California DLSE Approves of Simultaneous Reduction of Workweek and Salary of Exempt Employees

In a much-anticipated opinion, on August 19, the California Division of Labor Standards Enforcement (DLSE) aligned itself with federal law by allowing for the simultaneous reduction of a an exempt employee's workweek and salary without calling into question whether the employee is paid on a "salary basis" for overtime exemption purposes.

The question presented to the DLSE was whether an employer, when faced with a difficult economic environment, can reduce its employees' workweek from five days to four days and simultaneously reduce their salaries by 20% or some other proportion, without running afoul of the salary basis test for application of the white-collar exemptions from overtime requirements.

In addition to meeting applicable duties requirements, qualifying "white collar" employees must earn a monthly salary that is no less than two times the state minimum wage for full-time employment, defined as 40 hours per week. This qualifying amount is currently at least $640 per week for white-collar (administrative, professional, and executive) employees.

In interpreting California's salary basis requirement, the DLSE followed federal interpretations of the Fair Labor Standards Act's salary basis test. Applicable federal regulations provide that an employee is paid on a salary basis if he or she regularly receives a predetermined amount of compensation for each workweek that is not subject to reduction based on variations in the quality or quantity of work performed. 29 C.F.R. § 541.602. Also, if an employee is ready, willing, and able to work, deductions from that predetermined compensation may not be made for time when work is not available. Id.

The U.S. Department of Labor (DOL) has determined that the salary basis test does not preclude a bona fide fixed reduction in salary that corresponds to a reduction in the normal workweek, as long as the reduction is not designed to circumvent the requirement that employees receive their full salaries in any week they perform work. See DOL opinion letters 1970 WL 26462, 1997 WL 998010, and 1998 WL 852696.

Despite the prior DOL opinions permitting simultaneous workweek and salary reductions, in a 2002 opinion, California's DLSE had concluded that reducing the salary of an exempt employee during a period where the company operates a shortened workweek due to economic conditions violates the salary basis test. It relied in part on a federal court decision from the Northern District of New York, Dingwall v. Friedman Fisher Associates, P.C., 3 F. Supp. 2d 215 (N.D.N.Y. 1998).

In its recently issued opinion, the DLSE reevaluated Dingwall in light of numerous other federal cases, including a Tenth Circuit decision criticizing Dingwall as not well-reasoned. See In re Wal-Mart Stores, Inc., 395 F.3d 1177 (10th Cir. 2005). In particular, the DLSE noted the Tenth Circuit's reasoning that the federal regulations clearly refer "only to deductions during the current pay period, for which the salary has been fixed, not reductions in future salary." Id.

As a result, the DLSE rejected its earlier 2002 opinion and aligned itself with "a long line of reasoning and authority set forth in the federal regulation and the federal authorities and DOL opinion letters interpreting these federal regulations." The DLSE concluded that an employer may reduce the workweek with a corresponding reduction in salary based upon significant economic difficulties without violating the salary basis requirement in the following circumstances: (1) the employer intends to restore the full work schedule and salaries when economic conditions improve, (2) there is no indication that the employer intends to adjust the employees' salaries frequently,[1] and (3) the employees in question continue to earn a monthly salary that is two times the state minimum wage for full-time employment.

This recent DLSE opinion provides California employers with additional flexibility as they consider potential workweek and salary reductions as alternatives to employee layoffs.

If you have any questions about any of the issues raised in this Morgan Lewis Labor and Employment LawFlash, please contact any of the following Morgan Lewis attorneys:

Irvine
Barbara J. Miller

Los Angeles
John S. Battenfeld

Palo Alto
Carol Freeman

San Francisco
Rebecca Eisen

[1] Note that an employer that frequently changes employees' salaries and workweek risks its being found to treat such employees, in effect, as hourly nonexempt employees. See Archuleta v. Wal-Mart Stores, Inc., 543 F.3d 1226 (10th Cir. 2008) (relying on In re Wal-Mart Stores, Inc., court found that prospective reductions in base hours did not occur with such frequency as to constitute sham status as exempt employees).