Guidelines for Implementing California Salary Reductions
Employers that decide to reduce the salaries of exempt employees must ensure it is announced, implemented, and administered correctly.
With the coronavirus pandemic and resulting shelter-in-place command, many employers are feeling the pinch. Every industry is impacted. Every employer is looking for ways to stay afloat.
One way many employers do so is by cutting employee compensation. This could be through lay-offs, furloughs, or reduction in hourly or annual compensation.
Below, learn about things to be mindful about regarding reductions in annual salaried employees.
As a general rule, a California employer may lawfully reduce an exempt employee's salary, on a prospective basis, so long as the employee's guaranteed salary does not drop below two times the California minimum wage. On January 1, 2020,California’s statewide minimum wage rose to $13 per hour for employers with 26 or more employees and $12 per hour for employers with 25 or fewer employees.
(PLEASE NOTE - different municipalities [e.g. counties and cities] have different minimum wage amounts, thresholds, and different time frames for when they are being implemented. For example, the city of Santa Rosa will mandate a minimum wage of $14.00 per hour for employers of 1-25 employees and $15.00 per hour employers of 26 and more by July 1, 2020)
Accordingly, effective January 1, 2020, the minimum salary threshold for the state of California for these exemptions is as follows:
$54,080 per year (or $1,040 per week) for employers of 26 or more employees
$49,920 per year (or $960 per week) for employers of 25 or fewer employees
Prospective means beyond the past and present pay periods.
So, as long as the reduction does not breach these thresholds, California employers should be okay, right?
Problems to Reductions in Form
Well, not entirely. Where the reduction becomes problematic is a situation where the reduction is tied to the employee's hours/days of work and/or to some measure of production. Many times this arises where the employer tries to give the employee something positive to "offset" the reduction in salary and negative morale that flows from the reduction.
For example, an employer might consider reducing exempt employees' salaries by 20% in exchange for giving the employees Fridays off. California's Department of Labor Standards Enforcement (DLSE) has taken the position that this type of salary reduction violates the salary basis test and destroys exempt status (meaning that meal and rest breaks and daily/weekly overtime rules would apply to the affected employees). The DLSE reasoned that exempt employees are paid for the value of their work, not for the number of hours or days they work, and it is generally up to the exempt employee to determine the number of hours to work to accomplish his or her job duties. Tying the amount of an employee's compensation to the quantity of work the employee performs is at odds with the notion of being a salaried employee.
This was an adoption of a decision reached in federal court interpreting the same issue under federal law. In Dingwall v. Friedman Fisher Assocs., P.C., (N.D.N.Y 1998) 3 F. Supp. 2d 215, the employer reduced the length of workweeks for its exempt staff from five days to four, with a corresponding 20 percent reduction in pay for a period of six months during the economic recession of 1991–1992. The employer contended that the reduction in staff salaries was not a “deduction” but merely a change in the “regular” salaries to a new “predetermined” amount, and that the plaintiff received a fixed salary at all times.
The Dingwall court disagreed, relying upon the language of the FLSA regulations to hold that the salary reduction was not a mere alteration of the plaintiff’s fixed salary, but one made “on the basis of a reduction of days worked in response to an insufficient amount of work available.” The court ruled, “defendant’s reductions in the amount of days worked in response to a lack of available work and a proportionate reduction in fixed salary constitutes an actual and improper deduction.”
Not so fast
Notwithstanding the above, it is not entirely crystal clear that the above circumstances is how the law is governed today. Dingwall was decided in 1998. DLSE issued its opinion letter in 2002, adopting Dingwall. But since then the 10th Circuit court went the other way, DLSE has reissued its enforcement manual--several times--failing to adopt its own opinion letter, and the U.S. Department of Labor’s Wage and Hour Division (WHD), which is charged with interpreting and enforcing the Federal Labor Standards Act (FLSA)’s white-collar exemptions--upon which California basis its own exemptions--has repudiated Dingwall. The WHD most recently--and clearly--did so in a September 2019 Fact Sheet.
So, we have a situation that is as clear as mud. As a result, it is something to do your best to avoid unless you wish to live dangerously.
Below, please find a list of guidelines to go by when it comes to reducing exempt employee salaries in California:
Know the Thresholds. The minimum salary thresholds, generally, are listed above. However, they differ greatly municipality to municipalithy. Furthermore, there are other thresholds associated with particular exemptions (e.g. outside salespersons, computer professionals).
Do not get Triggered. Salary reductions may qualify as a “qualifying event” under COBRA and/or Cal-COBRA, as well as the impact on 401(k) and other retirement plans. It could trigger consequences for your company's participation in those programs--not to mention the newly introduced federal and state programs introduced in the wake of the coronavirus pandemic and shelter-in-place... reaction.
Not Retroactive or Immediate. The reduced salary can be implemented prospectively as of a future date. It cannot be applied retroactive or within the current pay period.
Amount of Reduction Must be Determined and Communicated. The amount of the reduced salary must be determined in advance of the date on which it is scheduled to take effect.
Do not Link it to Quality or Quantity of Work. In any communications about a salary reduction, employers may want to avoid linking the reduced salary to the quality or quantity of work performed before or after the change.
Do not Link it to Number of Hours. In any communications about a salary reduction, employers may want to avoid linking the reduced salary to a reduced number of hours or to any specific schedule of work. In reality, the duties and responsibilities an exempt employee is expected to perform do not correspond to a fixed schedule or a finite number of hours. Even once it is reduced, an employee’s salary compensates him or her for all hours worked in any workweek. Employers may want to include information to this effect in notices or communications to affected salaried employees.
Provide as Much Notice as Possible. The amount of notice that must be given to an employee before a salary reduction takes effect varies by state. There are a handful of states that require 30 days of notice or at least one pay period of notice. Most others require either seven days of notice. California merely requires that the notice be provided “prior to” the reduction.
Provide Written Notice. Providing written notice can help an employer establish that the notice was given in a timely manner and ensure that the reduced salary is lawful. In states with “wage theft” statutes, employers may face requirements to provide employees with statutory notices and to maintain records to show that employees have acknowledged the change in salary within a certain window of time.
Cannot Float the Decision. Once the reduced salary takes effect, it cannot be adjusted based upon day-to-day or week-to-week determinations of an employer’s operating requirements.
Be Conservative about Restoration. There is no explicit durational requirement for how long a new salary needs to be in place before it can be readjusted or restored to its prior level. An employer may want to wait to restore a reduced salary back to its prior level until it can make a long-term determination of operating requirements.
Do not Alter Expectations, Requirements, Hours after Restoration. Employers that restore reduced salaries to their prior levels may want to avoid making subsequent variations in response to business conditions, because these variations may create a risk of claims that the salary is a de facto hourly wage.
Check-In with Changes in Law, DLSE. Employers considering salary reductions for exempt employees in California may want to keep Dingwall and the DLSE’s latest guidance in mind.