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Many companies have undergone painful reductions in force in these tough economic times. One alternative to such reductions is the implementation of job furloughs. Furloughs are most commonly mandated unpaid time off, though they may be voluntary as well. Furloughs offer advantages for both employees and employers. Employees keep their jobs, rather than being forced to find other employment, and employers cut costs and keep an experienced workforce intact.

Whether voluntary or mandatory, employers must watch out for some potential traps associated with furloughs. These are dependent in large part on the category of the employees considered for furloughs. Employers have much greater flexibility placing FLSA non-exempt employees on furlough compared to FLSA exempt employees. In addition, there may be provisions in a collective bargaining agreement that limit an employer’s rights with respect to “furloughing” represented employees, which an employer would obviously have to keep in mind.

Wage And Hour Implications Of Furloughs. The basic wage and hour rules with respect to non-exempt employees are that they must be paid at least minimum wage for all hours worked, and must be paid time and a half for all hours worked over 40 in a workweek. Therefore, furloughing non-exempt employees is relatively easy from a wage and hour perspective. Employers may implement mandatory furlough periods for non-exempt employees, and those periods may range from full workweeks to periods of less than a full workday. Wage and hour laws also do not preclude an employer from lowering a non-exempt employee’s hourly rate, provided the rate is at least minimum wage, or from reducing the number of hours the employee is scheduled to work. The most significant caution with respect to furloughed non-exempt employees is that they must not perform any work while on furlough status. Non-exempt employees who perform any part of their job duties during a furlough are working, and must be paid for the hours they work.

The rules for exempt employees are very different. Wage and hour laws require that, for an employer to preserve the FLSA-exempt status of its exempt employees, it must pay them on a “salary” basis. A salary is a predetermined dollar amount that is not subject to reduction because of variations in the quality or quantity of the work performed. Subject to a few narrow exceptions, an employer must pay an exempt employee the full salary amount for any week in which the employee performs any work at all, without regard to the number of days or hours the employee worked. Deductions may not be made from the employee’s 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, partial week deductions may not be made for periods when work is not available. However, there is no requirement that the predetermined salary be paid if the employee performs no work at all for an entire workweek. Therefore, employers should not implement furloughs for exempt employees in less than full workweek increments, as doing so would require payment for the full workweek; doing otherwise might endanger the exempt status of those employees.

Employers should also direct that furloughed exempt employees not perform even the most minimal of tasks, such as checking voicemail or email. In addition, an employer who “permits” or has notice that an exempt employee is performing work while on furlough runs the risk of losing the exempt classification. Therefore, it is advisable to limit voicemail or email access, or to require them to turn in employer-issued blackberries or laptops. In a nutshell, non-exempt employees who perform work must be paid for the hours they work. Exempt employees who perform any work in a workweek must be paid for the full workweek, or the employer runs the risk of losing the exempt classification.

Benefit Implications Of Furloughs. Furloughs could cause employees to lose benefits if they participate in plans with eligibility requirements stated in hours. For example, participation in a 401(k) plan, a medical or disability insurance plan, a profit sharing plan, or eligibility for a family or medical leave, may all be based on the number of hours an employee works. A further complication could occur when a reduction in hours impacts an employee’s eligibility for health care benefits, which could trigger COBRA. Another impact may be on the employer’s match obligations for a 401(k) plan. For pension plans, a reduction in hours worked could result in employees not working enough in a plan year to earn vesting credits for the year.

It is essential, then, that an employer contemplating furloughs, particularly those of a significant duration, be cognizant of their potential impacts on employee benefits. And employers must also be careful that furloughs or work schedule reductions do not inadvertently trigger WARN Act liability (a 50 percent reduction in hours that extends for six months or longer).

At first blush, furloughs may appear to be an attractive alternative to workforce reductions for both employees and employers. However, there are a number of not-so-obvious rules and consequences employers need to be wary of.

Jennifer A. Zinn