DLSE Permits Salary Reductions in Response to Economic Downturn

Fourth Quarter 2009Newsletters California UPDATE Employment Law

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As a general rule, exempt employees must be paid their full salaries for workweeks in which they perform any work. There are exceptions, such as when an employee misses a day or more for personal reasons (other than sickness or disability) or when the employee starts employment mid-week. But an employer that makes improper reductions in exempt employees' salaries risks losing the exemption and exposes itself to claims for years' worth of unpaid overtime.

What about when the employer reduces the schedule and salaries of exempt employees as a way to control costs? In an Opinion Letter from August 19, 2009, California's Division of Labor Standards Enforcement (DLSE) concluded that the law permits such actions in appropriate circumstances.

The DLSE opinion responded to the following fact pattern. An employer struggling due to the present economic downturn wants to reduce from five scheduled workdays per week to four. The impact on hourly employees is obvious. They would not be paid for the time they don't work. As for exempt employees, the employer would reduce their salaries by 20 percent. The employer intends this to be a temporary change and will return to a five-day week and full salaries as soon as business conditions improve.

Contradicting an Opinion Letter it issued in 2002, the DLSE said the change is permissible, provided that it (1) is not intended to circumvent the rule that employees be paid their full salaries in any week they perform work and (2) does not reduce their compensation below the minimums required under applicable law. The DLSE emphasized that these steps would only be available to employers that “experienced significant economic difficulties due to the present severe economic downturn.” It further emphasized that this was a one-time, temporary adjustment. But in those circumstances, the DLSE granted employers a degree of flexibility to reduce exempt employees' work schedules and salaries without jeopardizing their exempt status.

Employers wishing to explore this option can contact any of our California employment lawyers. By then, the DLSE may have changed its position on this subject yet again.