May 2009 New Developments

CONSIDERING WAGE REDUCTIONS IN TOUGH ECONOMIC TIMES

Major automakers, financial service companies, and businesses across the spectrum of the American economy are struggling and looking for ways to reduce costs and improve the bottom line. While human capital is critical to any business, there are times when reductions may be necessary to insure survival of the entity. Job sharing, restructuring and reductions in force are a few options in these tough economic times, but an employer also may want to consider mandatory furloughs and reducing the work hours and compensation of employees as other possible alternatives. In the health care field, this option is, of course, subject to operating and other legal requirements, such as maintaining required staffing ratios, but it could be a viable alternative for some facilities. This article assumes no payment of overtime during the applicable workweek and the following analysis cannot be applied if an employee actually works overtime. In addition, facilities with collective bargaining agreements must act in conformance with those agreements and bargain with the union over any proposed changes.

In general, the wage and hour laws do not require an employer to provide a specified number of hours to an employee in any given week. Instead, they only mandate that employees be paid appropriately for the number of hours worked. Many employers are beginning to experiment with furloughs, in which an employee is retained on the payroll but excused from performing any work for a particular number of hours, days or weeks. Non-exempt employees who work on an hourly or other non-salary basis may be furloughed and have their work schedules and/or hourly wage rates reduced, so long as they are still paid the applicable minimum hourly wage for each hour worked. Non-exempt employees who work on a salary basis under the fluctuating workweek (i.e., half-time) overtime method can be converted to hourly employees for the duration of the furlough period and be paid for hours worked. For example, an employer may announce that, as of October 1, it will be putting the new system into effect and continuing it for the foreseeable future.

Employees who are exempt from overtime and paid on a salary basis ordinarily are required to be paid the entire salary in any workweek during which the employee performs any work, regardless of how many or few hours are worked. Therefore, to be accomplished legally, a furlough of an exempt employee must be for at least a full workweek and the employee must be relieved from performing any and all work during that week and must be paid his or her salary if he or she performs any work during the week. In addition, such furloughs can only be accomplished for workweeks in the future on a prospective basis in a manner that is not calculated to evade the requirements of the law. There are opinion letters from the Department of Labor (and a few federal cases) approving limited furloughs that are part of a program to reduce costs. According to the Department, “a fixed reduction in salary effective during a period when a company operates a shortened workweek due to economic conditions would be a bona fide reduction not designed to circumvent the salary basis payment” and, thus, such an action is legal. On the other hand, an employer would not be permitted to decide from week-to-week whether to furlough or reduce wages. It would have to be announced in advance and, ideally, run for a significant period of time.

Mandatory furloughs and wage reductions may not work as well in the health care field as in manufacturing industries where they are a common practice, but they are an option that can be considered and implemented. There are considerations other than wage and hour laws, so CAUTION is in order and an employer should implement such a program only after discussing all of the facts with legal counsel and obtaining counsel’s advice and approval. 

Importance of EMPLOYEE HANDBOOKS

This column will emphasize the importance of having an up-to-date employee handbook that is reviewed by counsel to insure compliance with all applicable laws. While conventional wisdom might hold that handbook provisions cannot hurt an employer if the handbook contains a disclaimer stating that the handbook does not create any contract rights and does not affect the at-will employment relationship, two recent cases suggest that what an employer does not know about handbooks may hurt it.

The first case concerned an employee who took maternity leave under the federal Family and Medical Leave Act. Her employer’s handbook, which was applicable Company-wide and even at smaller remote locations, broadly stated that employees who met the service and hours of work requirements would be entitled to FMLA leave for qualifying reasons. The handbook made no mention of the statutory requirement that an employer must have 50 employees within 75 miles of the worksite to be an employer under the FMLA. The plaintiff applied for leave, which was verbally approved by her supervisor and later approved in writing. At some point during the leave, the employer apparently discovered its error in granting the leave since it did not employ at least 50 people within 75 miles of the worksite. For reasons not clear in the court’s opinion (the case arose on a motion to dismiss so the facts were not well-developed) the employer decided to terminate the plaintiff’s employment four days before her scheduled return date.

The plaintiff sued, alleging both an FMLA violation and state law violations for breach of contract and promissory estoppel. On the FMLA claim, the employer’s jurisdictional argument that it was not an FMLA employer was rejected because plaintiff still might be able to prove that she detrimentally relied on the employer’s handbook, as well as its verbal and written approvals of her leave. An employer cannot interfere with an employee’s attempt to exercise her FMLA rights and, in an appropriate case, the employer’s actions might have misled the plaintiff into believing her leave was approved, causing her to reasonably rely on its assertions to her detriment. Whether the employer was legally estopped from relying on its affirmative defense would have to be determined after discovery and a fuller review of the facts. The plaintiff also could try to establish various state common law theories of recovery based on the employer’s assertions.

The second case concerned a broad confidentiality clause in an employee handbook, which stated: “Employee . . . understands that the terms of this employment, including compensation, are confidential . . . [and] Disclosure of these terms to other parties may constitute grounds for dismissal.” The National Labor Relations Board found this provision was overbroad because it would be reasonably understood by employees to prohibit their discussion of wages and other terms and conditions of employment with union representatives (i.e., “other parties”). Although confidentiality has been recognized as an important concern to employers, that concern must be balanced appropriately with the right of employees to discuss their wages and other terms and conditions of employment amongst themselves and with those who represent them. The court upheld the Board’s decision as a reasonable interpretation of the Act.

REMINDER. All employers should be using the new I-9 form as of April 3, 2009. The form can be accessed on the U.S. Citizenship & Immigration Services website at www.uscis.gov.