The spread of COVID-19 has already created significant economic downturn in the United States that will undoubtedly have a lasting impact. As the government and private businesses continue to take action to curb the spread of the pandemic, employers will face difficult decisions to address the financial hardships that result. Employers who are considering lowering their employees’ rate of pay during this economic decline must be mindful of the constraints of the Fair Labor Standards Act (“FLSA”) and parallel state wage and hour statutes to ensure that they remain compliant. When it comes to reducing an employee’s rate of pay, what is and is not permissible under the FLSA hinges largely on whether the employee is exempt or non-exempt from the FLSA’s minimum wage and overtime requirements.
Reductions in Pay for Salaried, Exempt Employees
Typically, under the FLSA, an employer must pay an exempt employee his or her full, predetermined salary amount for any week in which the employee performs any work, regardless of the number of days or hours the employee works. If an employee performs any work during a workweek, an employer cannot make deductions from the employee’s pay for absences due to changes in the operating requirements of the business. In other words, employees who are ready, willing, and able to work, and perform some work in a workweek, are entitled to their full predetermined salary, even when work is available only on a limited basis. With limited exceptions, an employer that makes such deductions to a salaried employee’s pay loses its entitlement to the exemption under the FLSA.
Despite these general rules, an employer may prospectively reduce an exempt employee’s predetermined salary amount during a business slowdown or economic downturn, so long as the salary change is bona fide and not simply used to evade the FLSA’s requirements. A prospective reduction in an exempt employee’s regular salary is permissible if the reduction is made prior to the employee performing any work in a workweek and the employee receives a salary of at least $684 per week. Employers should implement such a reduction only when it reflects the anticipated long-term needs of the business. Employers should not reduce or change employee salaries on a day-to-day or week-to-week basis based upon their operating requirements. Rather, prospective reductions in salary should remain consistent throughout the period of business need.
Reductions in Pay for Non-Exempt Employees
The limitations on an employer’s ability to reduce the pay of non-exempt, hourly employees are less stringent. Employers may lower a non-exempt hourly employee’s hourly rate of pay as long the employee receives the controlling minimum wage under federal, state or local law, whichever is higher, provided the employer notifies the employee before any work is performed under the new hourly rate. Likewise, the FLSA does not preclude employers from reducing the number of hours a non-exempt employee is scheduled to work and does not require employers to pay non-exempt employees for hours not actually worked.
State and Local Laws May Have Stricter Requirements
Employers should also be mindful that wage and hour laws vary state-by-state and state and local laws may have more stringent requirements than those mandated by the FLSA. Some states and cities have specific notice requirements that employers must comply with prior to implementing a wage reduction.
Z&R will continue to monitor the latest information governing employers and has created a resource center. Previous Z&R articles addressing employer requirements and considerations during the COVID-19 pandemic can be found here:
- Coronavirus Considerations for Employers
- Ohio Provides Some Cover for Employers and Employees in Wake of COVID-19
- Federal COVID-19 response mandates paid leave (for now)
- Application of the Worker Adjustment and Retraining Notification Act (“WARN”) to Closures Caused by the COVID-19 Pandemic
- Ohio BWC: Allows Deferment of Premium Payments and Addresses Compensability of Contracting COVID-19
- Ohio Department of Insurance Provides Coverage Flexibility for Ohio Employees in the Wake of COVID-19
*Lauren Drabic works in Z&R’s Cleveland office and regularly advises clients on all employment matters. If you have questions regarding the Ohio Department of Insurance Bulletin other employment-related matters, please contact Lauren at lmd@zrlaw.com or 216.696.4441.