Managing Wage & Hour Compliance During the COVID-19 Pandemic: Part II: Paid Time–off Donations, Leaves, Layoffs and Pay Reductions

04.15.2020

Part I of this two–part alert, The New Remote Workforce, focused on Labor Code wage and hour issues and best practices when transitioning a non–exempt workforce to working remotely. In addition to issues related to working remotely discussed in Part I, employers are undoubtedly feeling the economic impact created by the COVID–19 pandemic. There are a number of considerations employers should keep in mind when making efforts to save on labor costs. Part II of this alert addresses some of the most common employer considerations, including (A) leave-sharing programs, (B) potential discrimination claims, (C) distinctions between a furlough, a leave of absence and a layoff, (D) compensation reductions and (E) layoff implementation.

A.    Sharing is caring: paid time–off donations

Many employers are adopting leave–sharing programs where employees with accrued leave can donate paid leave to a leave bank maintained by the employer for use by other employees to cover an otherwise unpaid absence from work related to COVID-19.  If the leave–sharing program meets certain requirements, a leave donor is not subject to federal income or employment taxes on their donation to the leave bank and the leave recipient is. 

Leave–sharing programs for major disasters

The Internal Revenue Service provided guidance on major disaster leave–sharing plans, which can be found here in Notice 2006-59. At the request of California Governor Gavin Newsom, the President has declared the COVID-19 pandemic a major disaster in California. 

To qualify for favorable tax treatment, the leave–sharing program for major disasters must make leave recipient eligibility conditioned on an employee who: (1) has a medical condition (or family member with a medical condition) that requires prolonged absence of the employee from work and will result in substantial loss of income; and (2) has exhausted all other forms of paid leave.

B.    Be wary of “adverse employment action”

If not initiated properly, layoffs, furlough, and reductions in compensation may constitute an “adverse employment action,” meaning employees may claim discrimination. Although the motive for an employer taking such action is seemingly obvious—an effort to reduce labor costs amidst a global pandemic—the reason for who was selected is not as easily apparent. Therefore, employers should rely on legitimate and well–documented reasons for selecting the employees subject to layoff, furlough, or compensation reduction. In doing so, employers should also contact their legal counsel to evaluate their decisions prior to initiating them, and inquire about a disparate impact analysis.

C.    The Down Low on Furlough and Unpaid Leave of Absence

Generally, the furloughed employee retains their job, but ceases work for the duration of the furlough period and is typically not paid during the furlough period.

There has been much confusion lately surrounding the terminology and distinctions between a furlough, leave of absence, and layoff. California law does not assign a specific meaning to any of these terms. However, a furlough and leave of absence (paid or unpaid) are often considered temporary in nature with the employment relationship continuing. A layoff, on the other hand, signifies the end of the employment relationship. 

Prior to furlough, the affected employee should be informed in writing of the employer’s intent to take such action. Any work performed prior to the furlough period must be paid. During the furlough period, the employee is eligible for unemployment insurance benefits. Furloughing an employee may or may not constitute termination of that employee depending on several factors, including the length of the furlough and continuation of benefits. 

Short Furlough or Unpaid Leaves of Absence

A furlough extending beyond the employee’s normal pay period may trigger California Labor Code sections 201 and 203, which requires employers to pay an employee’s wages immediately upon termination, and imposes a penalty on employers who “willfully” fail to do so. The Division of Labor Standards Enforcement (DLSE) issued two opinion letters, in 1993 and 1996, impacting furloughs in which the DLSE opined that a furlough that does not include a definite return–to–work date within (a) the shorter of 10 days, or (b) the employee’s normal pay period, may be construed as a termination. The DLSE Policies and Interpretations Manual states at section 3.2.2:

Layoff. If an employee is laid off without a specific return date within the normal pay period, the wages earned up to and including the lay-off date are due and payable in accordance with Section 201. (Campos v. EDD (1982) 132 Cal.App.3d 961, 183 Cal.Rptr. 637; see also O.L. 1993.05.04 and O.L. 1996.05.30.) If there is a return date within the pay period and the employee is scheduled to return to work, the wages may be paid at the next regular rate of pay.

Therefore, according to the DLSE, a furlough meeting these criteria requires an employer to pay final wages, including vacation and paid time off, through and including the date of the furlough, under Section 201.

Longer Furlough

A furlough lasting longer than 10 days may trigger the obligation to provide written notice of layoff pursuant to Cal–WARN. While the federal WARN Act requires notification only when a layoff is to exceed more than six months, Cal–WARN includes no such timing requirement. In International Brotherhood of Boilmakers, etc. v. NASSCO Holdings Inc. (2017) 17 Cal.App.5th 1105, the California Court of Appeal held that a furlough exceeding a de minimis amount of time triggers an employer’s obligation to comply with Cal–WARN. Though the appellate court did not provide any guidance on what length of time is considered “de minimis,” in NASSCO, the employer furloughed 90 employees for three weeks due to lack of shipyard work, which the court found triggered the notice requirement under Cal–WARN. Thus, under NASSCO, employers contemplating a furlough of three weeks or more must comply with Cal–WARN’s notice requirement. A furlough between 10 and 14 days should consider complying with the Cal–WARN notice requirement until the de minimis factor is further clarified.

