In the first letter (FLSA Op. Ltr. 2009-2), the DOL addressed whether an employer “may require exempt employees to use accrued vacation time during a plant shutdown of less than a workweek without violating the salary basis test and thereby affecting their exempt status. The DOL indicated that this practice was permissible and had been approved as early as 2005:
Since employers are not required under the FLSA to provide any vacation time to employees, there is no prohibition on an employer giving vacation time and later requiring that such vacation time be taken on a specific day(s). Therefore, a private employer may direct exempt staff to take vacation or debit their leave bank account . . . , whether for a full or partial day’s absence, provided the employees receive in payment an amount equal to their guaranteed salary.
Wage and Hour Opinion Letter FLSA2005-41 (Oct. 24, 2005); see also 29 C.F.R. §§ 541.600, 541.602(a); 69 Fed. Reg. 22,122, 22,178 (Apr. 23, 2004) (“[E]mployers, without affecting their employees’ exempt status, may take deductions from accrued leave accounts.”). Therefore, the DOL opined “that the employer may require exempt employees to use accrued vacation time for any absence, including one resulting from a plant shutdown, without affecting their exempt status, provided that employees receive a payment in an amount equal to their guaranteed salary.” Notably, however, if “an exempt employee . . . has no accrued [vacation] benefits . . . or has a negative balance . . . [the employee must] still must receive the employee’s guaranteed salary for any absence(s) occasioned by the employer or the operating requirements of the business.” Wage and Hour Opinion Letter FLSA2005-41. In other words, exempt employees are entitled to be paid an amount equal to their full salary for every workweek in which they perform any compensable work (even just a few hours), and that payment may come from their accrued vacation/PTO bank or the employer’s payroll. Thus, if an employer wishes to avoid paying exempt salaries, the exempt employees must be furloughed in full week increments.
Insomniacs can read the full opinion letter at http://www.dol.gov/esa/whd/opinion/FLSA/2009/2009_01_14_02_FLSA.htm.
In contrast to the employer which mandated the use of vacation/PTO during brief plant shutdowns, the next employer sought clarification about whether it could “occasionally reduc[e] the hours worked by exempt employees due to short-term business needs (e.g., low patient census). In such cases, the employer [proposed to] offer[] “voluntary time off” (VTO) [on a first-come-first-served basis], where employees may, at their option, use paid annual, personal, or vacation leave, but continue to accrue employment benefits. . . . If there [were] insufficient volunteers for VTO, the employer [would] require[] “mandatory time off” (MTO) under a seniority-based rotational method. Exempt employees required to take MTO [could] use accrued paid leave or take unpaid MTO. If the employee elect[ed] not to use accrued paid leave or [did] not have sufficient accrued paid leave to cover the VTO or MTO, the employer [would] deduct[] the amount equal to the VTO or MTO from the employee’s salary, if it is shorter than one workweek. . . . [T]he employer does not pay [any] salary for [any] pay period [where the unpaid VTO or MTO lasts an entire workweek]. Salaried exempt employees may take VTO or be assigned MTO in one-day increments.”
The DOL noted that under 29 C.F.R. § 541.602(a), “[a]n employee will be considered to be paid on a 'salary basis' . . . if the employee regularly receives each pay period . . . a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. . . . An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.” (emphasis added).
According to the DOL, “salary deductions due to a reduction of hours worked for short-term business needs do not comply with § 541.602(a) because they result from 'the operating requirements of the business.' 29 C.F.R. § 541.602(a). Thus, '[i]f the employee is ready, willing and able to work, deductions may not be made for time when work is not available.' Id . Deductions from the fixed salary based on short-term business needs are different from a reduction in salary corresponding to a reduction in hours in the normal scheduled work week, which is permissible if it is a bona fide reduction not designed to circumvent the salary basis requirement, and does not bring the salary below the applicable minimum salary. See Field Operations Handbook § 22b00; Wage and Hour Opinion Letter FLSA2004-5 (June 25, 2004) (“[R]ecurrent changes in the normal scheduled workweek . . . more likely would appear to be designed to circumvent the salary basis requirement.”). Unlike a salary reduction that reflects a reduction in the normal scheduled work week and is not designed to circumvent the salary basis requirement, deductions from salary due to day-to-day or week-to-week determinations of the operating requirements of the business are precisely the circumstances the salary basis requirement is intended to preclude. Therefore, in this instance, salary deductions due to MTO lasting less than a workweek violate the salary basis requirement and may cause the loss of exempt status. The employer is not, however, required to pay the salary for MTO of a full workweek. See 29 C.F.R. § 541.602(a) (“Exempt employees need not be paid for any workweek in which they perform no work.”).” (italics added).
Of course, as already discussed above, “[f]or employees on MTO, the 'employer[], without affecting [the] employees’ exempt status, may take deductions from accrued leave accounts' [i.e., vacation or PTO] provided employees receive their guaranteed salary.” In short, for MTO, as long as the employer pays an amount equal to the employee’s full salary, the employer may make deductions from the MTO employee’s accrued vacation and/or PTO bank without jeopardizing the employee’s exempt status. The employer may not, however, reduce the MTO employee’s salary if s/he has not accrued vacation or PTO.
