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California DLSE Approves Work Schedule And Salary Reductions For Exempt Employees

9/8/2009

The Division of Labor Standards Enforcement, the California agency responsible for enforcing the state’s wage and hour laws, recently issued a formal opinion letter granting employers greater flexibility to cope with economic hardship by reducing salaries and working schedules for exempt employees without destroying their exempt status. In its Opinion Letter, the DLSE considered a proposed plan by an employer to reduce salaries of exempt employees by 20% while simultaneously reducing their workweek from five days to four days. The employer apparently had experienced economic difficulties, had already conducted layoffs, and wanted to avoid additional layoffs. The employer intended the salary cuts and four-day workweek to be temporary, with full salaries and workweeks restored “as soon as the business conditions permit.”

The legal question is whether a salary reduction with a corresponding hours reduction violates the requirement that exempt employees be paid on a “salary basis.” Under California law, to qualify for one of the “white collar” exemptions – the professional, administrative, or executive exemptions – employees must receive a salary equal to twice the minimum wage (currently, $640/week; $33,280/year), and the full salary must ordinarily be paid regardless of the number of hours the employee works during a workweek.

In its Opinion Letter, the DLSE advised the employer that its salary and workweek reduction plan would not violate the “salary basis” requirement for exempt employees. The DLSE explicitly reversed itself on this issue, as a previous 2002 Opinion Letter had come to the opposite conclusion. In reversing course, the DLSE stated that it would interpret California law on this issue in the same manner that federal courts and the federal Department of Labor have interpreted the federal Fair Labor Standards Act, which has the same salary basis requirement for exempt employees.

The DLSE’s new Opinion Letter addresses only the specific factual situation presented by the employer and, therefore, leaves some questions unresolved. For instance, what if an employer institutes a permanent, as opposed to temporary, salary and hours reduction based on a severe economic contraction? What if an employer institutes a temporary reduction in salary and hours for reasons other than a severe economic downturn? While the DLSE’s most recent Opinion Letter grants some much needed flexibility to employers desiring to adjust the salary and schedules of exempt employees during difficult economic times, the extent of that flexibility remains uncertain. Moreover, courts are not required to follow the opinions of the DLSE. Thus, this Opinion Letter will not protect employers from possible civil lawsuits, and employers should consult counsel before implementing exempt employee salary cuts based on a reduced workweek.