Legal Implications of Furloughs
Aug 04, 2011 QuickCounsel Download PDF
By Worklaw Network
Furloughs are normally considered an alternative to temporary layoffs and consist of either a reduction in hours or a period of unpaid time off, e.g. one day per week, one week per month, and so forth. The general theory is that a majority of employees share some hardship as opposed to a smaller number of employees losing their jobs, either temporarily through a layoff or permanently through a reduction in force. While a furlough may benefit employee morale and/or allow an employer to retain talent needed if business rebounds, furloughs can raise wage and hour issues, collective bargaining obligations, claims of discrimination or retaliation, contract claims, increased workers’ compensation payments, issues under the Worker Adjustment and Retraining Notification Act (WARN), and loss of benefits. Consequently, furloughs must be carefully planned to avoid increased legal risks.
FLSA and Wage and Hour
For workers to be exempt from entitlement to overtime compensation under the Fair Labor Standards Act (FLSA) and similar provisions of state law as executive, administrative, or professional employees, they must be paid on a “salaried basis” (i.e., a set amount if the employee performs any work including checking email during the week) in addition to having the requisite duties. Consequently, if exempt executive, administrative, or professional employees are to be furloughed in less-than-weekly increments (e.g. one day per week), their pay cannot be “docked” for the absence. Instead, while employees may have their salary reduced (subject to contractual, prior notice, or other limitations), the salary may not be reduced below $455/week under the FLSA or below the applicable state minimum salary if the employee is to remain exempt.
The National Labor Relations Act (NLRA) imposes a duty on employers and unions to bargain over the terms and conditions of employment of represented employees. Unless the employer and the union have already negotiated and reached agreement regarding how furloughs will be handled, employers will be obligated to bargain with a union representing affected employees over the decision to impose a furlough and the effects of the furlough.
Selection of Furloughed Employees
As with the selection of employees for a reduction in force or layoff, selection criteria should be neutral and uniformly applied. Application of the selection criteria should be tested for adverse impact based on a protected characteristic (e.g., race, sex, age, disability, military status, color, religion, etc.). Care must also be taken to ensure that employees are not selected because of their use of workers’ compensation or Family and Medical Leave Act benefits or because they engaged in other protected activity.
Selection of employees with work-related injuries might result in liability for additional income benefits under workers’ compensation laws due to the reduction in hours of work.
Employees selected for furlough may have contractual rights to certain compensation and/or paid-leave benefits. As such, their level of pay or benefits may not be subject to reduction, absent the employee’s agreement, simply because the employer relieves them of duty.
Under the WARN, employees are entitled to prior notice if a plant closing (20 CFR 639.3 (b)) or mass layoff (20 CFR 639.3 (c)) result in an employment loss (20 CFR 639.3 (b)). Employment Loss includes an employer’s reduction by at least 50% of the hours of work in each of 6 months. Thus, if a furlough results in at least a 50% reduction in hours and lasts for 6 months or more, a WARN notice will be required.
Benefits' plans frequently include within the definition of eligible employees a minimum number of hours an employee is scheduled to work (e.g., 30 hours per week). If the hours of work of a furloughed employee fall below the minimum threshold, the employee may lose eligibility for benefits. If an individual loses group health coverage due to a reduction in hours, that person will be entitled to a COBRA notice.
Furloughed employees may qualify for unemployment benefits, including partial unemployment benefits, for the week(s) in which they are furloughed. Eligibility for such benefits will depend upon state law, and successful claims will affect the company’s mandatory contributions to the state’s unemployment fund..
Furloughs are part of the employment landscape in any sluggish economy. Although furloughs are useful in avoiding layoffs and retaining skilled employees, taking such action could raise wage and hour, collective bargaining, contract, statutory, and compensation issues. As the possibility of a furlough becomes an issue for companies, in-house counsel needs to be aware of the restrictions and pitfalls inherent in the process.
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