Reducing exempt employees' work schedule and salary to avoid layoffs

STATE OF CALIFORNIA
DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT
455 Golden Gate Avenue, 9th Floor
San Francisco, California 94102
(415) 703-4863
(415) 703-4806 fax

ANGELA BRADS11/EET, STATE LABOR COMMISSIONER

ROBERT R. ROGINSON
Chief Counsel

                                      August 19, 2009

Kirby Wilcox
Paul, Hastings, Janofsky & Walker LLP
55 Second Street
Twenty-Fourth Floor
San Francisco, California 94105

      Re: Salary Basis Test - Work Schedule and Salary Reduction to Avoid Layoff

Dear Mr. Wilcox:

    This is in response to your letter dated March 23, 2009, requesting an opinion of this office

concerning the salary basis test for payment of an exempt employee covered by Wage Order 4.
Specifically, an employer represented by your firm would like to reduce the work schedule of its
exempt employees, coupled with a reduction in their salaries, as an alternative to avoiding or
limiting the need for job layoffs in the current difficult economic environment. You seek an
opinion as to whether this reduction is consistent with the salary basis test for exempt employees
under California law. As described more fully below, it is the opinion of the Division of Labor
Standards Enforcement (DLSE) that neither the Labor Code and Industrial Welfare Commission
wage order provisions, nor the federal law upon which the pertinent provisions of California law is
based, prohibits the employer described in your letter from implementing its proposed reduction in
the work schedule and salary of the affected exempt employees.

Factual B<tckground

     According to the information provided by you, the employer represented by your firm

(Employer) is experiencing significant economic difficulties due to the present severe economic
downturn facing California and the nation. The Employer seeks to cut costs until the business
conditions improve and has already conducted job layoffs. The Employer would like to reduce the
number of its employees' scheduled work days from five days to four days per week. In
implementing this reduction, the Employer would not pay non-exempt employees for the day that
they were not required to work and would reduce the salaries of the exempt employees by 20% or
some other proportion. You represent that the Employer views this measure as highly unusual and
temporary, in light of the economic challenges presented. As soon as the business conditions
permit, you indicate that the Employer intends to restore both the full five-clay work schedule and
the full salaries of its exempt employees.

Letter to Kirby Wilcox
August 19, 2009
Page 2

The White Collar Exemptions

   Although your letter does not expressly articulate it, we presume from the facts and analysis

described, that the question presented by your opinion letter request concerns the exemptions
described in Section 3 of Wage Order 4-2001, the so-called "white-collar" exemptions known as
the executive, administrative, and professional exemptions. Under California law, there is a
presumption that an employee is non-exempt, and accordingly, is entitled to overtime. This
presumption will be defeated only if the specific employee in question comes within the
exemptions that are set out in the applicable wage order. The burden to establish that the
exemption exists in the specific case is on the employer. (Ramirez v. Yosemite Water Co., Inc.
(1999) 20 Cal.4 th 785, 794; Hodge v. Superior Court (2006) 145 Cal.App.4 th 278) Furthermore,
the exemptions are narrowly construed against the employer and their application is limited to
those employees plainly and unmistakably within their terms. (Nordquist v. A1cGraw-Hill
Broadcasting (1995) 32 Cal.App.4th 555)

The Safa,y Basis Test

    The salary basis test is set forth in Labor Code§ 515(a) and the applicable wage order. In

particular, Wage Order 4, Section l(A)(l)(f) provides that in order for an employee to meet the
salary basis test portion of the exemption: "[s]uch an employee 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."

    There is no express restriction in California law to having a fixed reduction in a salary

during a period when the company operates a shortened workweek clue to economic conditions. In
particular, no such restriction exists under the wage order or California Labor Code. Nor are there
any identified California cases addressing this issue. While there are several differences between
the federal and state salary requirements (e.g. minimum dollar amounts), DLSE follows the general
federal interpretations under the federal Fair Labor Standards Act ("FLSA") salary basis test with
respect to allowable deductions for absences to the extent there is no inconsistency with specific
provisions in the Labor Code or IWC Orders. (DLSE Enforcement Policies and Interpretations
Manual (June 2002) [hereafter "DLSE Manual"], §§ 51.6.4 and 51.6.6; DLSE Opinion Letter
2002.03.01 [the salary requirements of state law are generally consistent with the federal "salary
basis" regulations set forth in 29 CFR § 541.118 (now§ 541.602), including DLSE's enforcement
position regarding deductions from salaries]).

    Under such circumstances, it is appropriate to consider federal authorities in the

interpretation of state laws that are patterned after federal law. (Bell v. Farmers Ins. Exchange
(2001) 87 Cal.App.4 th 805) This is not an example where California law is more protective than
federal law. For instance, in Ramirez v. Yosemite Water Co., where the issue before the court
concerned the definition of the exemption for "outside salesmen" and the court concluded that the
state law provided greater protection for employees than its federal analog, the court held that the
trial court erred in relying upon federal authorities in inte1vreting the wage order, stating "where
the language or intent of state and federal labor laws substantially differ, reliance on federal

Letter to Kirby Wilcox
August 19, 2009
Page 3

regulations or interpretations to construe state regnlations is misplaced." (Ramirez v. Yosemite
Water Co., supra, 20 Cal.4' 11 at p. 798)

    The applicable federal regulations and interpretations by the federal Department of Labor

(DOL) support the conclusion that the Employer may reduce its exempt employees' work schedule
and salary, as proposed, without violating the salary basis test.

