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Cutting Hours and Pay: Hourly vs. Salaried

The economic downturn is showing up in the Dr. Salary email inbox: I am getting a lot of emails about employers reducing pay, or cutting hours, and asking about the legal implications. Here are a few:

"[...] you said employers can get into trouble when exempt employees perform tasks normally done by non-exempt employees. We are experiencing this problem at work now. Non-exempt employees are losing money and jobs, because the company is requiring salaried managers to work the jobs of the hourly employees."

"[...] can a person be determined exempt for the reason of “Professional” when he/she only works 10 months out of the year, furloughed for 8 weeks to go on unemployment benefits, then return to work?"

"[...Given the downturn in our business] our exempt and non-exempt employees would be willing to trim their hours from 40 hours to 32 hours per week (get paid for 32). Having said that, I wanted to verify if this would violate any FLSA benefits and/or rights for either classification (exempt or non-exempt)."

"I am an exempt employee; can my company strongly request that I volunteer to take 2 days off without pay in order to help meet the annual budget?"

As I have described in the past, the one big benefit for employees to being exempt from the Fair Labor Standards Act (FLSA) (salaried) is that they must be paid for every week when they are ready, able and willing to work, whether there is work for them to do or not. Hourly workers (non-exempt) only need be paid when there is work for them to do.

What happens when a company is in trouble, and a lot of the staff are exempt? Are layoffs the only option? In this post, I will look at the ways an employer can reduce pay, and the federal legal implications of the choices.

I am Still not a Lawyer

First, a caveat: I am not a lawyer, and this is not legal advice. The way you can tell is that this is a blog, and you haven't paid me $200/hour to write this ;-)

I am also only considering Federal laws and regulations. Each state has its own laws about employment. Many, like California, have laws that are more restrictive on employers' options than Federal law.

If you are lucky enough to have an employment contract like Ford workers, that may further restrict what your employer can do to reduce your pay.

Finally, I will cover only pay practices that I have heard of US companies using, and the section of FLSA that applies to for-profit companies employing regular employees. There are likely other pay possibilities with which I am not familiar, and there are a lot of special cases in FLSA for government employees, teachers, contractors, and the like.

Lawyers would be happy to render an opinion for your specific case for money. Some over at Davis Wright Tremaine LLP here in Seattle even issued a bulletin about exempt employees and furloughs during the last economic downturn.

That bulletin, and the very helpful Department of Labor "eLaws" site and related opinions, are my sources.

Pay Cuts for Hourly Employees

For hourly employees (non-exempt), the FLSA rules for pay cuts, reduced hours, and layoffs are simple:

  • If there is no work, the employer can tell the employee to go home (or not come in)
  • The employer only has to pay for hours when the employee actually works

With the downturn, I suspect there are a lot of employers who are wishing more of their staff were hourly. For hourly employees, reducing costs to match reduced business is simple: tell people to say home and don't pay them for hours not worked.

It is not so easy to reduce the pay for exempt (salaried) employees by reducing work hours since, by definition, salaried jobs have no fixed number of hours that need to be worked each week to earn "full" pay. There is no such thing as a "part-time" salaried employee.

By the way, an employer is free to declare any position non-exempt (subject to the FLSA), start tracking hours, set an hourly wage, and start paying overtime, if necessary. Of course, all the other rules related to non-exempt employees would also apply.

First Question: Salaried Employees Doing Hourly Work

To answer the first reader's question, employers generally cannot legally give an exempt (salaried) employee the duties of a non-exempt (hourly) one, not change the status of that employee to non-exempt, and not pay that formerly exempt employee overtime.

Here is a simple example that could happen if the economy keeps going south:

  • I own an auto parts store
  • I employ a salaried store manager (exempt)
  • The manager manages 10 hourly counter workers and stockers.
  • The store is open from 7 am to 7 pm, 7 days a week, or 84 hours/week.

As long as the manager meets the other tests for the executive exemption from FLSA, he can end up working 12 hours a day, 7 days a week, managing the staff, and I don't have to pay him overtime.

Side note: In high school, I worked for a fast food restaurant flipping burgers. The restaurant manager was "salaried." He worked 80 hours or more every week, and was not a happy man...

Times turn hard, and sales are way down. To save money,

  • I decide to fire all the hourly workers
  • I have the store manager work the counter and stock
  • To do this legally, I have to re-classify the manager as hourly (non-exempt)
  • I must pay 1 1/2 times his base pay for every hour over 40 he works in a week.

Clearly, the hourly employees get the bad end of this deal: they are out of work.

The manager may come out ahead or behind, depending on the hourly wage we agree he will be paid in his new role as stocker/counter worker/store manager.

If I were paying the manager at the lowest possible rate for "executive" exemption, $455 week, he will definitely start earning more per week. Even if I pay Federal minimum wage of $6.55/hour during store hours, he will earn at least $694 per week (40*$6.55 + 44*1.5*6.55 = $694).

I will come back to the next three questions in my next post. They all are on the same subject: can salaried employees who are "ready, willing, and able to work" be paid less than their full salary?

Even in a down turn, it is important to know what you are worth in the market. The PayScale Salary Calculator is a quick and easy way to compare positions. When you want powerful salary data and comparisons customized for your exact position or job offer, be sure to build a complete profile by taking PayScale's full salary survey.

Cheers,

Al Lee

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