Labor & Employment Law

In Hard Economic Times, The "Salary" Basis For Exempt Employees Is Evolving

By Mark E. Tabakman, Esq.

In order to be exempt, an employee must perform certain duties and be paid a 'salary' as that term of art is defined. Employers/clients have been calling and inquiring whether they can reduce exempt employee salary, without jeopardizing the exemption. Under federal law, within certain parameters, this is permissible.

Now, the California Department of Industrial Relations' Division of Labor Standards Enforcement has issued an Opinion Letter (DLSE Opinion Letter 2009.08.19, 8/19/09) agreeing with the federal position. As California almost always has tougher, i.e. more pro-employee, standards than the Fair Labor Standards Act requires, I see this as a watershed development in wage-hour law.

Under the California Opinion Letter, an employer that experiences economic difficulties and, for example, reduces the work week of exempt employees from five days to four and also reduces their salary by 20% will not run afoul of the 'salary basis' test for these workers to still be considered exempt under California state law. The key is that the employer's action must be temporary in nature.

The Opinion Letter acknowledged that this issue had not been addressed by California courts, but acknowledged that the federal Department of Labor and federal courts have concluded that an employer who shortens a workweek because of straitened economic conditions does not violate the salary basis test for exempt status under federal law. In this case, the request for the opinion came from a California employer that was going through 'significant' economic difficulties arising from economic conditions in California.

The company had already laid off employees, but wanted to implement other measures until things got better. The employer also advised that it intended to restore the full workweek and when it do so, it would re-establish the original salaries of the affected exempt employees. The Opinion Letter noted that

'there is no express restriction in California law to having a fixed reduction in a salary during a period when the company operates a shortened workweek due to economic conditions.'

Plaintiff lawyers alleging misclassification first look at the salary basis issue. If the employees were not paid a 'salary' or had it impermissibly reduced, the exemption is lost for the single person or the entire class, without any examination of the duties of the affected employees. This opinion letter gives California employers a comfort level that employers in other States that follow the FLSA as a rule have already enjoyed, if that word can be used in the context of the economic crisis facing our country.

Full post as published by Wage & Hour - Development & Highlights on September 04, 2009 (boomark / email).