On March 17, 2020, California Governor Gavin Newsom issued Executive Order N-31-20 in response to the COVID-19 pandemic and the need for employers to act quickly to prevent the spread of the virus. The Executive Order temporarily suspends the 60–day notice requirement under Cal–WARN, and is retroactive to March 4, 2020. Under Executive Order N-31-20, employers are still required to provide written notice to employees of mass layoff, relocation, or termination. (See our prior alert here).

Exempt employee considerations

Employers should proceed with caution if they decide to furlough exempt employees. Although an employer can legally impose a full–workweek furlough and not pay the exempt employee their weekly salary, the exempt employee cannot perform any work during that furlough period. If the exempt employee performs any work at all, the employer is generally required to pay that employee his or her full salary for the entire week. Thus, if an employer decides to furlough an exempt employee for a full week, they should do so at the beginning rather than in the middle of the workweek.

Employers may also risk exposure if they mandate that their exempt employees use their paid time off while on furlough. Some employers take this route in an effort to mitigate the risk of an exempt employee who works during a full week furlough—i.e., the employer pays the employee through paid time off for time that the employee did not work during the workweek and pays salary for time actually worked.

A California DLSE internal memorandum, however, indicates that employers must provide a minimum of 90 days’ advanced notice when requiring employees to take mandatory paid time off. Therefore, if an employer would like for employees to use their paid time off during furlough, it should give its employees the opportunity to elect to use paid time off rather than requiring it. Note that under federal law, employers may be able to require employees to use paid time off during a furlough because employers are not required under the Fair Labor Standards Act (FLSA) to provide vacation time to employees. The Wage and Hour Division opinion letter suggesting that such action is permitted can be found here.

D.    Reducing Compensation

Employers can reduce non–exempt employees’ scheduled hours or hourly pay rates, but changes must be done prospectively. Of course, California and federal minimum wage requirements must still be satisfied. To minimize the potential for discrimination claims, employers should implement across–the–board pay cuts among its non–exempt employees rather than selectively choosing employees for pay reductions.

Employers with union workers or employees subject to contracts should review the applicable collective bargaining agreement (CBA) or employment agreement to ensure the proper parties are notified (i.e., the union) and the pay reduction does not violate the terms of the agreement.

Non–exempt employees subject to the pay reduction should be notified, in writing, in advance, and preferably prior to date of the pay period in which the reduction is to take effect in order to avoid complexities in calculating two different rates.

In regard to Cal–WARN, California courts have not yet opined whether reducing hours and/or pay is considered “separation from a position.” However, at least one court made a reference to this situation, and stated a much lower wage may trigger Cal–WARN. (MacIsaac v. Waste Mgmt. Collection & Recycling, Inc. (2005) 134 Cal. App. 4th 1076, 1087 n.8.)

Exempt employee considerations

Reduced compensation for exempt employees is subject to the salary basis test. Under both the California and federal salary basis test, exempt employees must be paid their minimum weekly salary regardless of how many or how few hours they work each week. To avoid violating the salary basis test in implementing partial–week reductions among exempt employees, employers may reduce future salaries and base hours if the employer has a bona fide reduction in the amount of work.

It is imperative that employers do not reduce schedules and salaries that would cause exempt employees to be paid less than the applicable salary minimum. Though an employer cannot reduce an exempt employee’s salary below the applicable minimum salary level threshold, the employer can consider reclassifying the employee from exempt to non–exempt. The re–classified employee would then be subject to timekeeping requirements, entitled to statutorily required meal and rest periods, and eligible for overtime compensation.

As with pay cuts among non–exempt employees, employers should provide advance written notice to non–exempt employees who are subject to the reduction in salary and schedule.

E.    Lay–Offs:  Breaking Up is Hard to do

A “layoff” is a termination of the employment relationship. As with pay cuts, employers should review any CBAs, employment agreements, or policies to ensure they are initiating layoffs in accordance with such agreements.

Under Labor Code section 201, employees who are discharged must be paid all wages due, including vacation pay, immediately at the time of termination. In the era of “social distancing” and remote work, employers may find it cumbersome to issue the discharged employee their wages immediately. However, a violation of section 201 results in wait time penalties that can add up quickly especially where an employer is implementing mass layoffs. Thus, employers should work with their wage and hour counsel to determine an effective way to issue discharged employees their final wages in compliance with the Labor Code. For employers who have switched its employees over to working remotely, some options to consider include:

  • Overnight mail to arrive on the effective date of termination (require signature confirming receipt);
  • Use of a courier service to deliver final wages to discharged employee (signature confirming receipt required); or
  • Arrange to meet in–person, preferably with a third–party person present, while maintaining safe social distancing practices.

Employers should also consider whether layoffs will trigger Cal–WARN. More information on Cal–WARN and California Governor Gavin Newsom’s temporary suspension on its 60–day notice requirement can be found in our prior alert here.

Finally, employers must provide the required documents for employees to seek unemployment insurance, including the Notice of Change in Relationship and the Unemployment Insurance Guide.

Conclusion / recommendations

There are several methods to manage labor costs, and some can be used in conjunction to achieve the desired balance of workforce size and expense reduction during the unprecedented economic disruption caused by the COVID-19 pandemic. Careful planning and execution is required to comply with the applicable laws and administrative opinions for each of the methods discussed, and when done properly, will help employers survive the pandemic and associated economic impact.

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