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Employers trying to reduce overheads during tough economic times marked by low demand may shut down a part or all their operations for a period, say one or two weeks around holidays, and force employees into mandatory furloughs. Employment law allows for such furloughs, though not directly.
Furloughs for employees covered under the Fair Labor Standards Act (FLSA) do not pose an issue. The law requires employers to pay employees only for the hours they actually work, so if an employee works for five hours a day, and is paid five hours there is no legal issue.
Federal and state laws, however, requires paying employees exempt from FLSA the same minimum salary for each pay period, and the entire salary due if the employee does any work during the workweek. Employers may not deduct from an exempt employee's salary for absences "occasioned by the employer" or caused by "the operating requirements of the business."
Employers furloughing exempt employees need to ensure that such employees don't perform any work, including checking voicemail or office mail from home, during the period of furlough. Employers need to inform employees in writing they are not authorizing ANY work during the furlough period, and preferably take away their company-issued smartphones and laptops for the period.
Most states, however, permit an employer to modify unilateral employment contracts by reducing compensation and deem that the employees' continued employment constitutes acceptance of the reduced compensation without any additional consideration. Routinely informing exempt staff of the revised work schedule for the following week may count as sham practice.
Employers may make prospective adjustments in working hours and corresponding pay adjustments for exempt employees, on providing adequate notice. The requirement for advance notification varies from state to state. Missouri mandates a 30 days notice, and Maryland requires one pay period. The provisions of any employment agreement may also apply. In cases when the cut in work hours exceeds 50 percent and the duration extends to a long period of a week or more, the provisions of Workers Advanced Notification Act (WARN) would apply.
Collective bargaining agreements (CBA) may act as a spanner in the works of mandatory furloughs. The provisions of CBA may mandate employers to bargain with unions or employee representatives before implementing a furlough or requiring use of vacation time during the furlough.
While furloughs are usually mandatory, some employers offer voluntary furloughs whereby employees may opt for some time off, with loss of pay, akin to unpaid vacations, as an alternative to "harsher" measures.
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Employers may allow employees the option to use, or mandate using accrued but unused vacation leave or other paid time off during furloughs. This would allow employers to retain the employee when work commences and reduce this liability from the company books, and provide employees with a source of income during the furlough period. However, not all state laws allow the employer the discretion to mandate use of vacation during a work furlough. California, for instance prohibits "use it or lose it" vacation policies and requires the employer to provide "reasonable notice" before depriving an employee of accrued vacation, and the definition of "reasonable notice" is still vague.
One issue with mandatory vacation is where employees have enough balance to cover a portion of the workweek. Employers permitting employees to take advances on their vacation credit need to consider their own in-house policy on whether such advances are otherwise possible, and if so, under what circumstances and eligibility, and what would happen if the employee quits before the vacation balance climbs back to zero. Many states require the employees consent to deduct any wages on separation from employment, including deductions for negative vacation balances. Other states simply forbid such deductions altogether regardless of any agreements between employee and employer.
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Furloughs present an alternative to layoffs. It keeps more persons employed, and allows companies to maintain their intellectual capital for better times, and reduce severance costs. It, however, comes with many possible pitfalls.
Reduced work weeks pose a danger of non-exempt employees losing their exempt status. The current threshold of non-exempt employees is $455 per week under federal law, and some states have a higher threshold. The best practice to prevent this from happening is to furlough employees for full weeks that coincide with the workweek. Prospective reduction in wages will not lead to loss of exempt status, even when wages fall beyond the threshold.
A reduced workweek may also effect on the employee’s eligibility for benefits. For instance, employee hours may drop such that they become part-time employees rather than full-time employees, rendering them ineligible for some employer benefit plans. Additionally, furloughs reducing working hours significantly may render the employee partially unemployed and eligible for unemployment benefits.
Of late, recession and the hard economic times in the aftermath has forced many companies to adopt furloughs. Employment laws, while allowing this practice, leave much gray area raising the possibilities of lawsuits in the future.
- USA Today. "More companies turn to furloughs to save money, jobs."
- The National Law Journal. "Employment lawyers predict that furloughs may lead to lawsuits." http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1202430811083&slreturn=1&hbxlogin=1. Retrieved August 22, 2011.
- Image Credit: Vacations- flickr.com/Bala under CC 2.0 license
- US Department of Labor. "Frequently Asked Question Regarding Furloughs and Other Reduction in Pay and Hour Worked Issues." Retrieved from http://lawyersusaonline.com/wp-files/pdfs/furlough.pdf%20on%20August%2022, 2011.