Federal sequester raises issues for exempt employees

March 14, 2013

Under the federal sequester, almost all government agencies must lop off billions from their budgets for the current fiscal year. This action may affect federal contractors, which would then be forced to rejigger their workforces through reduced hours, furloughs, etc.

Shuffling nonexempts’ hours is pretty straightforward, since they only need to be paid for their working time. The problem is exempts, who, under the Fair Labor Standards Act (FLSA), must receive a full week’s pay if they do any work during the week. Nevertheless, if you’re caught in this vise, and even if you’re not, but are facing similar issues, you do have options.

Option #1—Reduced hours. Exempts must receive a guaranteed salary of at least $455 a week, regardless of whether they work part time or full time. You could, on a prospective basis only, reduce exempts’ work schedules from, say, 52 five-day workweeks to 47 five-day workweeks and five four-day workweeks, with a corresponding reduction in pay during those five weeks.

In a 2009 Opinion Letter (FLSA 2009-18), the Department of Labor concluded 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 test. In fact, any reduced schedule would probably pass muster, provided it was intended to be permanent. Watch out: Too many changes in exempts’ schedules would probably nix the deal. Note: Opinion letters are intended as private advice to an inquiring employer. They may be used for informational purposes only; they may not be used or cited as precedent.

Option #2—Partial-week furloughs or shutdowns. FLSA regulations allow you to require that exempts take a paid full or partial day off provided you have a bona fide benefits plan, and exempts continue to receive payments equal to their guaranteed salary. Trap: Exempts who would run out of accrued time, so that debiting their leave banks would result in a negative balance, or those who have already run out of accrued time, must be paid their full salaries.

Option #3—Full-week furloughs or shutdowns. The FLSA rule is that exempts don’t need to be paid if you shut down for an entire week. They may use their vacation time, if they have any. Key: Working can encompass simple tasks such as responding to email. Therefore, you must clearly communicate to exempts that they are not to work, and define the work they’re not supposed to do. If necessary, have them turn in their company-issued smartphones or laptops and disable their remote access to the server.

PAYROLL PRACTICE TIP: State laws covering exempt employees can vary widely from the FLSA, so you should check those laws. In addition, all furloughed employees may be eligible for COBRA, so it would also be wise to touch base with your COBRA administrator.