The DOL also reminded the employer that “[s]ection 541.602(b)(1) states that ‘[d]eductions from pay may be made when an exempt employee is absent from work for one or more full days for personal reasons.' Salary deductions, therefore, may be made when exempt employees voluntarily take time off for personal reasons, other than sickness or disability, for one or more full days. For instance, an exempt employee paid $500 per week on a salary basis may take VTO for personal reasons for four days in a workweek and receive one fifth of the salary. The employee’s decision to take VTO, however, must be completely voluntary and not “occasioned by the employer or by the operating requirements of the business.” 29 C.F.R. § 541.602(a).” (emphasis added). Therefore, if the employee’s decision to take VTO is entirely voluntary and is not the result of pressure from the employer based on business conditions, the employer may – in addition to taking deductions from the employee’s accrued vacation and/or PTO bank – also make deductions from salary in full-day increments if the employee does not have any accrued vacation or PTO.
Insomniacs can read this opinion letter in full at http://www.dol.gov/esa/whd/opinion/FLSA/2009/2009_01_15_14_FLSA.htm.
If employers shorten an exempt employee’s workweek, the employer could argue that a reduction in salary is permissible. The DOL has approved such realities since at least 1988. (“[W]e have consistently taken the position that a bona fide reduction in an employee’s salary does not preclude salary basis payment as long as the reduction is not designed to circumvent the requirement that the employees be paid their full salary in any week in which they perform work. . . . Consistent with this position, we have stated that 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.“).
However, there are risks with this as reflected in last October’s decision in Archuleta v. Wal-Mart Stores, Inc. 543 F.3d 1226 (10th Cir. 2008). In that case, Wal-Mart shortened some pharmacists’ workweek during the slow periods each year (i.e., summer) and correspondingly shortened their salary. More problematic, however, was that some store managers informally reduced the workweeks of some pharmacists in order to save money. The District Court entered summary judgment for the employer, but the Court of Appeals reversed as to two plaintiffs in October on the grounds that it was a factual issue whether the store managers were as attempting to evade those two employee’s exempt status by basing their “salary” on hours worked.
The Court of Appeals had earlier held that “an employer could prospectively change its employees’ salaries without defeating the exemption for professionals . . . unless the purported ‘salary’ becomes a sham—the functional equivalent of hourly wages. . . . “If . . . the salary changes are so frequent as to make the salary the functional equivalent of an hourly wage, [the court] will treat the ‘salary’ as a sham and deny the employer the FLSA exemption for professional employees.”
According to the court’s opinion:
“in response to Plaintiffs’ theory—that Wal-Mart prospectively changed their base hours, on which their salary was calculated, with such frequency so as to make them, in effect, hourly employees—Wal-Mart presented a report summarizing the number of times it changed Plaintiffs’ base hours during the time period relevant to this case. That report indicated that 75% of the 573 Plaintiffs, or 432, did not experience any change in their base hours.8 Of the Plaintiffs who did experience a change in their base hours, 99 Plaintiffs, or just over 17%, experienced only one such change. Twenty-four Plaintiffs, or 4.2%, experienced two changes. But “the average length” of time “over which those two changes occurred was four years and seven months,” and the “average time between those two changes was 11.3 months. The shortest time between those two changes was eight weeks (for two pharmacists).” Aplt. App. at 269. Two such changes during this time frame are not sufficient to defeat an otherwise valid exemption. . . .
.
Wal-Mart’s report indicated that it had changed the base hours for eight Plaintiffs three times during the relevant time period. But “[t]he average length” of time over which these changes occurred “was four years and five months,” and “[t]he average length of time between those changes was 10.3 months.” Aplt. App. at 270. “The shortest time between those changes was six weeks (for one pharmacist).”
In addition, two Plaintiffs experienced four changes in their base hours. “[T]he average length” of time over which these four changes occurred, however, “was four years and six months,” and “[th]e average time between those four changes was 7.8 months. The shortest time in between those changes was ten weeks (for one pharmacist).” Id. For that one pharmacist, the report indicated that, after employing that pharmacist from August 29, 1993 through February 5, 1998, Wal-Mart changed the pharmacist’s base hours on January 6, 1995; January 5, 1996; March 15, 1996; and October 26, 1997. “For the other pharmacist who experienced four base hour changes during his relevant period (four years and eight months), the time between each of those changes was 12 weeks or longer.” Id. at 271. We conclude that the frequency of these prospective changes was not sufficient to create a factual dispute as to whether Wal-Mart was, in fact, treating these pharmacists as hourly employees.
However, “there were many other instances in which Wal-Mart ‘informally’ or verbally changed a pharmacist’s base hours. In support of this allegation, Plaintiffs offered the affidavits of twenty-one plaintiff-pharmacists. Only eight of these twenty-one pharmacists specifically mentioned experiencing one or, at most, two changes in their base hours. This evidence is insufficient to create a factual dispute as to whether Wal-Mart was treating these pharmacists as hourly, rather than salaried, employees.”
Insomniacs can read the court’s full opinion at http://www.ca10.uscourts.gov/opinions/07/07-1065.pdf. Insomniacs can review the index of all of the 2009 FLSA opinion letters at http://www.dol.gov/esa/whd/opinion/flsa.htm.
NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with an attorney.
