California Labor Commissioner Changes Course On Salary Reductions for Exempt Employees
On August 19, 2009, the Chief Counsel of the California Division of Labor Standards Enforcement ("DLSE") issued an Opinion Letter on behalf of the Labor Commissioner, Angela Bradstreet, in which the DLSE reversed its enforcement stance on the issue of shortened workweeks with reduced salaries for exempt employees. In the Opinion Letter, the DLSE opined that there is nothing in California law that would prevent an employer from implementing a reduction in exempt employee salaries that is directly proportional to a reduction in the number of days worked per week.
This change in the DLSE enforcement policy brings California law more in line with the federal Fair Labor Standards Act ("FLSA") regarding "furloughs" and salary reductions for exempt employees. For more information regarding the FLSA rules regarding furloughs, please see our March 2009 Client Alert.
Question Presented to the DLSE
The employer sought to reduce the work schedule of its exempt employees and implement a corresponding reduction of their salaries as an alternative to layoffs. Specifically, the employer proposed reducing the number of workdays from five (5) days to four (4) days per week and making a proportionate reduction in the salaries of the exempt employees by 20 percent. The employer represented to the DLSE that the reduction in workdays and salaries would be a temporary measure to assist the employer in weathering the current economic downturn. The employer intends to restore both the full five-day work schedule and the full salaries of its exempt employees.
The question presented to the DLSE was whether the employer's planned salary reduction is consistent with the "salary basis test" for exempt employees under California law.
The DLSE's Analysis
In order to qualify for an exemption from the overtime and minimum wage requirements of California law, an employee must meet both the "duties test" and the "salary basis test." For the purposes of the Opinion Letter, the DLSE assumed that the employees in question met the "duties test" for the "white collar" (executive, administrative and professional) exemptions described in the California Wage Orders.
At issue was whether the planned change ran afoul of the "salary basis test" as set forth in Labor Code § 515(a) and the Wage Orders. The Wage Orders provide that, in order for employees to meet the "salary basis test" portion of the exemption, the employees "… must also earn a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment. Full-time employment is defined in Labor Code Section 515(c) as 40 hours per week." At present, the California minimum wage is $8.00 per hour, which equates to a minimum salary of $2,733.33 per month for exempt employees.
The DLSE concluded that there is no express provision in the California Labor Code, the Wage Orders or in any California cases that would restrict or prevent and employer from implementing a fixed reduction in exempt employee salaries during a period when the employer operates a shortened workweek due to economic conditions. Since the DLSE found no precedent in California law, the DLSE looked to the federal interpretations under the FLSA for guidance.
The DLSE found that the applicable federal regulations and interpretations by the federal Department of Labor ("DOL") support the conclusion that an employer may reduce its exempt employees' work schedule and salary without violating the salary basis test. Specifically, the DLSE looked at 29 CFR § 541.602, which sets forth the general rule that exempt employees must be paid their pre-determined salary in any week in which they perform work, and the series of DOL opinion letters interpreting this regulation.
The DLSE reviewed DOL opinion letters, dating as far back to 1970, in which the DOL consistently concluded that the salary basis test does not preclude a bona fide fixed reduction in the salary of exempt employees to correspond with a reduction in the normal workweek, so long as the reduction is not designed to circumvent the requirement that the employees be paid their full salary, and in no event less than the legal minimum salary, in any week in which they perform work.
The DLSE cited, with approval, several federal decisions which address this issue (see Archuleta v. Wal-Mart Stores, Inc., 543 F.3d 1226 (10th Cir. 2008); In re Wal-Mart Stores, Inc., 395 F.3d 1177 (10th Cir. 2005); and Caperci v. Rite Aid Corporation, 43 F.Supp.2d 83 (Dist. Mass 1999)). These decisions support the conclusion that the employer's proposal to reduce simultaneously its exempt employees' work schedule and salary for the specific reasons described above does not violate the salary basis test.
Finally, the DLSE addressed its previous enforcement position, which is found in an e-mail Opinion Letter issued by the DLSE in 2002 (see DLSE Opinion Letter 2002.03.12). In that opinion, the DLSE concluded that the federal and state regulations preclude an employer from reducing the salary of an exempt employee during a period in which the company operates a shortened workweek due to economic conditions. This conclusion relied in part upon the federal trial court decision in Dingwall v. Friedman Fisher Associates, P.C., 3 F.Supp.2d 215 (N.D. NY 1998). In Dingwall, the defendant employer reduced the workweek of its staff from five days to four and simultaneously reduced their salaries by 20 percent.
The DLSE analyzed the decision in Dingwall in relation to the more recent federal precedent and determined that Dingwall is not well reasoned and should not form the basis of the DLSE's enforcement position. Although the DLSE did not withdraw Opinion Letter 2002.03.12, the DLSE determined that the employer was not prohibited under California law from implementing the proposed reduction in the work schedule and salary of the exempt employees.
The DLSE's Conclusion
The DLSE concluded that, while there are differences between the federal and state salary requirements (e.g., minimum dollar amounts), the DLSE will follow the interpretation under the FLSA regarding the validity of a reduction in the work schedule and salary of exempt employees. The DLSE stressed that the exempt employees must still meet the salary basis test by earning a monthly salary of at least $2,733.33 (the equivalent of two times the state minimum wage for a 40-hour week), as provided in Labor Code §§ 515 and the Wage Orders.
The DLSE cautioned that its conclusion is based on the employer's representations that: 1) the "proposal to reduce the number of its employees' scheduled work days from five days to four days per week, with a corresponding reduction in salary, is based upon the employer having experienced significant economic difficulties due to the present severe economic downturn"; and 2) "as soon as the business conditions permit, the employer intends to restore both the full five-day work schedule and the full salaries of its exempt employees."
What the DLSE Opinion Letter Means To Employers
While the DLSE Opinion Letter is not legally binding precedent in civil litigation, it should be given significant weight by the California courts. However, the Opinion Letter is binding precedent in any DLSE proceeding and signifies a favorable shift in the DLSE's enforcement policy in favor of giving employers more flexibility in implementing cost-cutting measures to address changing economic conditions. By implementing reductions in exempt employees' salaries and work schedules, an employer may be able to avoid layoffs and be in a better position to adjust to changes in the economy.
