As a funding deal continues to remain out of reach, and with the September 30th fiscal deadline rapidly approaching, a government shutdown appears close to certain. Whether it lasts for days, weeks, or months, a shutdown generally means that U.S. government employees, other than “essential” personnel, are placed on furlough and are not able to work. This may have downstream effects on economic activity and force some private employers to consider reducing pay and work schedules of their employees. Employers considering pay reductions should be aware of the more significant legal considerations these actions can trigger.

Payments to Employees

Under the Fair Labor Standards Act (“FLSA”), non-exempt workers are generally only required to be paid for time they work. As a result, in the event that a shutdown eliminates or reduces work for a non-exempt employee, employees only need to be paid the hours actually worked. However, for exempt employees, payment of the full salary is still owed unless a worker performs no work for an entire workweek. This means that exempt employees still must be paid their set, fixed salary if they are asked to perform any work in a workweek – such as responding to emails. They also must be paid their full salary if they work any part of a workweek.

Reductions to Exempt Employee Salaries and Working Time

Employers considering reductions to salaries for exempt employees due to the reduced work requirements should consider the risk that reductions could result in a loss of exempt status. Employers should pay particular attention to the FLSA requirement that exempt employees’ salaries cannot be reduced because of variations in the quality or quantity of the employees’ work. A salary reduction tied to a reduction in work poses the risk that the employees’ work is based on quantity, and is therefore not a “true salary.”

Employers may, however, have some latitude in reducing salaries if the reduction is tied to a corresponding reduction in employees’ work schedules. Here, employers must engage in an individualized jurisdictional analysis; while the DOL has opined that salary reductions tied to reductions in work schedules may be permitted, case law on the issue varies by jurisdiction. Notwithstanding this variance, there is a consistent view that adjustments to pay rates, if imposed only briefly or done too frequently, and tied to a reduction in work schedules, could result in a determination that employees are not being paid on a salary basis, but on an hourly basis.

However employers approach the option of salary reductions, they should ensure that reductions do not unintentionally fall below the relevant minimum salary thresholds (the current minimum federal salary rate is $684 per week and several states have set significantly higher thresholds). Employers should also keep in mind, as discussed above, that exempt employees must receive their full salary for any week in which they perform any amount of work.

Converting Salaried Exempt Workers to Part-Time Nonexempt

For some employers, the shutdown may prompt consideration of salary reductions that fall below the current threshold required to maintain exempt status. If that is the case, employers must convert those employees to non-exempt status and ensure compliance with all resulting obligations, including time keeping, paying the applicable minimum wage, overtime payments, and meal and rest breaks where required.

Reductions to Non-Exempt Employees’ Working Time

Employers considering reductions to non-exempt employees’ working time should focus their attention on the applicable jurisdiction’s laws governing “reporting time pay.” While in most cases an employer can send a non-exempt employee home without pay (provided they performed no compensable work), ten jurisdictions require “reporting time pay” to compensate employees for reporting to work even if no work was performed, or, if the employee was sent home prior to working a full shift.

Employers should also be mindful of laws that impose “predictive scheduling” and “predictability pay” obligations. As the label implies, “predictive scheduling” requires employers to provide certain employee groups substantial notice, typically 7 or 14 days, of upcoming scheduled shifts. Changes to the schedule within the mandatory notice period can trigger the additional obligation of paying a wage premium known as “predictability pay.” Presently, Oregon and eight cities have predictive scheduling and predictability pay laws.

Notice Requirements for Reductions in Pay Rates

It is recommended that at a minimum, notice of a pay rate reduction must be given to employees by no later than the day before the change will be effective. Employers should further be aware of nine states that may require earlier advance notice. To add to the complexity, these states range in the amount of time required, with Missouri (requiring 30 days) to North Carolina (24 hours advance notice) representing the two extremes.

Forced or Prohibited Use of Paid Vacation Time

Employers considering an involuntary furlough often evaluate options for prohibiting or requiring the application of vacation time to the furlough time. To our knowledge, this issue has not been directly addressed by the courts in any jurisdiction with respect to vacation pay. In determining whether to take such an approach to accrued vacation time, employers should review the discretion and control permitted by their vacation policy. A policy that gives the employer exclusive discretion to approve and override vacation time use will afford more flexibility during a furlough than a policy that is silent on the issue, or empowers employees to schedule their own vacation time unless disapproved by management.

Employers, however, should be mindful of the intersection of both potential notice requirements and protected leave laws when evaluating whether to require workers to use their paid time. For example, in California, prior notice may be required before mandating vacation usage. Forfeiture of vacation may be restricted in Nevada and Vermont Similarly, if a vacation leave policy also covers state or local protected sick leave, such time may be protected from mandated use.

Triggering Final Pay Obligations and Payout of Accrued PTO

Finally, should the shutdown go on for an extended period of time requiring involuntary furloughs to be implemented, consideration should be given to whether such an action may trigger the applicable state’s final pay obligations and pay-out of accrued paid time off (PTO).

Alaska, California, Colorado, Connecticut, Hawaii, Idaho, Illinois, Iowa, Massachusetts, Nevada, New Hampshire, New Jersey, Oregon, West Virginia, and Wyoming all have published statutory or agency guidance addressing whether and how final-pay timing requirements apply during furlough. Many other state statutes are silent on their application to furloughs but are broad enough to include a furlough as a final-pay triggering event.

The question of final pay out of accrued PTO presents a more delicate issue for employers. Generally, a payout of employees’ accrued PTO is not required for a bona fide temporary furlough. However, the risk lies in whether a temporary furlough will be considered bona fide or treated as a discharge that will trigger pay out obligations. In states like Colorado and Oregon, payout obligations can be triggered if a furlough lasts more than 30 or 35 days, respectively, although exceptions may exist for a shutdown mandated by the federal government. Employers seeking to implement furloughs without definite return dates or those that may last greater than a month should be particularly attuned to the nuances of this issue.

Final Considerations

Reductions to exempt and nonexempt employees’ wages and work schedules present a complex legal landscape employers must navigate through carefully. The uncertainty of how long the shutdown could last only adds to this complexity. Therefore, it is critical that employers carefully consider the legal consequences before taking action and consult with counsel to ensure proper compliance.