COVID-19: Rules Surrounding Employment Pay Reductions

What are an employee’s options when an employer makes a pay cut to an exempt employee? If they refuse, can they claim unemployment?

In light of the COVID-19 pandemic, many companies are experiencing a severe decline of revenue. Therefore, they are resorting to employee pay reductions. It is important that employers are following the necessary rules specifically regarding their exempt employees.

Exempt Employees

When an employee is “exempt”, it primarily means they are exempt from receiving overtime pay. The alternative is non-exempt employees. The details and rules governing exempt and non-exempt employees are covered by the Fair Labor Standards Act (“FLSA”).

Generally, to qualify as exempt under the FLSA, an employee must be paid on a salary basis, meaning the employee must receive the same amount of compensation each week, regardless of the number of hours or days they have worked.

The FLSA includes the following job categories as exempt: professional, administrative, executive, outside sales, and computer related.

The details vary state by state, but if an employee falls in the above categories, is salaried, and earns a minimum of $684 per week or $35,568 annually, they are considered exempt.

Reduction of Pay

An employer must pay an exempt employee the full predetermined salary amount “free and clear” for any week in which the employee performs any work without regard to the number of days or hours worked.

Employers cannot reduce an exempt employee’s pay in California for not meeting performance expectations or for poor work quality. Nor can they reduce the pay for exempt employees who have been disciplined for conduct issues.

However, absent an employment agreement to the contrary, it is generally lawful for employers to temporarily reduce wages for an economic slowdown, such as the current economic state resulting from COVID-19 pandemic. Employers should, however, give affected employees at least a pay period’s notice of the reduction in pay in order to comply with state wage payment and collection laws.

In California, there are wage theft prevention acts that require employers to notify employees in writing when making changes to certain employment conditions such as pay rates and methods of pay.

Does a Pay Reduction result in loss of exemption status?

The answer depends on how much your salary is following the pay reduction. A salary reduction will not result in loss of the exemption, as long as the employee still receives on a salary basis at least $684 per week.

What are the alternatives options to a Pay Reduction?

  1. Employees may be eligible for Unemployment Insurance (UI) benefits depending on the percentage of pay reduction, the amount of post-reduction salary, and applicable state law UI requirements and limitations.
  2. Unpaid Leave is another option that can be an alternative to the pay reduction. Subject to state and local laws, employers may require employees to exhaust PTO during an unpaid leave of absence. Any unpaid leave of absence imposed on an exempt employee must be for a full workweek or longer, and the employer must ensure that no work is performed during the leave.
  3. Deferring compensation for most exempt employees is rarely an option, but employers may consider deferring executive compensation until cash flow recovers. Many executives are compensated well above minimum salary thresholds to meet the white collar exemptions. Therefore, subject to agreement, employers may defer executive compensation while still meeting the minimum salary threshold.

Following a Pay Reduction or Layoff, will your Benefits continue?

Reduced workweeks may affect the level of benefit contributions to a 401(k) plan, particularly if the employee had planned to spread out the maximum annual contribution over the course of the year. If an employee is furloughed for an entire week, he or she may need to make additional premium payments in other weeks to ensure health or dental coverage for the month.

In California, if an employee is a parent of children in daycare or grades K-12, they are entitled to take up to 40 hours of leave per year to address a child care or school emergency, including unexpected school closures. Employers may require employees to use vacation or PTO benefits before they can take unpaid leave, but employers cannot require employees to use paid sick leave.

If you have experienced a pay reduction and require legal assistance with your employment options, please feel free to contact our offices at (858) 926-5797.

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