    29 CFR § 541.602 provides as follows:

             (a) General rule. An employee will be considered to be paid on a
             "salary basis" within the meaning of these regulations if the
             employee regularly receives each pay period on a weekly, or less
             frequent basis, a predetermined amount constituting all or part of the
             employee's compensation, which amount is not subject to reduction
             because of variations in the quality or quantity of the Vvork
             performed. Subject to the exceptions provided in paragraph (b) of
             this section, an exempt employee must receive the full salary for any
             week in which the employee performs any work without regard to
             the number of days or hours worked. Exempt employees need not be
             paid for any workweek in which they perform no work. An employee
             is not paid on a salary basis if deductions from the employee's
             predetermined compensation are made for absences occasioned by
             the employer or by the operating requirements of the business. If the
             employee is ready, willing and able to work, deductions may not be
             made for time when work is not available.

    In a series of opinion letters extending as far back as at least 1970, the DOL has

consistently concluded that the salary basis test does not preclude a bona fide fixed reduction in the
salary of an exempt employee 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 in any week in which they perform work. 1 Further the salary reduction may not reduce the
amount paid to the employee in any workweek to less than the minimum salary required under the
applicable law. In an opinion letter dated November 13, 1970 (1970 WL 26462), the DOL
considered the circumstance of an employer in the aerospace industry which had already had
extensive layoffs and was considering either reducing the existing workweek or laying off
additional workers. Specifically, the employer proposed to change from 52 five-day workweek
schedule to 4 7 five-day workweeks and 5 four-day workweeks, with the four-day workweeks
occurring at the end of that and succeeding calendar years. The DOL concluded that the proposed
change was not contrary to 29 CFR § 541.118 (now § 541.602, quoted above, following a revision
and renumber in 2004), stating:

'The DOL's Wage and Hour Division issues opinion letters to explain the requirements of the FLSA and its
regulations and bow they apply to particular circumstances. The DOL considers these opinion letters to be "rulings."
29 C.F.R. 790.1 ?(d). Federal courts have concluded that they are entitled to great weight when they interpret the
DOL's own ambiguous regulations. (Sec Archuleta v. Wal-Mart Stores, Inc. (10th Cir. 2008) 543 f.3d 1226 at th. 7)

Letter to Kirby Wilcox
August 19, 2009
Page 4

           Section 541.118 does not preclude a bona fide reduction in an
           employee's salary which is not designed to circumvent the salary
           basis requirement. A reduction in salary resulting from a temporary
           reduction in the normal workweek (such as you describe) is,
           therefore, permissible and will not defeat an otherwise valid
           exemption, provided that the reduction does not reduce the amount
           paid to the employee in any workweek to less than the minimum
           salary required by the regulations (currently $125 per week for
           executive and administrative employees and $140 per week for
           professional employees)."

    The many opinion letters issued subsequently by the DOL on this subject reach the same

result. They include an opinion letter issued March 4, 1997 (1997 WL 998010), in which the DOL
considered the proposal of an employer in the mental health field that wished to reduce the
workweek of certain exempt employees from 40 hours to 32 hours with a commensurate reduction
in pay. The DOL concluded that the proposal was not contrary to § 541.118. Similarly in an
opinion letter issued February 23, 1998 (1998 WL 852696), the DOL considered an industrial
manufacturer's progressive three-step plan to deploy staff when serious and persistent work
shortages occur in the defined work-unit. The second step of the plan included a reduction of
hours worked to 32 hours a week with corresponding pay reduction. The DOL concluded that the
plan, including the reduction in work schedule and pay, did not violate § 541. 118. Citing an earlier
opinion letter, the DOL stated:

           [W]e have stated that a fixed reduction in salary effective during a
           period when a company operates a shortened workweek due to
           economic conditions would be a bona fide reduction not designed to
           circumvent the salary basis payment. Therefore, the exemption
           would remain in effect as long as the employee receives the
           minimum salary required by the regulations and meets all other
           requirements for the exemption."

(Emphasis in original.) Other opinion letters issued by the DOL are in accord. See, DOL opinion
letter (June 3, 1999) 1999 WL 1002416 and DOL opinion letter (June 25, 2004) 2004 WL
2146925.

