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Furlough option may be risky for employers

By: dmc-admin//June 15, 2009//

Furlough option may be risky for employers

By: dmc-admin//June 15, 2009//

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Wary of depleting already lean work forces, some employers are sending their employees home without pay as the latest cost-cutting measure.

But employers may be implementing furloughs without considering the legal issues involved. And employment lawyers warn that businesses that aren’t careful may face wage and hour lawsuits.

“The common alternatives to layoffs right now are … employee furloughs or pay cuts, either across the board or [for] some broad category” of workers, said Jonathan Shapiro, regional managing partner in the Portland, Me. office of Fisher & Phillips.

One of the first questions employers face when considering furloughs is whether they will be voluntary or mandatory. Employers need to establish, through a formal process, whether to offer employees the option of furloughs or mandate them.

“The voluntary furlough can be seen as more proactive — employees may feel they have more control over their futures,” said Jill Pedigo Hall, a partner at Gonzalez, Saggio & Harlan in Milwaukee.

Margaret DiBianca, an associate at Young Conaway Stargatt & Taylor (http://www.ycst.com/) in Wilmington, Del., said she encourages clients to consider voluntary furloughs.

“I have worked with some clients who are in good economic straits, but are taking this opportunity to re-evaluate their own staffing,” she said. “You might be amazed by how many people voluntarily want to take the time off for summer.”

Employees also realize the financial struggles their employers are facing right now, Hall said.

“If the employees perceive they may have a job in jeopardy, but they can work a four-day week and still have a job, they’ll take that,” she explained.

Legal Complications

Most of the legal complications tied to furloughs involve salaried employees who are exempt from wage and hour regulations under the Fair Labor Standards Act.

Shapiro cautioned that any work done by exempt employees while on furlough requires that they be compensated at their regular salaries for that entire work week.

That means no checking mail, voicemail or e-mail.

“It’s pretty difficult to enforce,” he said.

Hall tells her clients that one way to bring some structure to the process is to establish a formal plan that involves reviewing duties and the number of hours a salaried employee puts into a regular work week.

If the employer establishes a four-day work week, a written plan should outline the specific functions to be performed and the timeframe for doing them.

“How do you guarantee that the employee who is now being paid four days a week is not working five? The best way you can do that is to set out your expectations in writing,” Hall said.

Legal Pitfalls

Other potential legal problems with furloughs and pay cuts include:

Discrimination claims.

Employers need to establish a solid plan for choosing who will be furloughed. Failing to establish clear guidelines can give rise to discrimination claims.

“One of the battles employers have is: how are you going to pick the people?” Hall said. She warned about the risk of picking employees strictly based on performance ratings or discipline and stressed the need for consistent application of criteria. She also recommended building objective factors into any involuntary furlough.

Contract violations.

“You can’t just announce your [exempt employee’s] salary is only $80,000 instead of $100,000 when there is a contract that says the agreement may only be amended by a written agreement between both parties,” Shapiro noted.

Benefits eligibility.

Most benefit plans require employees to work a minimum number of hours each week to be eligible for benefits.

A company that cuts all employees from 40 to 32 hours a week may inadvertently eliminate employees’ eligibility for health benefits.

“Every employer needs to review their benefits plan to make sure that they understand the impact upon their employees,” Hall said.

Employers also need to check the impact on vacation and 401k benefits.

Wage law violations.

Pay cuts for non-exempt employees cannot cause them to fall below state minimum wage limits. Also, an exempt employee’s weekly salary can’t fall below $455, the current federal minimum salary for an employee to be considered exempt.

Some employers seeking to avoid legal complications with exempt employees are changing the “work week” by implementing a four-day work week during the summer, or closing early on Fridays during the summer, and reducing salaries by a comparable amount, according to Shapiro.

“I’ve got multiple clients closing for summer hours on Friday afternoons, and they do a corresponding pay cut to account for those reduced work hours,” Shapiro said.

But DiBianca said the shortened work week wouldn’t work for many businesses, such as those with customer service departments that remain open all week.

Another non-layoff, cost-cutting option employers are using is requiring employees to use a certain amount of their accrued vacation time during the summer, rather than holding off until the fall.

“Often it is problematic for a company to have to carry a large amount of accrued paid vacation time on the books,” Shapiro said. “Requiring employees to take vacation time during the summer gets those numbers off the books.”

The benefit to all these efforts is that they can curb costs while avoiding further layoffs. “You’re not depleting your valuable resource,” DiBianca said. “It’s easy to cut right now, but when the economy turns around, it costs so much to get up and running again.”

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