COVID-19 is going to leave lasting changes in workplaces across all industries and all sizes of employers. As companies start to grapple with the complex myriad of legal, medical and ethical considerations surrounding the reopening of the workplace, wage/hour and pay equity issues must remain at the forefront of the decision-making process.
Moving forward, some employers will have to make the difficult decision to reopen operations with either a reduced workforce or by reducing the compensation of their workforce. Both scenarios present significant wage-and-hour implications that must be considered, including how these changes affect employees’ exempt classification. Indeed, many employers are already seeing a rise in compensation-related claims from employees and class-action attorneys. Employers who fail to address these wage-and-hour issues may see their efforts to reduce their payroll expenses result in a costly proliferation of Fair Labor Standards Act (FLSA) claims.
Potential Causes for the Loss of Exempt Classification
Implementing uniform compensation reductions across a workforce is becoming a common tool for reducing payroll expenses while continuing to maintain a full workforce. When calculating these reductions in salary, employers must ensure that the reduction does not take exempt employees below the federal and applicable state and local minimum salary levels to qualify as exempt from overtime compensation requirements. To avoid this, prior to implementing any salary reductions, employers should conduct a base salary review to determine whether the reduction will result in the loss of exempt classification for any employees. If a reduction would drop any exempt employees below the minimum salary level, the employer must determine whether the employees will be reduced only to the minimum salary level to retain their exempt classification or be reclassified as nonexempt and paid hourly.
Similarly, employers may also face FLSA compliance challenges when bringing exempt employees back on a reduced schedule. For example, some employers are having two employees split a position by working alternate days. Under the FLSA, exempt employees must be paid their entire salary for the week even if the employer has them work less than a full week. Therefore, simply paying an exempt employee a pro-rated reduced salary is not permissible. Rather, employers must implement proportional salary reductions in advance and provide employees with notice of the change. Employers should consult state and local wage-and-hour regulations, which often have mandatory written notice requirements. In addition, employers must ensure that the reduced proportional salary is not below the minimum salary level for exempt classifications under the FLSA or applicable state and local laws.
The reallocation of job duties due to a reduction in the overall workforce is another action that may result in the loss of exempt status under the FLSA. In order to continue operations with fewer employees, employers are reallocating job duties and expanding the responsibilities of their employees.
Limit Employee Reclassifications
As a result, many exempt employees are taking on new and diverse job responsibilities. But employers must use caution when assigning nonexempt job duties to its exempt employers. If the reallocation of duties causes an exempt employee to no longer be primarily performing job duties that qualify for an exemption, the employer will lose the exempt classification. The employer could face claims of misclassification including liability for unpaid overtime pay.
To avoid possible misclassification issues, it is recommended that the reallocation of nonexempt duties to exempt employees be kept to a minimum. In addition, employers should conduct an audit of the primary duties of all exempt employees after reopening to ensure that they are continuing to primarily engage in job duties that qualify for the applicable exemption.
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About the Author
Elizabeth B. Bradley is a shareholder at Fortney & Scott, LLC.