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Avoid the Legal Risks If You Must Make Coronavirus-Induced Salary Reductions for Exempt Employees

As the COVID-19 pandemic wreaks havoc with standard business operations and cash flow, it’s understandable that businesses are cutting back on their expenses in almost all areas, including the salaries of exempt employees. Still, despite the economic uncertainty, companies should be watchful and not let panic push them into implementing rash compensation-related cost-cutting measures.

Keep your wits about you as you navigate through the coronavirus-altered economy and make sure to steer clear of any legal risks in salary cuts for exempt employee.

Here’s your quick refresher:

Reductions in salary or number of work hours

Cuts in the fixed salary of an exempt employee will normally result in loss of the exemption mandated under Part 541 of the Department of Labor’s regulations. The employee who takes a salary cut should then be paid at least the applicable federal minimum wage and overtime pay (at a rate not less than 1.5 times the regular rate of pay for all overtime hours) required by the Fair Labor Standards Act. On the other hand, the FLSA does not prohibit an employer from reducing the number of hours the employee is scheduled to work.

Prospective reduction

In some circumstances, however, an eventual salary reduction may not cause a loss of the exemption, for example, during a business or economic slowdown, provided the change is bona fide and not used as a device to evade the salary basis requirements. Such a predetermined regular salary reduction, not related to the quantity or quality of work performed, will not result in loss of the exemption, as long as the employee still receives on a salary basis at least $684* per week.

But: deductions from predetermined pay occasioned by day-to-day or week- to-week determinations of the operating requirements of the business constitute impermissible deductions from the predetermined salary and would result in loss of the exemption.

The difference? The first instance involves a prospective reduction in the predetermined pay to reflect long-term business needs, rather than a short-term, day-to-day, or week-to-week deduction from the fixed salary for absences from scheduled work occasioned by the employer or its business operations.

Salary for work or no work done for a week

An employer must pay an exempt employee the full predetermined salary amount “free and clear” for any week that the employee performs any work regardless of the number of days or hours worked.

But: the FLSA does not require that the predetermined salary be paid if the employee does not perform any work for a full workweek.

Absences occasioned by employer or the business

Deductions may not be made from the employee’s predetermined salary for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available.

In general, employers are prohibited from making salary cuts if the employee works less than a full day; otherwise, the cuts result in loss of the section 13(a)(1) exemption.

Salary deductions in medicine, law, sales, or education

Physicians, lawyers, outside salespersons, or teachers in bona fide educational institutions are not subject to any salary requirements; therefore, deductions from the salary or pay of such employees will not result in loss of the exemption.

For any more payroll and HR management concerns, contact us.

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This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.