The California Labor Commissioner has published an Opinion Letter which provides employers with some latitude for salary reductions for exempt employees. Some companies are looking for ways to cut costs without having to lay off exempt employees. One way to do this would be to reduce the work hours of their exempt staff, with a commensurate reduction in salary. Exempt employees must generally be paid their weekly salary regardless of the number of hours they work during the week (there are some limited exceptions to this). And in the past, the Labor Commissioner has ruled that reducing hours would cause the employee to be deemed overtime eligible (and possibly entitled to back overtime wages).

The Labor Commissioner has now concluded that California law permits employers to temporarily reduce an exempt employee’s salary, with a commensurate reduction in hours, without jeopardizing the employee’s overtime exempt status.This new enforcement position is extremely helpful to employers looking for ways to avoid layoffs by reducing salaries and work hours. However, there are some important conditions that still must be satisfied to maintain the employee’s exempt status.

Condition 1:

The reduction in pay and hours must be temporary, and the employer must intend to restore the employee to a full salary and schedule when business conditions improve. Therefore there is a distinct possibility that salary and workweek adjustments that are not intended to be temporary may not receive the same treatment.

Condition 2:

All of the current rules for maintaining overtime exempt status still must be satisfied. The employee still must spend more than half of the workweek performing exempt duties. The employee also must be paid a monthly salary of no less than twice the state’s minimum wage, which presently equals $2,773.33 per month. And, the employee must be paid the entire new salary even if he or she works fewer hours than scheduled.

However, be aware that a Labor Commissioner’s Opinion Letter is not binding on a court. Although the Labor Commissioner’s Opinion Letter should be considered persuasive by a court, it is certainly possible that a court could reach a different conclusion if an employee challenged the reduced salary/hour arrangement.

In addition, as an employer, you are expected to know and understand all the factors for properly determining whether an employee should be classified as exempt in the first place. Violations of the law in this area are a very common cause of litigation and the penalties and fines can be steep (there is a three year look-back period). Human Resources 4U can help you to determine if you have your employees properly classified.

Human Resources 4U is a full service Human Resources consulting company specializing in small and midsize businesses. Note: This article is presented with the understanding that we are not engaged in rendering legal advice. If legal advice is required, the services of a competent attorney should be sought.