    We were unable to identify any California appellate decisions addressing specifically the

issue presented in your request. Several federal appellate and district courts, however, have
addressed the issue of simultaneous reductions in work schedules and salaries under the FLSA.
(See Archuleta v. Wal-Mart Stores, Inc. (10 th Cir. 2008) 543 F.3d 1226; In re Wal-Mart Stores,
Inc. (10 th Cir. 2005) 395 F.3d 1177; Caperci v. Rite Aid Corporation (Dist. Mass 1999) 43
F.Supp.2d 83) These federal appellate and trial court decisions support the conclusion that the
Employer's proposal to reduce simultaneously its exempt employees' work schedule and salmy for
the specific reasons described above does not violate the salary basis test. In Archuleta, the Tenth
Circuit considered whether a compensation practice used by the retailer for its fulltime pharmacists

Letter to Kirby Wilcox
August 19, 2009
Page 5

violated the salary basis test because it resulted in adjustments to the employees' base salary. The
plaintiff employees contended that although Wal-Mart purported to pay its pharmacists as salaried
professionals, it actually changed their· salaries so frequently that it treated them, in effect, as
hourly non-exempt employees. The court upheld a summary judgment order in favor of the
employer, holding that the retailer's policy of prospectively reducing the pharmacists' base hours
did not occur with such frequency that their status as salaried employees was a sham. (Archuleta,
supra, 543 F.3d at p. 1234) In reaching this conclusion, the court relied upon its previous holding
in In re Wal-Mart Stores, Inc., the DOL opinion letters issued November 13, 1970 and Februmy
23, 1998, supra, and the rationale in two trial court decisions, Caperci v. Rite Aid Corp. (D.Mass
1999) 43 F.Supp.2d 83 and Thomas v. County of Failfax (E.D.Va. 1991) 758 F.Supp. 353.

     An e-mail letter issued by this office in 2002 affirmed the DLSE policy to follow the

federal regulations concerning the salary basis test. (See DLSE Opinion Letter 2002.03.12) In the
letter, however, it was concluded that the applicable federal regulations preclude an employer from
reducing the salmy 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. (N.D. NY 1998) 3 F.Supp.2d
215. In Dingwall, the defendant employer reduced the workweek of its staff from five days to four
and simultaneously reduced their salaries by one-fifth. Employees were then able to collect one
day of unemployment benefits, a benefit arrangement approved by the New York State Depmiment
of Labor. District Court Judge Kahn rejected the defendant employer's argument that this
reduction was permissible under the salmy basis test, holding that the reduction constituted m1
actual and improper deduction in violation of the applicable federal regulations. (Dingwall v.
Fhedman Fisher Associates, supra, 3 F.Supp.2d at p. 220) As described more fully by the Tenth
Circuit Court of Appeals, however, the decision in Dingwall is not well-reasoned m1d misguided.
(In re Wal-Mart Stores, Inc., supra, 395 F.3d at p. 1188) The appellate court noted that the federal
regulation the trial court relied upon for its ruling (29 C.F.R. § 541.l 18(a)(l)) "clearly refers only
to deductions during the current pay period, for which the salary has been fixed, not reductions in
future salary." (Id.). "More imp01iantly, and remarkably, the court made no reference to the
applicable [DOL] opinion letters." (Id.). Of course, the 2002 DLSE letter predates the In re Wal-
Mart decision and they did not benefit from the thorough discussion of the issue in that case. For
all of the foregoing reasons, the DLSE's prior reliance upon Dingwall for the conclusion that the
federal regulations prohibit the simultaneous reduction of a workweek schedule and salary
presented in this case is not persuasive and does not provide an appropriate basis to reject the long
line of reasoning and authority set forth in the federal regulation and the federal authorities and
DOL opinion letters interpreting these federal regulations.

    In the circumstances presented in this letter, the Employer's 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. Furthermore, according to the specific
representations made by you on behalf of the Employer, 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. In accordance with the several DOL opinion letters and federal district and
appellate court decisions interpreting the federal law, which the DLSE has historically followed,

Letter to Kirby Wilcox
August 19, 2009
Page 6

and based upon the facts presented which provide no indication that the Employer intends to adjust
the salary any more frequently than described, it is the opinion of this office that the Employer is
not prohibited under California law from implementing the proposed scheduled reduction in the
work schedule and salary of the affected exempt employees so long as the employee still meets the
salary test by earning a monthly salary equivalent to no less than two times the state minimum
wage for full time employment as provided in Labor Code §§.515(a) and (c) and IWC Wage Order
4, Section 1(A)(l )(f). Of course, each affected employee must also continue to satisfy the duties
test for the applicable exemption as set forth in Section 1 of the wage order.

    This opinion is based exclusively on the facts and circumstances described in your request

and is given based upon your representations, express or implied, that you have provided a full and
fair description of all facts and circumstances that would be pertinent to our consideration of the
questions presented. The existence of any other factual or historical background not contained in
your letter might require a conclusion different from the one expressed herein. You have
represented that this opinion is not sought by a party to pending private litigation concerning the
issues addressed herein. You have also represented that this opinion is not sought in c01111ection
with an investigation or litigation between a client or firm and the Division of Labor Standards
Enforcement.

   I hope that the above sufficiently responds to your request and thank you for your interest in

ensuring compliance with California's wage and hour laws.

                        ~---~ry".?Robert R. Roginson
                                  Chief Counsel

RRR:

cc: Labor Commissioner Angela Bradstreet