for a week. In the age of smartphones, high-speed internet, and remote access, many work functions can be performed away from the office. Even minimal activities can potentially qualify as work – a furloughed employee who checks an email on his company account or takes a troubleshooting phone call from the office may be performing compensable “work.” And although a nonexempt employee would likely only be entitled to pay for the time actually spent on those tasks, an exempt employee would be entitled to an entire week’s salary. It is, therefore, crucial for employers to take measures to ensure employees (both nonexempt and exempt) perform no work during furlough periods. Employers should consider implementing and enforcing policies formally prohibiting work while on a furlough. Those policies should be disseminated to non-furloughed employees as well, along with instructions not to communicate with furloughed employees about work matters. Employers may also want to consider restricting furloughed employees’ access to job-related tools, such as company email or cellphones.
The consequences for failing to comply with FLSA requirements can be substantial. Employers found in violation of the law may be liable for back wages, liquidated damages, attorneys’ fees, and court costs. Repeat or willful violations may draw civil penalties. Willful violations may also result in criminal penalties, including fines and imprisonment.
The FLSA does not require payment of earned wages, vacation, or PTO at the time of termination. Many states, however, have strict final payout laws, some of which potentially apply to temporary events like furloughs. California, for example, requires an employer to “immediately” pay a terminated employee all wages earned and unpaid at the time of termination (including all earned and unused vacation) or face a potential waiting time penalty of a full day of wages for each day payment is delayed, up to 30 days. Notably, in opinion letters issued in 1993 and 1996, the California Division of Labor Standards Enforcement (DLSE) took the position that a temporary “shutdown” or “layoff” qualifies as a “termination” unless it does not exceed 10 days and a definite date is provided for return to work within the normal pay period. Though DLSE opinion letters are not binding authority, they can be persuasive and provide valuable guidance, particularly when addressing legal questions courts have yet to answer. Accordingly, in light of the DLSE’s position, and the current lack of contrary authority, California employers may want to consider treating furloughs exceeding 10 days as terminations and pay all wages, as well as accrued vacation and PTO, due on a furloughed employee’s last day worked.
Larger businesses are likely aware of the Worker Adjustment and Retraining Notification (WARN) Act (and parallel state “mini-WARN” acts), which requires covered employers to provide advance notification of closings and layoffs (a more detailed discussion of the WARN Act can be found here). What businesses might not realize, though, is that under certain circumstances, a furlough may also trigger WARN obligations. Employers must provide WARN notices for furloughs exceeding six months. And if a furlough is expected to last less than six months, but is later extended beyond that timeframe, the employer must provide notice as soon as it becomes reasonably foreseeable that the extension is required. In addition, the employer must be able to show that the extension is due to business circumstances not reasonably foreseeable at the time of the initial furlough.
An employer that violates the WARN Act’s notice requirements will be liable to each affected employee for back pay and benefits for the period of violation, up to 60 days. Failure to provide notice as required to a unit of local government may result in a civil penalty of up to $500 for each day of violation. Courts have discretion to award reasonable attorneys’ fees as well.
A furlough can be an effective, temporary cost-saving measure for employers seeking to avoid permanent terminations. Carried out improperly, though, a furlough can end up costing more than its intended savings. To reduce the risks, employers considering a furlough are encouraged to first consult with legal counsel.
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